Management's Discussion and Analysis of Results of Operations and Financial
Condition
This Annual Report 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 Bank of America Corporation (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 Annual Report should not rely solely on the forward-looking
statements and should consider all uncertainties and risks discussed throughout
this report. 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 general 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 level of
nonperforming assets, charge-offs and provision expense can be affected by
local, regional and international economic and market conditions, including the
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. The Corporation is
also exposed to potential litigation liabilities, including costs, expenses,
settlements and judgments, that may adversely affect the Corporation.
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 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 Internet; 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.
Overview
The Corporation is a Delaware corporation, a bank holding company and a
financial holding company, and is headquartered in Charlotte, North Carolina.
The Corporation operates in 21 states and the District of Columbia and has
offices located in 34 countries. The Corporation provides a diversified range of
banking and certain nonbanking financial services and products both domestically
and internationally through four business segments:
Consumer and Commercial Banking, Asset Management, Global Corporate and
Investment Banking and Equity Investments. A customer-centered strategic focus
is changing the way the Corporation is managing its business. In addition to
existing financial reporting, the Corporation has begun preparing customer
segment-based financial operating information. At December 31, 2001, the
Corporation had $622 billion in assets and approximately 143,000 full-time
equivalent employees. Refer to Table One and Table Twenty-Five for annual and
quarterly selected financial data, respectively.
Key performance highlights for 2001 compared to 2000:
o Net income totaled $6.8 billion, or $4.18 per common share (diluted),
compared to $7.5 billion, or $4.52 per common share (diluted). The return on
average common shareholders' equity was 13.96 percent.
o Operating earnings, which excluded charges related to the Corporation's
strategic decision to exit certain consumer finance businesses in 2001 and
related to restructuring in 2000, totaled $8.0 billion, or $4.95 per common
share (diluted), compared to $7.9 billion, or $4.72 per common share
(diluted). Excluding exit charges, the return on average common
shareholders' equity was 16.53 percent in 2001. Shareholder value added
(SVA), excluding exit and restructuring charges, remained essentially
unchanged at $3.1 billion.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
33
o Total revenue includes net interest income on a taxable-equivalent basis and
noninterest income. Total revenue was $35.0 billion, an increase of $1.7
billion.
o Net interest income increased $2.0 billion to $20.6 billion. The
increase was primarily due to the effects of changes in interest rates
on the Corporation's asset and liability positions and investment
portfolio repositioning, an increased trading-related contribution,
higher deposit and equity levels and a favorable shift in loan mix.
These factors were partially offset by the impact of the money market
deposit pricing initiative and a decrease in auto lease financing
contributions. Average managed loans and leases were $378.7 billion, a
$1.2 billion decrease, primarily due to an eight percent decrease in
commercial loans and leases, partially offset by an eight percent
increase in consumer loans and leases. Average customer-based deposits
grew to $306.9 billion, a $14.9 billion increase. The net interest yield
was 3.68 percent, a 48 basis point increase. The increase in the net
interest yield was primarily due to the effect of changes in interest
rates and investment portfolio repositioning.
o Noninterest income was $14.3 billion, a $234 million decrease. Consumer
and Commercial Banking experienced a $321 million, or nine percent,
increase in service charges driven by higher business volumes. A $192
million, or nine percent, increase in card income was primarily due to
both new account growth in both credit and debit card and increased
purchase volume on existing accounts. Revenue in the mortgage banking
business increased 48 percent primarily reflecting higher origination
activity, increased gains from higher loan sales to the secondary market
and the favorable mark-to-market adjustments on certain mortgage banking
assets and related derivative instruments, partially offset by increased
prepayments on mortgage loans as a result of the declining interest rate
environment. Income from investment and brokerage services increased $45
million in the Asset Management segment largely due to new asset
management business and the completed acquisition of Marsico Capital
Management LLC (Marsico), partially offset by lower broker activity due
to decreased trade volume. The noninterest income component of
trading-related revenue within Global Corporate and Investment Banking
increased $77 million, as increased revenues from trading-related
activities in interest rate, fixed income and commodities contracts more
than offset a decrease in equities and equity derivatives trading.
Investment banking income increased $67 million, as strong growth in
fixed income origination was partially offset by weaker demand for
syndications, equity underwriting and advisory services. Equity
Investments had equity investment gains of $230 million, reflecting a
sharp decline of $763 million.
o On August 15, 2001, the Corporation announced that it was exiting its auto
leasing and subprime real estate lending businesses. As a result of exiting
these consumer finance businesses, the Corporation recorded pre-tax charges
of $1.7 billion ($1.3 billion after-tax), consisting of provision for credit
losses of $395 million and business exit costs, the noninterest expense
component, of $1.3 billion.
o Including the exit charge, the provision for credit losses was $4.3 billion.
Excluding the exit charge, the provision for credit losses was $3.9 billion,
an increase of $1.4 billion from 2000. Excluding exit-related charge-offs of
$635 million, net charge-offs were $3.6 billion, or 0.99 percent of average
loans and leases, an increase of 38 basis points from 2000. This increase in
net charge-offs of $1.2 billion from 2000 was primarily due to credit
quality deterioration in the commercial-domestic portfolio and an increase
in bankcard charge-offs. As a matter of corporate practice, we do not
discuss specific client relationships; however, due to the publicity and
interest surrounding Enron Corporation, the Corporation is making an
exception. Net charge-offs in 2001 included $210 million related to Enron
Corporation. Excluding exit-related charges, the Corporation recorded
additional provision expense in excess of charge-offs of $283 million due to
deterioration in credit quality and the overall uncertainty in the economy.
o Nonperforming assets were $4.9 billion, or 1.49 percent of loans, leases and
foreclosed properties at December 31, 2001, a $549 million decrease from
December 31, 2000. The decrease was primarily a result of the transfer of
$1.2 billion of nonperforming subprime real estate loans to loans held for
sale as well as nonperforming loan sales, partially offset by increases in
the commercial - domestic loan portfolio that resulted from credit
deterioration as companies were affected by the weakening economic
environment. The allowance for credit losses totaled $6.9 billion or 2.09
percent of total loans and leases at December 31, 2001, a 35 basis point
increase from 1.74 percent of total loans and leases at December 31, 2000.
o Noninterest expense excluding business exit costs in 2001 and restructuring
charges in 2000 was $19.4 billion, a $1.3 billion increase, primarily driven
by higher personnel, litigation, professional fees, data processing and
marketing expenses. Higher personnel expense was driven by a $150 million
severance charge in the fourth quarter of 2001 related to ongoing efficiency
improvement programs, higher revenue-related incentive compensation and
increased salaries expense. Higher professional fees reflected the increase
in initiatives related to the Corporation's strategy to improve customer
satisfaction, the launch of a company-wide Six Sigma quality and
productivity program and implementation of a new integrated business
planning process. The Corporation recorded $334 million in litigation
expense in the fourth quarter of 2001 related to small settlements and an
addition to the legal reserve to cover increased exposure to existing
litigation. Subsequent to December 31, 2001, the Corporation announced that
it had reached an agreement in principle to settle various shareholder
lawsuits for payments totaling $490 million. The proposed settlement will be
paid from existing litigation reserves and insurance and will not have an
impact on the Corporation's financial results. For additional information on
litigation, see Note Twelve of the consolidated financial statements.
o A tax benefit of $418 million, generated as a result of the Corporation's
realignment of certain problem loan management activities into a
wholly-owned subsidiary, Banc of America Strategic Solutions, Inc. (SSI),
resulted in a 17 percent effective tax rate for the fourth quarter of 2001.
The assets and liabilities of SSI are fully consolidated with those of the
Corporation.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
34
Table 1 Five-Year Summary of Selected Financial Data
(Dollars in millions, except per share information) 2001 2000 1999 1998 1997
----------------------------------------------------
As Reported
Income statement
Net interest income $ 20,290 $ 18,349 $ 18,127 $ 18,298 $ 18,432
Noninterest income 14,348 14,582 14,179 12,189 11,756
Total revenue 34,638 32,931 32,306 30,487 30,188
Provision for credit losses 4,287 2,535 1,820 2,920 1,904
Gains on sales of securities 475 25 240 1,017 271
Business exit costs 1,305 - - - -
Merger and restructuring charges - 550 525 1,795 374
Other noninterest expense 19,404 18,083 17,986 18,741 17,625
Income before income taxes 10,117 11,788 12,215 8,048 10,556
Income tax expense 3,325 4,271 4,333 2,883 4,014
Net income 6,792 7,517 7,882 5,165 6,542
- ------------------------------------------------ ------ ------ ------ ------ ------
Performance ratios
Return on average assets 1.05% 1.12% 1.28% 0.88% 1.20%
Return on average common shareholders' equity 13.96 15.96 16.93 11.56 15.26
Total equity to total assets (at year end) 7.80 7.42 7.02 7.44 7.81
Total average equity to total average assets 7.49 7.02 7.55 7.67 8.02
Dividend payout ratio 53.44 45.02 40.54 50.18 32.09
- ------------------------------------------------ ------ ------ ------ ------ ------
Per common share data
Earnings $ 4.26 $ 4.56 $ 4.56 $ 2.97 $ 3.71
Diluted earnings 4.18 4.52 4.48 2.90 3.61
Cash dividends paid 2.28 2.06 1.85 1.59 1.37
Book value 31.07 29.47 26.44 26.60 25.49
- ------------------------------------------------ ------ ------ ------ ------ ------
Cash basis financial data/(1)/
Earnings $ 7,670 $ 8,381 $ 8,770 $ 6,067 $ 7,397
Earnings per common share 4.81 5.09 5.08 3.49 4.20
Diluted earnings per common share 4.72 5.03 4.98 3.41 4.09
Return on average assets 1.18% 1.25% 1.42% 1.04% 1.36%
Return on average common shareholders' equity 15.77 17.80 18.85 13.64 17.55
- ------------------------------------------------ ------ ------ ------ ------ ------
Operating Basis/(2)/
Income statement
Net interest income $ 20,290 $ 18,349 $ 18,127 $ 18,298 $ 18,432
Net interest income (taxable-equivalent basis) 20,633 18,671 18,342 18,461 18,589
Noninterest income 14,348 14,582 14,179 12,189 11,756
Total revenue 34,638 32,931 32,306 30,487 30,188
Total revenue (taxable-equivalent basis) 34,981 33,253 32,521 30,650 30,345
Provision for credit losses 3,892 2,535 1,820 2,920 1,904
Gains on sales of securities 475 25 240 1,017 271
Other noninterest expense 19,404 18,083 17,986 18,741 17,625
Income before income taxes 11,817 12,338 12,740 9,843 10,930
Income tax expense 3,775 4,475 4,500 3,353 4,124
Net income 8,042 7,863 8,240 6,490 6,806
Average diluted common shares issued and outstanding (in 1,625,654 1,664,929 1,760,058 1,775,760 1,782,172
thousands)
- ------------------------------------------------ --------- --------- --------- --------- ---------
Performance ratios
Return on average assets 1.24% 1.17% 1.34% 1.11% 1.25%
Return on average common shareholders' equity 16.53 16.70 17.70 14.54 15.88
Efficiency ratio 55.47 54.38 55.30 61.15 58.08
Net interest yield 3.68 3.20 3.45 3.69 4.00
Dividend payout ratio 45.13 43.04 38.77 39.90 30.83
Shareholder value added $ 3,087 $ 3,081 $ 3,544 $ 2,056 $ 2,603
- ------------------------------------------------ ----- ----- ----- ----- -----
Per common share data
Earnings $ 5.04 $ 4.77 $ 4.77 $ 3.73 $ 3.86
Diluted earnings 4.95 4.72 4.68 3.64 3.76
- ------------------------------------------------ ------ ------ ------ ------ ------
Cash basis financial data/(1)/
Earnings $ 8,920 $ 8,727 $ 9,128 $ 7,392 $ 7,661
Earnings per common share 5.59 5.30 5.28 4.25 4.36
Diluted earnings per common share 5.49 5.24 5.19 4.15 4.24
Return on average assets 1.37% 1.30% 1.48% 1.26% 1.41%
Return on average common shareholders' equity 18.34 18.54 19.62 16.62 18.18
Efficiency ratio 52.96 51.78 52.57 58.20 55.27
- ------------------------------------------------ ------ ------ ------ ------ ------
Average balance sheet
Total loans and leases $ 365,447 $392,622 $ 362,783 $ 347,840 $ 343,151
Total assets 649,547 671,573 616,838 584,487 543,796
Total deposits 362,653 353,294 341,748 345,485 336,883
Long-term debt 64,638 65,338 52,619 45,098 41,984
Trust preferred securities 4,984 4,955 4,955 4,871 4,353
Common shareholders' equity 48,609 47,057 46,527 44,467 42,151
Total shareholders' equity 48,678 47,132 46,601 44,829 43,610
- ------------------------------------------------ ------ ------ ------ ------ ------
Risk-based capital ratios (at year end)/(3)/
Tier 1 capital 8.30% 7.50% 7.35% 7.06% 6.50%
Total capital 12.67 11.04 10.88 10.94 10.89
Leverage ratio 6.56 6.12 6.26 6.22 5.57
- ------------------------------------------------ ------ ------ ------ ------ ------
Market price per share of common stock
Closing $ 62.95 $ 45.88 $ 50.19 $ 60.13 $ 60.81
High 65.54 61.00 76.38 88.44 71.69
Low 45.00 36.31 47.63 44.00 48.00
- ------------------------------------------------ ------ ------ ------ ------ ------
/(1)/ Cash basis calculations exclude goodwill and other intangible amortization
expense.
/(2)/ Operating basis excludes provision for credit losses of $395 million and
noninterest expense of $1,305 million related to the exit of certain consumer
finance businesses in 2001 and merger and restructuring charges in 2000, 1999,
1998 and 1997.
/(3)/ Ratios for 1997 have not been restated to reflect the impact of the
BankAmerica and Barnett mergers.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
35
Summary of Significant Accounting Policies
The Corporation's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. Many of the Corporation's accounting policies require significant
judgment regarding valuation of assets and liabilities and/or significant
interpretation of the specific accounting guidance. The Corporation's
significant accounting policies are discussed in detail in Note One of the
consolidated financial statements. The following is a summary of the more
judgmental and complex accounting policies of the Corporation.
Many of the Corporation's assets and liabilities are recorded using various
valuation techniques that require significant judgment as to recoverability. The
collectablity of loans is reflected through the Corporation's estimate of the
allowance for credit losses. The Corporation performs periodic and systematic
detailed reviews of its lending portfolio to assess overall collectibility. In
addition, certain assets and liabilities are reflected at their estimated fair
value in the consolidated financial statements. Such amounts are based on either
quoted market prices or estimated values derived by the Corporation utilizing
dealer quotes, market comparisons or internally generated modelling techniques.
The Corporation's internal models generally involve present value of cash flow
techniques. The various valuation techniques are discussed in greater detail
elsewhere in management's discussion and analysis and the notes to the
consolidated financial statements.
There are other complex accounting standards that require the Corporation
to employ significant judgment in interpreting and applying certain of the
principles prescribed by those standards. These judgments include, but are not
limited to, the determination of whether a financial instrument or other
contract meets the definition of a derivative in accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and the applicable hedge deferral criteria,
the accounting for the transfer of financial assets and extinguishments of
liabilities in accordance with Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 140), and the determination of when
certain special purpose vehicles should be consolidated in the Corporation's
balance sheet and statement of income. For a more complete discussion of these
policies, see Notes One, Five and Eight of the consolidated financial
statements.
The remainder of management's discussion and analysis of the Corporation's
results of operations and financial position should be read in conjunction with
the consolidated financial statements and related notes presented on pages 78
through 119.
Business Segment Operations
The Corporation provides a diversified range of banking and nonbanking financial
services and products through its various subsidiaries. The Corporation manages
its operations through four business segments: Consumer and Commercial Banking,
Asset Management, Global Corporate and Investment Banking and Equity
Investments. Certain operating segments have been aggregated into a single
business segment. In the first quarter of 2001, the thirty-year mortgage
portfolio was moved from Consumer and Commercial Banking to the Corporate Other
segment. In the third quarter of 2001, certain consumer finance businesses being
liquidated were transferred from Consumer and Commercial Banking to Corporate
Other. A customer-centered strategic focus is changing the way the Corporation
is managing its business. In addition to existing financial reporting, the
Corporation has begun preparing customer segment-based financial operating
information.
The business segments summarized in Table Two are primarily managed with a
focus on various performance measures including total revenue, net income,
shareholder value added (SVA), return on average equity and efficiency. Some of
these performance measures are also presented on a cash basis which excludes the
impact of goodwill and other intangible amortization expense. Total revenue
includes net interest income on a taxable-equivalent basis and noninterest
income. The net interest income of the business segments reflects the results of
a funds transfer pricing process which matches assets and liabilities with
similar interest rate sensitivity and maturity characteristics and reflects the
allocation of net interest income related to the Corporation's overall asset and
liability management activities on a proportionate basis. SVA is a performance
measure that is aligned with the Corporation's growth strategy orientation and
strengthens the Corporation's focus on generating long-term growth and
shareholder value. SVA is defined as cash basis operating earnings less a charge
for the use of capital. The capital charge is calculated by multiplying 12
percent (management's estimate of the shareholder's minimum required rate of
return on capital invested) by average total common shareholders' equity (at the
Corporation level) and by average allocated equity (at the business segment
level). Equity is allocated to each business segment based on an assessment of
its inherent risk.
See Note Nineteen of the consolidated financial statements for additional
business segment information, reconciliations to consolidated amounts and
information on Corporate Other. Additional information on noninterest income can
be found in the "Noninterest Income" section beginning on page 46. Certain prior
period amounts have been reclassified between segments and their components
(presented after Table Two) to conform to the current period presentation.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
36
Table 2 Business Segment Summary
For the Year Ended December 31
---------------------------------------------------------------------------------
Consumer and Global Corporate
Commercial Asset and Investment Equity
Banking/(1)/ Management/(1)/ Banking/(1)/ Investments/(1)/
--------------------- ------------------- ---------------- ------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
------- ------- ------ ------ ------ ------ ----- -----
Net interest income/(2)/ $ 13,364 $ 12,620 $ 741 $ 666 $ 4,592 $ 3,725 $ (151) $ (139)
Noninterest income/(3)/ 8,008 7,356 1,733 1,801 4,639 4,444 183 1,007
- ------------------------- ------- ------- ------ ------ ------ ------ ----- -----
Total revenue 21,372 19,976 2,474 2,467 9,231 8,169 32 868
Provision for credit losses 1,802 1,111 121 47 1,275 751 8 4
Net income 4,842 4,551 521 589 1,879 1,759 (94) 461
Cash basis earnings 5,479 5,200 578 619 2,022 1,897 (84) 472
Shareholder value added 3,165 2,830 312 421 644 336 (363) 241
Net interest yield 5.06% 4.93% 2.91% 2.80% 2.40% 1.97% n/m n/m
Return on average equity 25.1 23.0 23.6 35.7 16.4 13.5 (4.0)% 24.0%
Cash basis return on equity 28.4 26.3 26.1 37.5 17.6 14.6 (3.6) 24.6
Efficiency ratio 54.7 56.7 62.2 59.3 55.9 59.1 n/m 12.9
Cash basis efficiency ratio 51.7 53.5 59.9 58.0 54.3 57.4 n/m 11.7
Average:
Total loans and leases $ 181,900 $ 173,870 $ 24,381 $ 22,729 $ 80,739 $ 94,391 $ 476 $ 436
Total deposits 266,049 256,805 11,897 11,338 66,983 68,364 13 14
Total assets 290,388 282,014 26,767 24,724 230,755 227,417 6,509 5,453
Year end:
Total loans and leases $ 185,429 $ 179,014 $ 24,692 $ 24,273 $ 66,556 $ 93,510 $ 433 $ 497
Total deposits 280,965 264,196 12,208 12,337 66,532 68,138 - 35
Total assets 304,874 287,013 26,810 27,140 194,146 206,820 6,230 6,691
------------------------- ------- ------- ------ ------ ------- ------- ----- -----
n/m = not meaningful
/(1)/ There were no material intersegment revenues among the segments.
/(2)/ Net interest income is presented on a taxable-equivalent basis.
/(3)/ Noninterest income included the $83 million SFAS 133 transition adjustment
net loss which was included in trading account profits in 2001. The components
of the transition adjustment by segment were a gain of $4 million for Consumer
and Commercial Banking, a gain of $19 million for Global Corporate and
Investment Banking and a loss of $106 million for Corporate Other (not included
in the table above).
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.
The results for 2001 reflect the Corporation's continued focus on card
services as a growth area. End of period managed consumer card outstandings
increased 19 percent from 2000, primarily driven by the leveraging of the
Corporation's franchise to open new accounts with existing customers, the
results of card marketing programs and efforts aimed at increasing customer
satisfaction. In 2001, merchant processing volume increased 12 percent, and
total card services purchase volume increased 12 percent, primarily driven by an
18 percent increase in debit card purchase volume. The increase in debit card
purchase volume was a result of increased customer penetration and activation
rates, partially offset by a drop in purchase volume growth rates following the
events of September 11, 2001.
In the second quarter of 2001, the Corporation's commercial real estate
banking business was moved from Global Corporate and Investment Banking to
Consumer and Commercial Banking. The credit and client management process and
customer base of the business are better aligned with those of Consumer and
Commercial Banking.
Consumer and Commercial Banking
(Dollars in millions) 2001 2000
--------- ---------
Net interest income $ 13,364 $ 12,620
Noninterest income 8,008 7,356
- ------------------------------------ --------- ---------
Total revenue 21,372 19,976
Provision for credit losses 1,802 1,111
Cash basis earnings 5,479 5,200
Shareholder value added 3,165 2,830
Cash basis efficiency ratio 51.7% 53.5%
- ------------------------------------ --------- ---------
o Total revenue increased $1.4 billion, or seven percent, in 2001 compared to
2000.
o Net interest income increased $744 million, or six percent, due to a
favorable shift in loan mix, overall loan and deposit growth and the
Corporation's overall asset and liability management. This increase was
partially offset by the impact of the money market deposit pricing
initiative as the Corporation offered more competitive money market savings
rates.
o Noninterest income increased $652 million, or nine percent, driven by nine
percent increases in card income and service charges and strong mortgage
banking revenue.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
37
o Cash basis earnings in 2001 rose $279 million, or five percent, due to the
increases in net interest income and noninterest income discussed above,
partially offset by an increase in the provision for credit losses and a
three percent increase in noninterest expense.
o The provision for credit losses increased $691 million, or 62 percent,
reflecting higher charge-offs in the commercial and bankcard loan
portfolios.
o Shareholder value added increased $335 million over the prior year as a
result of the increase in cash basis earnings and lower capital as a result
of reductions in commercial loan levels.
The major components of Consumer and Commercial Banking are Banking Regions,
Consumer Products and Commercial Banking.
Banking Regions
Banking Regions serves consumer households in 21 states and the District of
Columbia and overseas through its network of 4,251 banking centers, 13,113 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, debit card
products and credit products such as home equity, mortgage and personal auto
loans. Banking Regions also includes small business banking providing treasury
management, credit services, community investment, check card, e-commerce and
brokerage services to nearly two million small business relationships across the
franchise.
Banking Regions
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 8,561 $ 8,587
Noninterest income 3,866 3,547
- ------------------------------- -------- --------
Total revenue 12,427 12,134
Provision for credit losses 281 268
Cash basis earnings 3,108 3,056
Shareholder value added 1,767 1,693
Cash basis efficiency ratio 58.5% 58.1%
- ------------------------------- -------- --------
o Total revenue in 2001 increased $293 million, or two percent, as an increase
in noninterest income was partially offset by a slight decrease in net
interest income.
o Loan growth, primarily in residential mortgages and home equity lending,
and deposit growth had a positive effect on net interest income but were
offset by the impact of the money market deposit pricing initiative.
o Noninterest income increased $319 million, or nine percent, primarily
due to an increase in consumer service charges of $170 million, or seven
percent, resulting from higher business volumes, and a $117 million, or
23 percent, increase in debit card income, driven by a higher number of
active debit cards from increased penetration and activation rates and
an increase in purchase volume.
o Cash basis earnings increased $52 million, or two percent, in 2001,
primarily attributable to the increase in revenue discussed above offset by
a three percent increase in noninterest 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, lending and investing to develop low-
and moderate-income communities, student lending and certain insurance services.
Consumer Products also provides retail finance and floorplan programs to marine,
RV and auto dealerships.
Consumer Products
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 2,211 $ 1,382
Noninterest income 3,109 2,822
- ------------------------------- ----------------
Total revenue 5,320 4,204
Provision for credit losses 915 527
Cash basis earnings 1,447 1,077
Shareholder value added 1,012 649
Cash basis efficiency ratio 40.1% 47.7%
- ------------------------------- ----------------
o Total revenue in 2001 increased $1.1 billion, or 27 percent, due to
increases in both net interest income and noninterest income.
o Net interest income increased $829 million, or 60 percent, primarily due
to an increase in bankcard receivables from portfolio growth and
maturity of credit card securitizations as well as lower funding costs.
o Noninterest income increased $287 million, or 10 percent, primarily due
to strong mortgage banking revenue and increased credit card income.
Mortgage banking revenue increased $246 million, or 48 percent, due to
higher origination activity and increased gains from higher loan sales
to the secondary market. Mortgage banking revenue also included the
favorable net mark-to-market adjustments, included in trading account
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
38
profits, on certain mortgage banking assets and the related derivative
instruments. These increases were partially offset by increased
prepayments on mortgage loans as a result of the declining interest rate
environment. Credit card income grew $75 million, or four percent, due
to new consumer card account growth and an increase in purchase volume,
partially offset by a decline in servicing income from maturity of
credit card securitizations.
o The $370 million, or 34 percent, increase in cash basis earnings in 2001 was
due to the increases in net interest income and noninterest income discussed
above. These increases were partially offset by an increase in the provision
for credit losses and higher expenses. Expense growth was primarily driven
by card marketing and mortgage production volume activities.
o The provision for credit losses increased 74 percent to $915 million
primarily due to higher net charge-offs in the bankcard loan portfolio.
The increase in bankcard charge-offs was driven by portfolio growth, an
increase in personal bankruptcy filings and a weaker economic
environment.
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
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 2,592 $ 2,651
Noninterest income 1,033 987
- ------------------------------- -------- --------
Total revenue 3,625 3,638
Provision for credit losses 606 316
Cash basis earnings 924 1,067
Shareholder value added 386 488
Cash basis efficiency ratio 45.6% 44.7%
- ------------------------------- -------- --------
o Noninterest income increased five percent and was offset by a two percent
decline in net interest income. Total revenue in 2001 remained flat at $3.6
billion.
o The $46 million increase in noninterest income was primarily
attributable to higher corporate service charges as customers opted to
pay service charges rather than carry excess deposit balances in the
lower rate environment, offset by the liquidation of certain commercial
finance businesses.
o Net interest income declined $59 million, primarily due to a reduction
in commercial loans and the liquidation of certain commercial finance
businesses.
o The $143 million, or 13 percent, decline in cash basis earnings was
primarily driven by an increase in the provision for credit losses,
partially offset by a tax benefit of $53 million in the fourth quarter of
2001 related to the funding of SSI.
o The provision for credit losses increased $290 million to $606 million
as a result of credit deterioration in the commercial loan portfolio.
o Shareholder value added decreased $102 million as the decline in cash basis
earnings was partially offset by lower capital as a result of reductions in
commercial loan levels.
Asset Management
Asset Management includes the Private Bank, Banc of America Capital Management
and the Individual Investor Group. The Private Bank's goal is to assist
individuals and families in building and preserving their wealth by providing
investment, fiduciary and comprehensive credit expertise to high-net-worth
clients. Banc of America Capital Management is an asset-gathering and asset
management organization serving the needs of institutional clients,
high-net-worth individuals and retail customers. Banc of America Capital
Management manages money and distribution channels, manufactures investment
products, offers institutional separate accounts and wrap programs, and provides
advice to clients through asset allocation expertise and software. The
Individual Investor Group, which is comprised of Private Client Services and
Banc of America Investment Services, Inc., provides investment, securities and
financial planning services to affluent and high-net-worth individuals. Private
Client Services focuses on high-net-worth individuals. Banc of America
Investment Services, Inc. includes both the full-service network of investment
professionals and an extensive on-line investor service.
One of the Corporation's strategies is to focus on and grow the asset
management business. Recent initiatives include new investment platforms that
broaden the Corporation's capabilities to maximize market opportunity for its
clients. The Corporation continues to enhance the financial planning tools used
to assist clients with their financial goals.
Effective January 2, 2001, the Corporation acquired the remaining 50
percent of 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.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
39
Client assets at December 31, 2001 and 2000 were:
Client Assets
(Dollars in billions) 2001 2000
-------- --------
Assets under management $ 314.2 $ 278.1
Client brokerage assets 99.4 99.5
Assets in custody 46.9 48.5
- -------------------------- -------- --------
Total client assets $ 460.5 $ 426.1
-------------------------- ------- -------
Assets under management typically generate fees based on a percentage of
their value. Assets of the Nations Funds family of mutual funds reached $148
billion at December 31, 2001, primarily driven by an increase in money market
funds in the declining equity market environment. Growth in assets under
management of $36 billion, or 13 percent, was primarily driven by the growth in
money market funds as well as the addition of the remaining Marsico Funds.
Client brokerage assets, a source of commission revenue, were flat at
approximately $100 billion compared to the prior year. Assets in custody, which
generate custodial fees, declined slightly.
Asset Management
(Dollars in millions) 2001 2000
------ ------
Net interest income $ 741 $ 666
Noninterest income 1,733 1,801
- ------------------------------- ------ ------
Total revenue 2,474 2,467
Provision for credit losses 121 47
Cash basis earnings 578 619
Shareholder value added 312 421
Cash basis efficiency ratio 59.9% 58.0%
- ------------------------------- ------ ------
o Total revenue remained flat at $2.5 billion in 2001, as the increase
in net interest income was offset by a decline in noninterest income.
o Net interest income increased $75 million, or 11 percent, due to the
Corporation's overall asset and liability management and growth in
the commercial and residential mortgage loan portfolios.
o Noninterest income decreased $68 million, or four percent, as a
decline in other income was partially offset by an increase in
investment and brokerage services income. The increase in investment
and brokerage services income was due to new asset management
business and the completed acquisition of Marsico, partially offset
by lower broker activity due to decreased trade volume.
o Cash basis earnings decreased $41 million, or seven percent, in 2001,
primarily due to a $74 million increase in provision expense largely
related to one loan that was charged off in the second quarter of 2001
and increased noninterest expense.
o Noninterest expense increased $78 million, or five percent,
reflecting investments in new private banking offices, the
acquisition of Marsico, and personnel supporting revenue growth
initiatives, partially offset by one-time business divestiture
expenditures in 2000.
o Shareholder value added declined $109 million due to the decline in
cash basis earnings and the increased capital associated with the
acquisition of Marsico.
Global Corporate and Investment Banking
Global Corporate and Investment Banking provides a broad array of financial
services such as investment banking, capital markets, trade finance, treasury
management, lending, leasing and financial advisory services to domestic and
international corporations, financial institutions and government entities.
Clients are supported through offices in 34 countries in four distinct
geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and
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, structured finance and trade services.
Global Corporate and Investment Banking
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 4,592 $ 3,725
Noninterest income 4,639 4,444
- --------------------------------------------- -------- --------
Total revenue 9,231 8,169
Provision for credit losses 1,275 751
Cash basis earnings 2,022 1,897
Shareholder value added 644 336
Cash basis efficiency ratio 54.3% 57.4%
- --------------------------------------------- -------- --------
o In 2001, total revenue increased $1.1 billion, or 13 percent,
primarily due to $620 million, or 22 percent, growth in
trading-related revenue.
o Net interest income increased $867 million, or 23 percent, as a
result of higher trading-related activities and the Corporation's
overall asset and liability management, partially offset by lower
commercial loan levels.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
40
o Noninterest income increased $195 million, or four percent, as increases
in investment and brokerage services, corporate service charges, trading
account profits and investment banking income were partially offset by a
decline in other income.
o Cash basis earnings increased $125 million, or seven percent, in 2001 as
revenue growth was partially offset by higher credit-related costs and
noninterest expense.
o The provision for credit losses increased $524 million to $1.3 billion
due to credit quality deterioration in the commercial-domestic loan
portfolio of Global Credit Products.
o A $331 million, or seven percent, increase in noninterest expense was
primarily due to higher market-related incentives and other expenses in
line with revenue growth.
o Shareholder value added increased $308 million as a result of the increase
in cash basis earnings as well as lower capital due to reductions in loan
levels.
Global Corporate and Investment Banking offers clients a comprehensive
range of global capabilities through three components: Global Investment
Banking, Global Credit Products and Global Treasury Services.
Global Investment Banking
Global Investment Banking includes the Corporation's investment banking
activities and risk management products. Through a separate subsidiary, Banc of
America Securities LLC, Global Investment Banking 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 and prime-brokerage services. Debt and equity
securities research, loan syndications, mergers and acquisitions advisory
services and private placements are also provided through Banc of America
Securities LLC.
In addition, Global Investment Banking provides risk management solutions
for our global customer base using interest rate, equity, credit and commodity
derivatives, foreign exchange, fixed income 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 Investment
Banking 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 Investment Banking
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 1,693 $ 1,125
Noninterest income 3,153 3,007
- ------------------------------- -------- --------
Total revenue 4,846 4,132
Provision for credit losses 26 43
Cash basis earnings 932 778
Shareholder value added 512 374
Cash basis efficiency ratio 69.9% 72.6%
- ------------------------------- -------- --------
o Total revenue grew $714 million, or 17 percent, in 2001 primarily due to
higher trading-related revenue.
o Net interest income grew $568 million, or 51 percent, as a result of
higher trading-related activities.
o Higher investment and brokerage services income and investment banking
income more than offset a decrease in other income, resulting in
noninterest income growth of five percent. Investment banking income
increased $67 million as strong fixed income originations were partially
offset by weaker demand in syndications, equity underwriting and
advisory services.
o Cash basis earnings increased $154 million, or 20 percent, in 2001, as
revenue growth was partially offset by an increase in noninterest expense.
o The $390 million, or 13 percent, increase in noninterest expense
was primarily due to higher market-related incentives and other
expenses in line with revenue growth.
Global Credit Products
Global Credit Products provides credit and lending services and includes the
corporate industry-focused portfolio, leasing and project finance.
Global Credit Products
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ 2,181 $ 1,993
Noninterest income 664 678
- ------------------------------- -------- --------
Total revenue 2,845 2,671
Provision for credit losses 1,265 764
Cash basis earnings 766 887
Shareholder value added (127) (208)
Cash basis efficiency ratio 20.6% 23.5%
- ------------------------------- -------- --------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
41
o Total revenue increased $174 million, or seven percent, in 2001 compared
to 2000.
o Net interest income increased $188 million, or nine percent, compared
to the prior year as lower funding costs offset the impact of lower
commercial loan levels.
o Noninterest income declined $14 million, or two percent, primarily
due to declines in the leasing portfolio, partially offset by an
increase in trading account profits.
o Cash basis earnings declined $121 million, or 14 percent, primarily due
to an increase in the provision for credit losses, partially offset by
the increase in revenue and a tax benefit of $93 million in the fourth
quarter of 2001 related to the funding of SSI.
o The provision for credit losses increased $501 million, or 66 percent,
driven by credit quality deterioration in the commercial-domestic
loan portfolio. Net charge-offs included $210 million in charge-offs
related to Enron Corporation.
o Shareholder value added increased $81 million as the decline in cash basis
earnings was offset by lower capital, reflecting the continued efforts to
reduce corporate loan levels and exit less profitable relationships.
Global Treasury Services
Global Treasury Services provides the technology, strategies and integrated
solutions to help financial institutions, government agencies and public and
private companies manage their operations and cash flows on a local, regional,
national and global level.
Global Treasury Services
(Dollars in millions) 2001 2000
------ ------
Net interest income $ 718 $ 607
Noninterest income 822 759
- ------------------------------- ------ ------
Total revenue 1,540 1,366
Provision for credit losses (16) (56)
Cash basis earnings 324 232
Shareholder value added 259 170
Cash basis efficiency ratio 67.4% 77.6%
- ------------------------------- ------ ------
o Revenue increased $174 million, or 13 percent, with increases in both net
interest income and noninterest income in 2001.
o Net interest income increased $111 million, or 18 percent, primarily due
to deposit growth and lower funding costs.
o Noninterest income increased $63 million, or eight percent, due to an
increase in corporate service charges as customers chose to pay service
charges rather than maintain excess deposit balances in the lower rate
environment.
o Cash basis earnings increased $92 million, or 40 percent, in 2001 driven
primarily by the growth in revenue.
Equity Investments
Equity Investments includes Principal Investing, which is comprised of a
diversified portfolio of investments in companies at all stages of the business
cycle, from start up to buyout. Investments are made on both a direct and
indirect basis in the U.S. and overseas. Direct investing activity focuses on
playing an active role in the strategic and financial direction of the portfolio
company as well as providing broad business experience and access to the
Corporation's global resources. Indirect investments represent passive limited
partnership stakes in funds managed by experienced third party private equity
investors who act as general partners. Equity Investments also includes the
Corporation's strategic technology and alliances investment portfolio.
Equity Investments
(Dollars in millions) 2001 2000
-------- --------
Net interest income $ (151) $ (139)
Noninterest income 183 1,007
- ------------------------------- -------- --------
Total revenue 32 868
Provision for credit losses 8 4
Cash basis earnings (84) 472
Shareholder value added (363) 241
Cash basis efficiency ratio n/m 11.7%
- ------------------------------- -------- --------
n/m = not meaningful
o In 2001, both revenue and cash basis earnings decreased substantially
primarily due to lower equity investment gains.
o Equity investment gains decreased $763 million to $230 million, with
$50 million in Principal Investing and $180 million in the strategic
investments portfolio. Principal Investing recorded cash gains of $425
million, offset by impairment charges of $335 million, of which $245
million occurred in the fourth quarter of 2001, and fair value
adjustment losses of $40 million. Equity investment gains in the
strategic investments portfolio included $140 million in the first
quarter of 2001 related to the sale of an interest in the Star Systems
ATM network.
o Net interest income consists primarily of the funding cost associated
with the carrying value of investments.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
42
o Shareholder value added declined $604 million reflecting the decline in cash
basis earnings and an increase in capital driven by an increase in the level
of equity investments and unused commitments.
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 last three years and most recent five
quarters is presented in Tables Four and Twenty-Six, respectively. The changes
in net interest income from year to year are analyzed in Table Five.
As reported, net interest income on a taxable-equivalent basis increased
$2.0 billion to $20.6 billion in 2001 compared to 2000. 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, excluding balance sheet portfolios used to manage interest rate
risk. 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 46, as trading strategies are typically evaluated based
on total revenue. Noninterest income, rather than net interest income, is
recorded for assets that have been securitized as the Corporation takes on the
role of servicer and records servicing income, and gains and losses on
securitizations, where appropriate.
Table Three below provides a reconciliation of net interest income on a
taxable-equivalent basis presented in Table Four to core net interest income for
the year ended December 31:
Table 3 Net Interest Income
(Dollars in millions) 2001 2000 Change
--------- --------- ------
Net interest income
As reported/(1)/ $ 20,633 $ 18,671 10.5%
Less: Trading-related net interest income (1,566) (1,023)
Add: Impact of securitizations, asset sales and divestitures 65 7
- ----------------------------------------------------------- --------- --------- -----
Core net interest income $ 19,132 $ 17,655 8.4%
----------------------------------------------------------- -------- -------- -----
Average earning assets
As reported $ 560,316 $ 583,467 (4.0)%
Less: Trading-related earning assets (125,263) (113,551)
Add: Earning assets securitized, sold and divested 3,616 641
- ----------------------------------------------------------- --------- --------- -----
Core average earning assets $ 438,669 $ 470,557 (6.8)%
----------------------------------------------------------- -------- -------- -----
Net interest yield on earning assets/(1)/ /(2)/
As reported 3.68% 3.20% 48bp
Add: Impact of trading-related activities 0.69 0.55 14
Impact of securitizations, asset sales and divestitures (0.01) - (1)
----------------------------------------------------------- --------- --------- -----
Core net interest yield on earning assets 4.36% 3.75% 61bp
----------------------------------------------------------- --------- --------- -----
/(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 $19.1 billion in 2001
compared to $17.7 billion in 2000, an increase of $1.5 billion. The increase in
core net interest income was driven by changes in interest rates and the effect
of portfolio repositioning, higher levels of core funding and a favorable change
in managed loan mix, partially offset by the impact of the money market deposit
pricing initiative and the decrease in auto lease financing contributions. The
higher levels of core funding reflected a $14.9 billion increase in average
customer-based deposits and a $1.5 billion increase in average shareholders'
equity.
Core average earning assets were $438.7 billion in 2001, a decrease of
$31.9 billion, compared to $470.6 billion in 2000, primarily reflecting reduced
securities levels and average managed commercial loan balances partially offset
by growth in average managed consumer loan levels. Falling interest rates in
2001 allowed the Corporation to shed lower yielding assets and reposition its
balance sheet to take advantage of a steepened yield curve. Average managed
consumer loans increased eight percent led by growth in residential mortgages,
bankcard receivables and home equity lines. Average managed commercial loans
decreased eight percent, reflecting continuing efforts to reduce corporate loan
levels and exit less profitable relationships. Loan growth is dependent on
economic conditions and the management of borrower, industry, product and
geographic concentrations.
The core net interest yield increased 61 basis points to 4.36 percent in
2001 compared to 3.75 percent in 2000, mainly due to the effects of changes in
interest rates and portfolio repositioning, higher levels of core funding and a
favorable change in managed loan mix.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
43
Table 4 Average Balances and Interest Rates - Taxable-Equivalent Basis
2001
-----------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
-------- ------- ----
Earning assets
Time deposits placed and other short-term investments $ 6,723 $ 318 4.73%
Federal funds sold and securities purchased under agreements to resell 35,202 1,414 4.02
Trading account assets 66,418 3,653 5.50
Securities/(1)/ 60,372 3,761 6.23
Loans and leases/(2)/:
Commercial - domestic 133,569 9,879 7.40
Commercial - foreign 26,492 1,567 5.90
Commercial real estate - domestic 24,607 1,700 6.91
Commercial real estate - foreign 348 20 6.08
- -------------------------------------------------------------- -------- ------- ----
Total commercial 185,016 13,166 7.12
- -------------------------------------------------------------- -------- ------- ----
Residential mortgage 81,472 5,920 7.27
Home equity lines 22,013 1,625 7.38
Direct/Indirect consumer 39,528 3,025 7.65
Consumer finance 18,555 1,683 9.07
Bankcard 16,641 1,879 11.29
Foreign consumer 2,222 127 5.80
- -------------------------------------------------------------- -------- ------- ----
Total consumer 180,431 14,259 7.90
- -------------------------------------------------------------- -------- ------- ----
Total loans and leases 365,447 27,425 7.50
- -------------------------------------------------------------- -------- ------- ----
Other earning assets 26,154 2,065 7.90
- -------------------------------------------------------------- -------- ------- ----
Total earning assets/(3)/ 560,316 38,636 6.90
- -------------------------------------------------------------- -------- ------- ----
Cash and cash equivalents 22,542
Other assets, less allowance for credit losses 66,689
- -------------------------------------------------------------- -------- ------- ----
Total assets $ 649,547
- -------------------------------------------------------------- ------- ------- ----
Interest-bearing liabilities Domestic interest-bearing deposits:
Savings $ 20,208 213 1.05
NOW and money market deposit accounts 114,657 2,498 2.18
Consumer CDs and IRAs 74,458 3,853 5.17
Negotiable CDs, public funds and other time deposits 5,848 290 4.96
- -------------------------------------------------------------- -------- ------- ----
Total domestic interest-bearing deposits
- -------------------------------------------------------------- -------- ------- ----
Foreign interest-bearing deposits/(4)/:
Banks located in foreign countries 23,397 1,053 4.49
Governments and official institutions 3,615 152 4.21
Time, savings and other 22,940 827 3.62
- -------------------------------------------------------------- -------- ------- ----
Total foreign interest-bearing deposits 49,952 2,032 4.07
- -------------------------------------------------------------- -------- ------- ----
Total interest-bearing deposits 265,123 8,886 3.35
- -------------------------------------------------------------- -------- ------- ----
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 92,476 4,167 4.51
Trading account liabilities 29,995 1,155 3.85
Long-term debt/(5)/ 69,622 3,795 5.45
- -------------------------------------------------------------- -------- ------- ----
Total interest-bearing liabilities/(6)/ 457,216 18,003 3.94
- -------------------------------------------------------------- -------- ------- ----
Noninterest-bearing sources:
Noninterest-bearing deposits 97,529
Other liabilities 46,124
Shareholders' equity 48,678
- -------------------------------------------------------------- -------- ------- ----
Total liabilities and shareholders' equity $ 649,547
- -------------------------------------------------------------- -------- ------- ----
Net interest spread 2.96
Impact of noninterest-bearing sources .72
- -------------------------------------------------------------- -------- ------- ----
Net interest income/yield on earning assets $ 20,633 3.68%
- -------------------------------------------------------------- -------- ------- ----
/(1)/ The average balance and yield on securities are based on the average of
historical amortized cost balances.
/(2)/ Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
/(3)/ Interest income includes taxable-equivalent basis adjustments of $343,
$322 and $215 in 2001, 2000 and 1999, respectively. Interest income also
includes the impact of risk management interest rate contracts, which increased
(decreased) interest income on the underlying assets $978, $(48) and $306 in
2001, 2000 and 1999, respectively. These amounts were substantially offset by
corresponding decreases or increases in the income earned on the underlying
assets. For further information on interest rate contracts, see "Asset and
Liability Management Activities" beginning on page 67.
/(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 $63, $(36) and $116 in 2001, 2000, and 1999, respectively. These
amounts were substantially offset by corresponding decreases or increases in the
interest paid on the underlying liabilities. For further information on interest
rate contracts, see "Asset and Liability Management Activities" beginning on
page 67.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
44
2000 1999
- ----------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------
$ 4,863 $ 336 6.91% $ 5,268 $ 295 5.59%
42,021 2,354 5.60 32,252 1,666 5.17
48,938 2,751 5.62 39,206 2,102 5.36
84,211 5,111 6.07 80,127 4,811 6.00
148,168 12,025 8.12 138,339 10,112 7.31
29,316 2,114 7.21 29,374 1,897 6.46
25,878 2,299 8.88 25,533 2,115 8.28
304 27 8.87 294 25 8.76
- ----------------------------------------------------------------------------------
203,666 16,465 8.08 193,540 14,149 7.31
- ----------------------------------------------------------------------------------
91,091 6,754 7.41 78,948 5,667 7.18
19,492 1,748 8.97 16,152 1,268 7.85
41,476 3,446 8.31 42,274 3,469 8.21
24,395 2,160 8.85 18,752 1,670 8.91
10,279 1,241 12.07 9,778 1,134 11.59
2,223 195 8.77 3,339 316 9.45
- ----------------------------------------------------------------------------------
188,956 15,544 8.23 169,243 13,524 7.99
- ----------------------------------------------------------------------------------
392,622 32,009 8.15 362,783 27,673 7.63
- ----------------------------------------------------------------------------------
10,812 926 8.57 11,875 881 7.41
- ----------------------------------------------------------------------------------
583,467 43,487 7.45 531,511 37,428 7.04
- ----------------------------------------------------------------------------------
24,766 25,766
63,340 59,561
- ----------------------------------------------------------------------------------
$ 671,573 $ 616,838
- ----------------------------------------------------------------------------------
$ 23,452 314 1.34 $ 23,655 300 1.27
99,927 2,941 2.94 98,649 2,374 2.41
77,409 4,205 5.43 74,010 3,534 4.78
7,626 481 6.31 6,646 361 5.44
- ----------------------------------------------------------------------------------
208,414 7,941 3.81 202,960 6,569 3.24
- ----------------------------------------------------------------------------------
18,788 1,130 6.01 16,301 802 4.92
8,922 513 5.75 7,884 400 5.08
26,024 1,423 5.47 25,949 1,231 4.74
- ----------------------------------------------------------------------------------
53,734 3,066 5.71 50,134 2,433 4.85
- ----------------------------------------------------------------------------------
262,148 11,007 4.20 253,094 9,002 3.56
- ----------------------------------------------------------------------------------
131,492 7,957 6.05 116,150 5,826 5.02
23,843 892 3.74 15,458 658 4.26
70,293 4,960 7.06 57,574 3,600 6.25
- ----------------------------------------------------------------------------------
487,776 24,816 5.09 442,276 19,086 4.32
- ----------------------------------------------------------------------------------
91,146 88,654
45,519 39,307
47,132 46,601
- ----------------------------------------------------------------------------------
$ 671,573 $ 616,838
- ----------------------------------------------------------------------------------
2.36 2.72
.84 .73
- ----------------------------------------------------------------------------------
$ 18,671 3.20% $ 18,342 3.45%
- ----------------------------------------------------------------------------------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
45
Table 5 Analysis of Changes in Net Interest Income - Taxable-Equivalent Basis
From 2000 to 2001 From 1999 to 2000
------------------------------------------------------------------
Due to Change in/(1)/ Due to Change in/(1)/
---------------------- Net ---------------------- Net
(Dollars in millions) Volume Rate Change Volume Rate Change
------------------------------------------------------------------
Increase (decrease) in interest income
Time deposits placed and other short-term investments $ 129 $ (147) $ (18)$ (23) $ 64 $ 41
Federal funds sold and securities purchased under (383) (557) (940) 506 182 688
agreements to resell
Trading account assets 982 (80) 902 521 128 649
Securities (1,446) 96 (1,350) 242 58 300
Loans and leases:
Commercial - domestic (1,179) (967) (2,146) 719 1,914 1,913
Commercial - foreign (204) (343) (547) (3) 220 217
Commercial real estate - domestic (114) (485) (599) 28 156 184
Commercial real estate - foreign 4 (11) (7) 2 - 2
- --------------------------------------------------------------------------------------------------------------------------
Total commercial (3,299) 2,316
- --------------------------------------------------------------------------------------------------------------------------
Residential mortgage (717) (117) (834) 873 214 1,087
Home equity lines 227 (350) (123) 262 218 480
Direct/Indirect consumer (161) (260) (421) (64) 41 (23)
Consumer finance (518) 41 (477) 504 (14) 490
Bankcard 768 (130) 638 57 50 107
Foreign consumer - (68) (68) (106) (15) (121)
- --------------------------------------------------------------------------------------------------------------------------
Total consumer (1,285) 2,020
- --------------------------------------------------------------------------------------------------------------------------
Total loans and leases (4,584) 4,336
- --------------------------------------------------------------------------------------------------------------------------
Other earning assets 1,315 (176) 1,139 (80) 125 45
- --------------------------------------------------------------------------------------------------------------------------
Total interest income (4,851) 6,059
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense Domestic
interest-bearing deposits:
Savings (43) (58) (101) (2) 16 14
NOW and money market deposit accounts 430 (873) (443) 34 533 567
Consumer CDs and IRAs (162) (190) (352) 166 505 671
Negotiable CDs, public funds and other time
deposits (112) (79) (191) 54 66 120
- --------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits (1,087) 1,372
- --------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits:
Banks located in foreign countries 276 (353) (77) 122 206 328
Governments and official institutions (305) (56) (361) 53 60 113
Time, savings and other (168) (428) (596) 3 189 192
- --------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits (1,034) 633
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits (2,121) 2,005
- --------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under
agreements to repurchase and other short-term
borrowings (2,362) (1,428) (3,790) 775 1,356 2,131
Trading account liabilities 230 33 263 358 (124) 234
Long-term debt (45) (1,120) (1,165) 793 567 1,360
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense (6,813) 5,730
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net interest income $1,962 $ 329
- --------------------------------------------------------------------------------------------------------------------------
/(1)/ The changes for each category of interest income and expense are
divided between the portion of change attributable to the variance in
volume or rate for that category. The change in rate/volume variance
has been allocated to the rate variance.
Noninterest Income
As presented in Table Six, noninterest income decreased $234 million to $14.3
billion in 2001 from the comparable 2000 period. The decrease in noninterest
income reflects the increases in service charges, card income, investment and
brokerage services, mortgage banking income and investment banking income being
offset by a sharp decline in equity investment gains as well as declines in
other income and trading account profits.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
46
Table 6 Noninterest Income
Increase/(Decrease)
--------------------
(Dollars in millions) 2001 2000 Amount Percent
--------- --------- -------- --------
Consumer service charges $ 2,866 $ 2,654 $ 212 8.0%
Corporate service charges 2,078 1,889 189 10.0
- ----------------------------------------------- --------- --------- -------- --------
Total service charges 4,944 4,543 401 8.8
----------------------------------------------- --------- --------- -------- --------
Consumer investment and brokerage services 1,546 1,466 80 5.5
Corporate investment and brokerage services 566 463 103 22.2
- ----------------------------------------------- --------- --------- -------- --------
Total investment and brokerage services 2,112 1,929 183 9.5
----------------------------------------------- --------- --------- -------- --------
Mortgage banking income 593 512 81 15.8
Investment banking income 1,579 1,512 67 4.4
Equity investment gains 291 1,054 (763) (72.4)
Card income 2,421 2,229 192 8.6
Trading account profits/(1)/ 1,842 1,923 (81) (4.2)
Other income 566 880 (314) (35.7)
- ----------------------------------------------- --------- --------- -------- --------
Total $14,348 $14,582 $(234) (1.6)%
----------------------------------------------- -------- --------- -------- --------
/1/ Trading account profits in 2001 included the $83 million SFAS 133
transition adjustment net loss. The components of the transition
adjustment by segment were a gain of $4 million for Consumer and
Commercial Banking, a gain of $19 million for Global Corporate and
Investment Banking and a loss of $106 million for Corporate Other.
The following section discusses the noninterest income results of the
Corporation's four business segments. For additional business segment
information, see "Business Segment Operations" beginning on page 36.
Consumer and Commercial Banking
o Noninterest income for Consumer and Commercial Banking increased $652
million to $8.0 billion in 2001 from the comparable 2000 period, driven
by increased service charges, higher card income and strong mortgage
banking revenue.
o Service charges include deposit account service charges, non-deposit
service charges and fees and bankers' acceptances and letters of credit
fees. Service charges increased $321 million to $3.8 billion in 2001
due to an increase in both consumer and corporate service charges.
Consumer service charges increased $204 million primarily due to higher
business volumes. Corporate service charges increased $117 million as
corporate customers chose to pay higher fees rather than maintain
excess deposit balances in the lower rate environment.
o Card income includes interchange income, credit and debit card fees and
merchant discount fees. Card income increased $192 million to $2.4
billion primarily due to new account growth in both credit and debit
card and increased purchase volume on existing accounts. Growth in
income for the core portfolio is being generated through traditional
marketing channels, expanding relationships with existing customers and
leveraging the banking center network. Card income includes activity
from the securitized portfolio of $193 million and $209 million in 2001
and 2000, respectively. This amount represents residual income which
consists of revenues from the securitized credit card portfolio offset
by charge-offs and interest expense paid to the bondholders.
o Mortgage banking revenue increased $246 million to $758 million in 2001
and was comprised of mortgage banking income of $593 million and
trading account profits of $165 million. The amount recorded in trading
account profits represents the net mark-to-market adjustments on
certain mortgage banking assets and the related derivative instruments.
The increase in mortgage banking revenue in 2001 primarily reflected
higher origination activity, increased gains on loan sales to the
secondary market and favorable net mark-to-market adjustments included
in trading account profits. These increases were partially offset by
increased prepayments on mortgage loans as a result of the declining
interest rate environment. The average managed portfolio of mortgage
loans serviced increased $6.1 billion to $334.8 billion in 2001
compared to the same period in 2000. Total production of first mortgage
loans originated through the Corporation increased $30.6 billion to
$82.4 billion in 2001, reflecting a significant increase in
refinancings as a result of declining interest rates. First mortgage
loan origination volume was composed of approximately $49.6 billion of
retail loans and $32.8 billion of correspondent and wholesale loans in
2001. Retail first mortgage origination volume increased to 60 percent
of total volume in 2001 from 42 percent in 2000. The Corporation made a
strategic decision to exit the correspondent loan origination channel
during the second quarter of 2001. The Corporation's decision to exit
the correspondent business was based upon its overall strategy to
focus on businesses with greater potential to deepen and expand
customer relationships and with higher potential returns.
Asset Management
o Noninterest income for Asset Management decreased $68 million to $1.7
billion in 2001 compared to the same period in 2000. The decrease was
primarily attributable to a decline in other income, partially offset
by increased income from investment and brokerage services.
o Income from investment and brokerage services includes personal and
institutional asset management fees and brokerage income. Income from
investment and brokerage services increased $45 million to $1.6 billion
in 2001 compared to the same period in 2000. This increase was largely
due to new asset management business and the completed acquisition of
Marsico being offset by lower broker activity due to decreased trade
volume.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
47
Global Corporate and Investment Banking
o Noninterest income for Global Corporate and Investment Banking increased
$195 million to $4.6 billion in 2001 compared to the same period in 2000.
The increase was primarily due to increases in investment and brokerage
services, corporate service charges, trading account profits and investment
banking income, partially offset by a decline in other income.
o Corporate service charges increased $72 million to $1.1 billion in
2001, primarily driven by corporate customers opting to pay service
charges rather than maintain excess deposit balances in the lower rate
environment.
o Trading account profits, as reported in the Consolidated Statement of
Income, does not include the net interest income recognized on
interest-earning and interest-bearing trading positions or the related
funding charge or benefit. Trading account profits as well as
trading-related net interest income ("trading-related revenue") are
presented in the following table as they are both considered in
evaluating the overall profitability of the Corporation's trading
positions.
Trading-related revenue increased $620 million to $3.4 billion in
2001, due to a $543 million increase in the net interest margin and a
$77 million increase in trading account profits. Increases in the fixed
income, interest rate and commodities contract categories were
partially offset by a decrease in equities and equity derivatives
contracts. Fixed income showed the largest increase, up $483 million,
or 129 percent, primarily attributable to an increase in market
liquidity which resulted from a lower interest rate environment, as
well as tightening of credit spreads. Revenue from interest rate
contracts increased $198 million to $893 million reflecting a more
volatile rate environment as well as an increase in customer flow as
customers sought to lock in lower rates. Commodities contracts
increased $102 million to $172 million, attributable to market
volatility and increased customer flow. Foreign exchange revenue
increased $5 million to $541 million. Income from equities and equity
derivatives contracts decreased $168 million to $920 million, due to a
slowdown in customer activity in the market. Trading account profits in
2001 included a $19 million transition adjustment gain resulting from
the adoption of SFAS 133.
Trading-related Revenue in Global Corporate and Investment Banking
(Dollars in millions) 2001 2000
-------- --------
Trading account profits $ 1,818 $ 1,741
Net interest income 1,566 1,023
- --------------------------------------- -------- --------
Total trading-related revenue $ 3,384 $ 2,764
- --------------------------------------- -------- --------
Trading-related revenue by product
Foreign exchange contracts $ 541 $ 536
Interest rate contracts 893 695
Fixed income 858 375
Equities and equity derivatives 920 1,088
Commodities 172 70
- --------------------------------------- -------- --------
Total trading-related revenue $ 3,384 $ 2,764
- --------------------------------------- -------- --------
o Investment banking income increased $67 million to $1.6 billion in 2001.
Increases in securities underwriting and other investment banking income
were offset by declines in syndications and advisory fees. Securities
underwriting fees increased $177 million to $797 million from strong growth
in high grade and high yield origination which was offset by lower equity
underwriting. Syndication fees decreased $119 million to $402 million in
2001 as a result of fewer deals in the marketplace. A sluggish market for
advisory services drove a decline in fees of $22 million to $276 million in
2001. Investment banking income by major activity follows:
Investment Banking Income
(Dollars in millions) 2001 2000
-------- --------
Securities underwriting $ 797 $ 620
Syndications 402 521
Advisory services 276 298
Other 104 73
- ----------------------------- -------- --------
Total $ 1,579 $ 1,512
- ----------------------------- -------- --------
Equity Investments
o Noninterest income for Equity Investments decreased $824 million to $183
million in 2001 compared to the same period in 2000. This decrease resulted
from a sharp decline in equity investment gains driven by weaker equity
markets.
o Equity investment gains decreased $763 million to $230 million, with
$50 million in Principal Investing and $180 million in the strategic
investments portfolio. Principal Investing recorded cash gains of $425
million, offset by impairment charges of $335 million, of which $245
million occurred in the fourth quarter of 2001, and fair value
adjustment losses of $40 million. Equity investment gains in the
strategic investments portfolio included a gain of $140 million in the
first quarter of 2001 related to the sale of an interest in the Star
Systems ATM network.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
48
Provision for Credit Losses
The provision for credit losses totaled $3.9 billion for the year ended December
31, 2001 compared to $2.5 billion in 2000, excluding the impact of charges
related to the exit of the subprime real estate lending business. The increase
in the provision for credit losses from last year was primarily due to an
increase in net charge-offs, which included $210 million in charge-offs in the
fourth quarter of 2001 related to Enron Corporation. Additional provision
expense was also recorded in 2001 to increase the allowance for credit losses
due to deterioration in credit quality and the overall uncertainty in the
economy. Excluding the impact of subprime real estate exit-related charges, the
provision for credit losses for 2001 was $283 million in excess of net
charge-offs. Total net charge-offs, excluding the impact of exit-related
charges, were $3.6 billion for the year ended December 31, 2001 compared to $2.4
billion in 2000. This increase was due to higher charge-offs in the commercial -
domestic portfolio due to a deterioration in credit quality stemming from the
weak economic environment. Bankcard charge-offs also increased due to growth in
the portfolio, an increase in personal bankruptcy filings and a weaker economic
environment.
An exit-related provision for credit losses of $395 million, combined with
an existing allowance for credit losses of $240 million, was used to write down
the subprime real estate loan portfolio to estimated market value in the third
quarter of 2001. This resulted in charge-offs of $635 million in the consumer
finance loan portfolio. Including the exit impact, the provision for credit
losses totaled $4.3 billion and total net charge-offs were $4.2 billion for the
year ended December 31, 2001.
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 54.
Noninterest Expense
As presented in Table Seven, the Corporation's noninterest expense increased
$2.1 billion to $20.7 billion in 2001. This increase in noninterest expense was
driven by business exit costs, higher other general operating expense,
personnel, professional fees, data processing and marketing, reflecting
investments in growth businesses such as e-commerce, Asset Management and card
and payment businesses.
Table 7 Noninterest Expense
2001 2000 Increase/(Decrease)
--------------------------------------------------------------------
(Dollars in millions) Amount Percent/(1)/ Amount Percent/(1)/ Amount Percent
-------- ----------- -------- ----------- ------- -------
Personnel $ 9,829 28.1% $ 9,400 28.2% $ 429 4.6%
Occupancy 1,774 5.1 1,682 5.0 92 5.5
Equipment 1,115 3.2 1,173 3.5 (58) (4.9)
Marketing 682 1.9 621 1.9 61 9.8
Professional fees 564 1.6 452 1.4 112 24.8
Amortization of intangibles 878 2.5 864 2.6 14 1.6
Data processing 776 2.2 667 2.0 109 16.3
Telecommunications 484 1.4 527 1.6 (43) (8.2)
Other general operating 2,687 7.7 2,114 6.4 573 27.1
General administrative and other 615 1.8 583 1.8 32 5.5
Business exit costs 1,305 3.7 - - 1,305 n/m
Restructuring charges - - 550 1.7 (550) n/m
- ---------------------------------- -------- --------- -------- ------ -------- ------
Total $ 20,709 59.2% $ 18,633 56.0% $ 2,076 11.1%
- ---------------------------------- -------- --------- -------- ------ -------- ------
/(1)/ Percent of net interest income on a taxable-equivalent basis and
noninterest income.
o Personnel expense increased $429 million to $9.8 billion in 2001, primarily
due to a severance charge of $150 million in the fourth quarter of 2001
related to ongoing efficiency improvement programs, higher revenue-related
incentive compensation and increased salaries expense. The Corporation had
approximately 143,000 full-time equivalent employees at both December 31,
2001 and 2000.
o Marketing expense increased $61 million to $682 million for 2001, primarily
due to the Corporation's national brand-building campaign and higher card
marketing in Consumer and Commercial Banking.
o Professional fees increased $112 million to $564 million for 2001, primarily
reflecting higher consulting and other professional fees due to an increase
in initiatives related to the Corporation's strategy to improve customer
satisfaction, the launch of a company-wide Six Sigma quality and productivity
program and implementation of a new integrated business planning process.
o Data processing expense increased $109 million to $776 million for 2001,
primarily due to higher outsourced processing expense as a result of the
outsourcing of personnel services and higher item processing and check
clearing expenses.
o Other general operating expense increased $573 million to $2.7 billion in
2001, reflecting $334 million in litigation expenses in the fourth quarter of
2001 related to small settlements and an addition to the legal reserve to
cover increased exposure to existing litigation, foreclosed properties
expense in Corporate Other and other miscellaneous expenses throughout the
Corporation.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
49
o On August 15, 2001, the Corporation announced that it was exiting its
auto leasing and subprime real estate lending businesses. As a result
of this strategic decision, the Corporation recorded pre-tax business
exit costs in the third quarter of 2001 of $1.3 billion in noninterest
expense. Business exit costs consisted of goodwill write-offs of $685
million, auto lease residual charges of $400 million, real estate
servicing asset charges of $145 million and other transaction costs of
$75 million.
o As part of its productivity and investment initiatives announced on
July 28, 2000, the Corporation recorded a pre-tax charge of $550
million in the third quarter of 2000. Of the $550 million restructuring
charge, approximately $475 million was used to cover severance and
related costs and approximately $75 million was used for other costs
related to process change and channel consolidation. At December 31,
2001, the reserve had been substantially utilized.
Income Taxes
The Corporation's income tax expense for 2001 was $3.3 billion for an
effective tax rate of 32.9 percent and for 2000 was $4.3 billion for an
effective tax rate of 36.2 percent. The decrease in the effective tax rate for
2001 was due primarily to a fourth quarter tax benefit of $418 million. The tax
benefit, which resulted in a 17 percent effective tax rate for the fourth
quarter of 2001, was generated as a result of the Corporation's realignment of
certain problem loan management activities into a wholly-owned subsidiary. This
tax benefit was partially offset by the portion of goodwill write-off included
in business exit costs recorded during 2001 that is not deductible for federal
or state income tax purposes. Note Seventeen of the consolidated financial
statements includes a reconciliation of expected federal income tax expense
computed using the federal statutory rate of 35 percent to actual income tax
expense.
Balance Sheet Review
The Corporation utilizes an integrated approach in managing its balance sheet.
The following summary discusses various aspects of both on-and off-balance
sheet positions as of December 31, 2001 and 2000 and for the years then ended.
Cash and Cash Equivalents
At December 31, 2001, cash and cash equivalents were $26.8 billion, a decrease
of $676 million from December 31, 2000. During 2001, net cash used in operating
activities was $12.8 billion, net cash provided by investing activities was
$37.6 billion and net cash used in financing activities was $25.3 billion. For
further information on cash flows, see the Consolidated Statement of Cash Flows
of the consolidated financial statements.
Securities
The securities portfolio serves a primary role in the Corporation's balance
sheet management activities. The decision to purchase or sell securities is
based upon the current assessment of economic and financial conditions,
including the interest rate environment, liquidity requirements and on- and
off-balance sheet positions.
The average securities portfolio in 2001 decreased $23.8 billion to $60.4
billion due to significant reductions in the portfolio in early 2001. As a
percentage of total uses of funds, the average securities portfolio decreased by
four percent to nine percent in 2001.
The securities portfolio at December 31, 2001 consisted of
available-for-sale securities totaling $84.5 billion compared to $64.7 billion
at December 31, 2000. The increase in available-for-sale securities was
concentrated in the mortgage-backed securities portfolio and was primarily a
result of loans securitized during the year and subsequently held in the
portfolio. The reduction in the U.S. Treasury securities and agency debentures
in the available-for-sale portfolio was driven by portfolio repositioning during
the year. The estimated average duration of the available-for-sale securities
portfolio was 3.34 years at December 31, 2001 compared to 4.13 years at December
31, 2000.
The valuation allowance for available-for-sale and marketable equity
securities is included in shareholders' equity. At December 31, 2001, the
valuation allowance consisted of net unrealized losses of $480 million, net of
related income taxes of $311 million. At December 31, 2000, the valuation
allowance reflected net unrealized losses of $560 million, net of related income
taxes of $330 million.
Held-to-maturity securities totaled $1.0 billion at December 31, 2001
compared to $1.2 billion at December 31, 2000. At December 31, 2001 and 2000,
the market value of the Corporation's held-to-maturity securities reflected
pre-tax net unrealized losses of $40 million and $54 million, respectively.
Gains on sales of securities were $475 million in 2001 compared to $25
million in 2000. The majority of the gains were realized in the fourth quarter
of 2001 as the Corporation reduced its risk of slower prepayments in the
securities portfolio through sales of mortgage-backed securities in anticipation
of rising interest rates. See Note Three of the consolidated financial
statements for further details on securities.
Loans and Leases
As presented in Table Four, average loans and leases, the Corporation's primary
use of funds, decreased $27.2 billion to $365.4 billion in 2001. This decline
was primarily due to a decrease in consumer finance loans as the Corporation
exited the subprime real estate lending business and a decline in commercial
loans as the Corporation continued efforts to reduce corporate loan levels and
exit less profitable relationships. The Corporation also reviews loans on a
managed basis, which adjusts for securitizations, sales and divestitures.
Average managed loans and leases decreased $1.2 billion to $378.7 billion in
2001. This decrease was primarily due to lower average managed commercial loan
levels, partially offset by growth in average managed consumer loans. See Note
Eight of the consolidated financial statements for additional information on
managed loans.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
50
Average managed commercial loans decreased $15.3 billion to $187.2 billion
in 2001. The commercial-domestic portfolio decreased $12.2 billion to $135.8
billion, reflecting aggressive paydowns precipitated by falling interest rates
and continuing efforts to exit less profitable relationships. The commercial-
foreign portfolio declined $2.4 billion to $26.5 billion primarily due to
paydowns on customer balances.
Average managed consumer loans increased eight percent in 2001, reflecting
increases throughout the consumer loan portfolios. Average managed residential
mortgages increased $4.6 billion to $84.0 billion due to strong growth in
branch-originated products. Average managed bankcard loans increased $4.4
billion to $24.6 billion due to an increase in new business volume and slower
balance paydowns. Average managed home equity lines increased $2.5 billion to
$22.0 billion, due to the impact of new marketing programs implemented in mid
2000. Average managed consumer finance loans increased $2.3 billion to $18.6
billion, and average managed direct/indirect consumer loans increased $308
million to $40.1 billion.
A significant source of liquidity for the Corporation is the repayments and
maturities of loans. Table Eight presents the contractual maturity distribution
and interest sensitivity of selected loan categories at December 31, 2001, and
indicates that approximately 44 percent of the selected loans had maturities of
one year or less. The securitization and sale of certain loans and the use of
loans as collateral in asset-backed financing arrangements are also sources of
liquidity.
Table 8 Selected Loan Maturity Data/(1)/
December 31, 2001
---------------------------------------------
Due after
Due in 1 year
1 year through Due after
(Dollars in millions) or less 5 years 5 years Total
-------- --------- --------- ---------
Commercial - domestic $ 42,536 $ 47,058 $ 21,382 $ 110,976
Commercial real estate - domestic 2,888 5,905 3,374 12,167
Construction real estate - domestic 5,748 3,963 393 10,104
Foreign/(2)/ 16,389 3,538 1,408 21,335
- ------------------------- -------- -------- --------- ---------
Total selected loans $ 67,561 $ 60,464 $ 26,557 $ 154,582
- ------------------------- -------- -------- --------- ---------
Percent of total 43.7% 39.1% 17.2% 100.0%
Cumulative percent of total 43.7 82.8 100.0
Sensitivity of loans to changes in interest rates for loans due
after one year:
Fixed interest rates $ 8,821 $ 12,648 $ 21,469
Floating or adjustable interest rates 51,643 13,909 65,552
------- -------- -------- --------
Total $ 60,464 $ 26,557 $ 87,021
------- -------- -------- --------
/(1)/ Loan maturities are based on the remaining maturities under contractual
terms.
/(2)/ Loan maturities include consumer and commercial foreign loans.
Deposits
Table Four provides information on the average amounts of deposits and the rates
paid by deposit category. Through the Corporation's diverse retail banking
network, deposits remain a primary source of funds for the Corporation. Average
deposits increased $9.4 billion to $362.7 billion in 2001 due to a $6.8 billion
increase in average domestic interest-bearing deposits and a $6.4 billion
increase in average total noninterest-bearing deposits, partially offset by a
$3.8 billion decrease in average foreign interest-bearing deposits. Average core
deposits, which exclude negotiable CDs, public funds, other domestic time
deposits, and foreign interest-bearing deposits, increased $14.9 billion to
$306.9 billion in 2001. The increase in average core deposits was primarily
driven by an increase in money market savings accounts and noninterest-bearing
deposits, partially offset by a decline in CDs and savings accounts. The
increase in money market savings accounts was driven by the Corporation's
deposit pricing initiative to offer more competitive money market savings rates.
As a percentage of total sources of funds, average core deposits increased by
four percent to 47 percent in 2001. At December 31, 2001, core deposits exceeded
loans and leases. See Note Nine of the consolidated financial statements for
further details on deposits.
Short-Term Borrowings
The Corporation uses short-term borrowings as a funding source and in its
management of interest rate risk. Table Nine presents the categories of
short-term borrowings.
During 2001, total average short-term borrowings decreased $39.0 billion to
$92.5 billion from $131.5 billion in 2000. This decline was primarily due to
decreases in repurchase agreements, short-term notes payable and commercial
paper driven by lower funding needs.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
51
Table 9 Short-Term Borrowings
2001 2000 1999
--------------------------------------------------------------
(Dollars in millions) Amount Rate Amount Rate Amount Rate
-------- ----- ------- ----- ------- -----
Federal funds purchased
At December 31 $ 5,487 1.45% $ 4,612 5.92% $ 4,806 3.04%
Average during year 6,267 3.99 4,506 6.44 5,835 5.03
Maximum month-end balance during year 8,718 - 7,149 - 8,311 -
Securities sold under agreements to repurchase
At December 31 42,240 1.25 44,799 6.26 69,755 4.12
Average during year 54,826 4.01 79,217 5.93 73,242 4.89
Maximum month-end balance during year 70,674 - 90,062 - 83,046 -
Commercial paper
At December 31 1,558 1.99 6,955 6.54 7,331 5.83
Average during year 4,156 4.91 9,645 6.41 7,610 5.17
Maximum month-end balance during year 7,410 - 10,762 - 8,379 -
Other short-term borrowings
At December 31 20,659 2.13 35,243 5.97 40,340 5.18
Average during year 27,227 5.56 38,124 6.18 29,463 5.30
Maximum month-end balance during year 39,391 - 45,271 - 40,340 -
Long-Term Debt and Trust Preferred Securities
Long-term debt decreased $5.0 billion to $62.5 billion at December 31, 2001,
from $67.5 billion at December 31, 2000. The overall decline in long-term debt
reflected a decline in average assets, but was partially offset by additional
issuances to maintain liquidity, repay maturing debt and fund share repurchases.
During 2001, the Corporation issued, domestically and internationally, $14.9
billion in long-term senior and subordinated debt, an $8.6 billion decrease from
$23.5 billion during 2000. The Corporation issued $575 million of trust
preferred securities in 2001. There were no trust preferred securities issued in
2000. See Notes Ten and Eleven of the consolidated financial statements for
further details on long-term debt and trust preferred securities, respectively.
Subsequent to December 31, 2001, the Corporation issued $1.7 billion of
long-term senior and subordinated debt, with maturities ranging from 2007 to
2027.
Bank of America Corporation, as successor to NationsBank Corporation,
announced the redemption of its 7.84 percent Trust Originated Preferred
Securities issued by NB Capital Trust I and its 7.75 percent Trust Originated
Preferred Securities issued by BankAmerica Capital I. The redemption date is
March 15, 2002 with a redemption price of $25 per security plus accrued and
unpaid distributions, if any, up to but excluding the redemption date of March
15, 2002.
Subsequent to December 31, 2001, BAC Capital Trust II, a wholly-owned
grantor trust of Bank of America Corporation, issued $900 million in capital
securities. The annual dividend rate is 7 percent and is paid quarterly on
February 1, May 1, August 1 and November 1 of each year, commencing May 1, 2002.
The debt ratings of the Corporation and Bank of America, N.A at December
31, 2001 are reflected in the following table:
Bank of America Corporation Bank of America, N.A.
-----------------------------------------------------------------------------
Commercial Senior Subordinated
Paper Debt Debt Short-Term Long-Term
---------- ------ ------------ ---------- ---------
Moody's Investors Service P-1 Aa2 Aa3 P-1 Aa1
Standard & Poor's Corporation A-1 A+ A A-1+ AA-
Fitch, Inc. F-1+ AA- A+ F-1+ AA
- ------------------------------- ---------- ------ ------------ ---------- ---------
Debt and Lease Obligations
The Corporation has contractual obligations to make future payments on debt and
lease agreements. Long-term debt, capital leases and trust preferred securities
are reflected on the balance sheet, whereas, operating lease obligations for
office space and equipment are not recorded on the balance sheet. These types of
obligations are more fully discussed in Notes Ten and Eleven of the consolidated
financial statements. Total debt and lease obligations at December 31, 2001
included:
Due after Due after
Due in 1 year 3 years
1 year through through Due after
(Dollars in millions) or less 3 years 5 years 5 years Total
-----------------------------------------------------------------------
Debt and lease obligations
Long-term debt and capital $ 11,592 $ 18,781 $ 14,875 $ 17,248 $ 62,496
leases/(1)/
Trust preferred securities/(1)/ - - - 5,530 5,530
Operating lease obligations 1,174 1,994 1,413 2,528 7,109
-------- --------- ---------- --------- --------
Total debt and lease obligations $ 12,766 $ 20,775 $ 16,288 $ 25,306 $ 75,135
-------- --------- ---------- --------- --------
/(1)/ Includes principal payments
only.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
52
Credit Extension Commitments
Many of the Corporation's lending relationships, including those with commercial
and consumer customers, contain both funded and unfunded elements. The unfunded
component of these commitments is not recorded on the Corporation's balance
sheet. These commitments are more fully discussed in Note Twelve of the
consolidated financial statements. The table below summarizes the total unfunded
credit extension, or off-balance sheet, commitment amounts by expiration date.
Expires after Expires after
Expires in 1 year 3 years
1 year through through Expires after
(Dollars in millions) or less 3 years 5 years 5 years Total
---------- ------------- ------------- ------------- -----------
Credit extension commitments
Credit card commitments $ 73,644 $ - $ - $ - $ 73,644
Other loan commitments/(1)/ 97,570 50,891 37,359 35,709 221,529
Standby letters of credit and financial 28,268 8,790 829 2,487 40,374
guarantees
Commercial letters of credit 3,243 518 49 147 3,957
- -------------------------------------- ---------- ------------- ------------- ------------- -----------
Total credit extension commitments $ 202,725 $ 60,199 $ 38,237 $ 38,343 $ 339,504
-------------------------------------- ---------- ------------- ------------- ------------- -----------
/(1)/ Other loan commitments include equity commitments of approximately $2.7
billion primarily related to obligations to fund existing venture
capital equity investments.
Off-Balance Sheet Financing Entity Commitments
In the normal course of business, the Corporation also supports its customers'
financing needs through facilitating their access to the commercial paper
markets. These markets provide an attractive, lower cost financing alternative
for the Corporation's customers. These customers sell assets, such as high-grade
trade or other receivables or leases, to a commercial paper financing entity,
which in turn issues high-grade short-term commercial paper that is
collateralized by such assets. The Corporation facilitates these transactions
and bills and collects fees from the financing entity for the services it
provides including administration, trust services and marketing the commercial
paper. In addition, the Corporation receives fees for providing liquidity and
standby letters of credit or similar loss protection commitments to the
financing entities. The Corporation manages its credit risk on these commitments
by subjecting them to normal underwriting and risk management processes. At
December 31, 2001 and 2000, the Corporation had off-balance sheet liquidity
commitments and standby letters of credit and other financial guarantees to
these financing entities of $36.1 billion and $27.6 billion, respectively.
Substantially all of these liquidity commitments and standby letters of credit
and other financial guarantees mature within one year. These amounts are
included in total credit extension commitments in the table above. Net revenues
earned from fees associated with these financing entities were approximately
$223 million and $200 million in 2001 and 2000, respectively.
In addition, to preserve its own liquidity and control its capital
position, the Corporation from time to time will seek alternative funding
sources. To accomplish this, the Corporation will sell or fund assets using an
off-balance sheet financing entity, which in turn, issues collateralized
commercial paper or structured notes to third-party market participants. The
Corporation may provide liquidity and standby letters of credit or similar loss
protection commitments to the financing entity, or it may enter into a
derivative with the entity whereby the Corporation assumes certain market risk.
Similar to that discussed above, the Corporation receives fees for the services
it provides to the financing entity, and it manages any market risk on
commitments or derivatives through normal underwriting and risk management
processes. Derivative activity related to these financing entities is included
in Note Five of the consolidated financial statements. At December 31, 2001 and
2000, the Corporation had off-balance sheet liquidity commitments and standby
letters of credit and other financial guarantees to these financing entities of
$3.9 billion and $2.9 billion, respectively. Substantially all of these
liquidity commitments and standby letters of credit and other financial
guarantees mature within one year. These amounts are included in total credit
extension commitments in the table above. Net revenues earned from fees
associated with these financing entities were $49 million and $51 million in
2001 and 2000, respectively.
Because the Corporation provides liquidity and credit support to these
financing entities, the Corporation's credit ratings and changes thereto will
affect the borrowing cost and liquidity of these entities. In addition,
significant changes in counterparty asset valuation and credit standing may also
affect the liquidity of the commercial paper issuance. Further, disruption in
the commercial paper markets may result in the Corporation having to fund under
these commitments and letters of credit discussed above. These risks, along with
all other credit and liquidity risks, are managed by the Corporation within its
policies and practices. See Note One of the consolidated financial statements
for an additional discussion of off-balance sheet financing entities.
Capital Resources and Capital Management
Shareholders' equity at December 31, 2001 was $48.5 billion compared to $47.6
billion at December 31, 2000, an increase of $892 million. The increase was
primarily due to $3.2 billion of net earnings (net income less dividends), $1.1
billion of net gains on derivatives and $1.1 billion in common stock issued
under employee plans, partially offset by the repurchase of common stock for
approximately $4.7 billion. The Tier 1 Capital Ratio rose 80 basis points from
December 31, 2000 to 8.30 percent. At December 31, 2001, the Corporation was
classified as well-capitalized.
On December 11, 2001, the Corporation's Board of Directors (the Board)
authorized a new stock repurchase program of up to 130 million shares of the
Corporation's common stock at an aggregate cost of up to $10.0 billion. No
shares had been repurchased under the 2001 program at December 31, 2001. The
remaining buyback authority for common stock under the 2000 repurchase program
totaled $2.1 billion, or two million shares. During 2001, the Corporation
repurchased approximately 82 million shares of its common stock in open market
repurchases at an average per-share price of $57.58,
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
53
which reduced shareholders' equity by $4.7 billion and increased earnings per
share by approximately $0.08 for the year ended December 31, 2001. Management
anticipates it will continue to repurchase shares at least equal to shares
issued under its various stock option plans. See Note Thirteen of the
consolidated financial statements for additional disclosures related to the
repurchase program.
On October 24, 2001, the Board approved a $0.04 per share, or seven
percent, increase in the quarterly common dividend. This increase brings the
common dividend to $0.60 per share for the fourth quarter of 2001 and $2.28 per
share for the year ended December 31, 2001.
The regulatory capital ratios of the Corporation and Bank of America, N.A.,
along with a description of the components of risk-based capital, capital
adequacy requirements and prompt corrective action provisions, are included in
Note Fourteen of the consolidated financial statements.
Risk Management Overview
The Corporation's goal in managing risk is to produce appropriate risk-adjusted
returns, reduce the wide volatility in earnings and increase shareholder value.
The Corporation believes it has a governance structure and risk management
approach in place in order to reach that goal. Processes are designed to align
the Corporation's measures for business success with the measures for return,
growth and risk. Further, these processes enable the Corporation to better
communicate with its associates the corporate appetite for risk, manage sources
of earnings' volatility and manage appropriate capital levels.
The Corporation manages risk by adherence to the following key principles:
o Emphasize that individual decision-making and accountability are the
cornerstone.
o Include risk assessments in all business units.
o Appropriate limits, policies, procedures and measures are in place.
o Independently test, verify and evaluate controls.
o Identify and minimize the sources of earnings' volatility.
o Use SVA as a key financial measure to evaluate businesses and to direct
capital.
Each of these key principles contributes to a more risk/return focused
culture. Importantly, the Corporation believes SVA leads to better risk/return
decisioning and to a lower risk profile. Reinforcing the cost of capital among
the Corporation's business segments creates critical assessments of the
Corporation's uses of capital. The cost of capital for each business is based on
an assessment of its specific credit, market and operational risk.
The goal of the governance structure is to enable management to actively
balance risk and return.
o The Chief Financial Officer has oversight responsibility for the
soundness of the Corporation's capitalization and earnings.
o The Chief Risk Officer has enterprise-wide oversight of market, credit
and operational risks.
o The business unit leaders have responsibility for
meeting corporate performance objectives within the boundaries of their
allocated risk position.
The Corporation manages day-to-day risk-taking through three senior
executive committees. The Risk and Capital Committee determines the corporate
objectives for each performance measure, allocates capital, sets aggregate risk
levels and plans the use of capital. It also coordinates two committees
responsible for market and credit risk. The Asset and Liability Committee
reviews aggregate balance sheet exposures, including trading positions,
recommends balance sheet capital allocations and recommends changes in the
market risk profile. The Credit Risk Committee reviews business asset quality,
portfolio management results and industry concentrations and limits.
The Board of Directors addresses risk in three ways. The Finance Committee
oversees both market and credit risk through reports from the Asset and
Liability Committee and the Credit Risk Committee. The Asset Quality Committee
of the Board also reviews credit risk, and the Audit Committee of the Board
reviews the scope and coverage of the external audit and internal audit
activities.
Senior management and the Board of Directors oversight builds on the
cornerstone of the Corporation's corporate governance: individual
decision-making and accountability. The Corporation's corporate governance is
designed so that individuals at all levels are delegated appropriate authority,
take appropriate action and are accountable for actions taken. Wherever
practical, decision-making authority is delegated as close to the customer as
possible.
The following sections, Credit Risk Management and Credit Portfolio Review,
Market Risk Management and Liquidity Risk Management, provide specific
information on the Corporation's processes and current risk assessment in each
area as of December 31, 2001 and 2000.
Credit Risk Management and Credit Portfolio Review
In conducting business activities, the Corporation is exposed to the risk that
borrowers or counterparties may default on their obligations to the Corporation.
This exposure exists in both on-and off-balance sheet relationships. Credit
risk arises through the extension of loans and leases, certain securities,
off-balance sheet letters of credit and financial guarantees, unfunded loan
commitments and through counterparty exposure on trading and capital markets
transactions. To manage both on-and off-balance sheet credit risk, the Risk
Management group, which reports to the Chief Risk Officer, establishes policies
and procedures and communicates, implements and monitors the application of
these throughout the Corporation.
The Corporation uses statistical techniques and modeling to estimate both
expected losses and unexpected losses for each segment of the portfolio. The
expected loss drives the periodic credit cost charged to earnings for management
reporting purposes, and the unexpected loss estimate drives the capital
allocation to each business unit. Both the expected loss and unexpected loss are
incorporated into each business unit's SVA measurement. As a result, the overall
credit risk profile of each business unit is an important factor in assessing
its performance.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
54
The Corporation's overall objective in managing credit risk is to minimize
the adverse impact of any single event or set of occurrences. To achieve this
objective, the Risk Management group works with lending officers, trading
personnel and various other line personnel in areas that conduct activities
involving credit risk to maintain a credit risk profile that is diverse in terms
of product type, industry concentration, geographic distribution and borrower or
counterparty concentration.
The Corporation manages credit exposure to individual borrowers and
counterparties on an aggregate basis including loans and leases, securities,
letters of credit, bankers' acceptances, derivatives and unfunded commitments.
The creditworthiness of individual borrowers or counterparties is determined by
experienced personnel, and limits are established for the total credit exposure
to any one borrower or counterparty. Credit limits are subject to varying levels
of approval by senior line personnel and credit risk management.
The approving credit officer assigns borrowers or counterparties an initial
risk rating which is based primarily on an analysis of each borrower's financial
capacity in conjunction with industry and economic trends. Risk ratings are
subject to review and validation by the independent credit review group.
Approvals are made based upon the perceived level of inherent credit risk
specific to the transaction and the counterparty and are reviewed for
appropriateness by senior line and credit risk personnel. Credits are monitored
by line and credit risk management personnel for deterioration in a borrower's
or counterparty's financial condition which would impact the ability of the
borrower or counterparty to perform under the contract. Risk ratings are
adjusted as necessary, and the Corporation seeks to reduce exposure in such
situations where appropriate.
The Corporation also has a goal of managing exposure to a single borrower,
industry, product-type, country or other concentration through syndications of
credits, credit derivatives, participations, loan sales and securitizations.
Through the Global Corporate and Investment Banking segment, the Corporation is
a major participant in the syndications market. In a syndicated facility, each
participating lender funds only its portion of the syndicated facility,
therefore limiting its exposure to the borrower. The Corporation's strategy
remains one of origination for distribution. Additionally, the SVA discipline
discourages the retention of loan assets that do not generate a positive return
above the cost of risk-adjusted capital.
For consumer and small business lending, credit scoring systems are
utilized to determine the relative risk of new underwritings and provide
standards for extensions of credit. Consumer portfolio credit risk is monitored
primarily using statistical models and reviews of actual payment experience in
an attempt to predict portfolio behavior.
In some credit situations, the Corporation obtains collateral to support
credit extensions and commitments. Generally, such collateral is in the form of
real and/or personal property, cash on deposit or other liquid instruments. In
certain circumstances, the Corporation obtains real property as security for
some loans that are made on the general creditworthiness of the borrower and
whose proceeds were not used for real estate-related purposes.
An independent Credit Review group provides executive management, the Board
of Directors and the Credit Risk Committee with an evaluation of portfolio
quality and the effectiveness of the credit management process. The group
conducts ongoing reviews of credit activities and portfolios through
transactional and process reviews, re-examining on a regular basis risk
assessments for credit exposures and overall compliance with policy.
Loans and Leases Portfolio Review
The Corporation's credit exposure is focused in its loans and leases portfolio,
which totaled $329.2 billion and $392.2 billion at December 31, 2001 and 2000,
respectively. In addition, there are off-balance sheet commitments to fund
loans, which totaled $295.2 billion and $315.2 billion at December 31, 2001 and
2000, 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 Ten presents the loans and leases by category.
Additional information on the Corporation's industry, real estate and foreign
exposures can be found in the Concentrations of Credit Risk section beginning on
page 61.
As a result of the exit of the auto leasing and subprime real estate
lending businesses, the Corporation immediately ceased originations of auto
leases and subprime real estate loans. The Corporation intends to allow its auto
lease portfolio to run off over its remaining term of three to four years. The
Corporation began to execute its exit strategy for the subprime real estate loan
portfolio through securitizations and sales in the fourth quarter of 2001.
Additional information on the exit of these consumer finance businesses can be
found in Notes Two and Six of the consolidated financial statements.
Table 10 Loans and Leases
December 31
---------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial-domestic $118,205 35.9% $146,040 37.2% $143,450 38.7% $137,422 38.5% $122,463 35.8%
Commercial-foreign 23,039 7.0 31,066 7.9 27,978 7.5 31,495 8.8 30,080 8.8
Commercial real estate- 22,271 6.8 26,154 6.7 24,026 6.5 26,912 7.5 28,567 8.3
domestic
Commercial real estate- 383 .1 282 .1 325 .1 301 .1 324 .1
foreign
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial 163,898 49.8 203,542 51.9 195,779 52.8 196,130 54.9 181,434 53.0
- ---------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 78,203 23.8 84,394 21.5 81,860 22.1 73,608 20.6 71,540 20.9
Home equity lines 22,107 6.7 21,598 5.5 17,273 4.7 15,653 4.4 16,536 4.8
Direct/Indirect consumer 37,638 11.5 40,457 10.3 42,161 11.4 40,510 11.3 40,058 11.7
Consumer finance 5,331 1.6 25,800 6.6 22,326 6.0 15,400 4.3 14,566 4.3
Bankcard 19,884 6.0 14,094 3.6 9,019 2.4 12,425 3.5 14,908 4.4
Foreign consumer 2,092 .6 2,308 .6 2,244 .6 3,602 1.0 3,098 .9
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer 165,255 50.2 188,651 48.1 174,883 47.2 161,198 45.1 160,706 47.0
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans and leases $329,153 100.0% $392,193 100.0% $370,662 100.0% $357,328 100.0% $342,140 100.0%
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
55
Commercial Portfolio
At December 31, 2001 and 2000, total commercial loans outstanding totaled $163.9
billion and $203.5 billion, respectively. Domestic commercial loans, including
commercial real estate, accounted for 86 percent and 85 percent of total
commercial loans at December 31, 2001 and 2000, respectively.
Commercial-domestic loans outstanding totaled $118.2 billion and $146.0
billion at December 31, 2001 and 2000, respectively. The Corporation had
commercial-domestic loan net charge-offs of $1.9 billion for 2001, compared to
$1.3 billion for 2000. Net charge-offs increased primarily due to deterioration
in credit quality stemming from the weak economic environment, the sale of
distressed loans in 2001 and fourth quarter charge-offs of $210 million related
to Enron Corporation. In addition to the Enron loan charge-offs, the Corporation
also wrote off $21 million in Enron securities related to a collateralized loan
obligation. Nonperforming commercial-domestic loans were $3.1 billion, or 2.64
percent of commercial-domestic loans, at December 31, 2001, compared to $2.8
billion, or 1.90 percent, at December 31, 2000. The increase in nonperforming
loans was primarily driven by the weakening economic environment which impacted
various industries and business segments, partially offset by sales of
nonperforming loans. In addition, the remaining Enron loan balance of $226
million, of which $42 million was unsecured, was classified as nonperforming
subsequent to the charge-off in the fourth quarter. Commercial-domestic loans
past due 90 days or more and still accruing interest were $175 million at
December 31, 2001, compared to $141 million at December 31, 2000.
Commercial-foreign loans outstanding totaled $23.0 billion and $31.1
billion at December 31, 2001 and 2000, respectively. The Corporation had
commercial-foreign loan net charge-offs for 2001 of $208 million, compared to
$86 million for 2000. Nonperforming commercial-foreign loans were $461 million,
or 2.00 percent of commercial-foreign loans, at December 31, 2001, compared to
$486 million, or 1.56 percent, at December 31, 2000. Commercial-foreign loans
past due 90 days or more and still accruing interest were $6 million at December
31, 2001 compared to $37 million at December 31, 2000. For additional
information, see the International Exposure discussion beginning on page 63.
Commercial real estate-domestic loans totaled $22.3 billion and $26.2
billion at December 31, 2001 and 2000, respectively. Net charge-offs were $39
million and $13 million for 2001 and 2000, respectively. Nonperforming
commercial real estate-domestic loans were $240 million, or 1.08 percent of
commercial real estate-domestic loans, at December 31, 2001, compared to $236
million, or 0.90 percent, at December 31, 2000. At December 31, 2001, commercial
real estate-domestic loans past due 90 days or more and still accruing interest
were $40 million compared to $16 million at December 31, 2000. Table Seventeen
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 Eighteen presents aggregate commercial loan and lease exposures by
certain significant industries.
Consumer Portfolio
At December 31, 2001 and 2000, total consumer loans outstanding totaled $165.3
billion and $188.7 billion, respectively. Approximately 65 percent and 70
percent of these loans were secured by first and second mortgages on residential
real estate at December 31, 2001 and 2000, respectively.
In 1999, the Federal Financial Institutions Examination Council (FFIEC)
issued the Uniform Classification and Account Management Policy (the Policy)
which provides guidance for and promotes consistency among banks on the
charge-off treatment of delinquent and bankruptcy-related consumer loans. The
Corporation implemented the Policy in the fourth quarter of 2000, which resulted
in accelerated charge-offs of $104 million across several product types in the
consumer loan portfolio.
Residential mortgage loans decreased to $78.2 billion at December 31, 2001
compared to $84.4 billion at December 31, 2000 as growth in retail mortgage
originations was more than offset by the impact of securitizations of $52.9
billion. Net charge-offs on residential mortgage loans were $26 million for
2001. Nonperforming residential mortgage loans increased $5 million to $556
million at December 31, 2001.
Home equity lines increased to $22.1 billion at December 31, 2001 compared
to $21.6 billion at December 31, 2000. Net charge-offs on home equity lines were
$19 million and $20 million for 2001 and 2000, respectively. Nonperforming home
equity lines increased to $80 million at December 31, 2001 compared to $32
million at December 31, 2000.
Consumer finance loans outstanding totaled $5.3 billion and $25.8 billion
at December 31, 2001 and 2000, respectively. Consumer finance nonperforming
loans decreased to $9 million at December 31, 2001 compared to $1.1 billion at
December 31, 2000. These decreases were due to the transfer of approximately
$21.4 billion of subprime real estate loans, of which $1.2 billion was
nonperforming, to loans held for sale as a result of the exit of the subprime
real estate lending business in the third quarter of 2001. The Corporation had
consumer finance net charge-offs of $929 million for 2001 compared to $266
million for 2000. The increase in net charge-offs primarily reflected
exit-related charge-offs of $635 million that were used to write down the
subprime real estate loan portfolio to estimated market value in the third
quarter of 2001 and a weakened economic environment.
Bankcard receivables increased to $19.9 billion at December 31, 2001
compared to $14.1 billion at December 31, 2000. This increase was due to new
account growth and increased purchase volume on existing accounts. Net
charge-offs on bankcard receivables for 2001 were $672 million compared to $338
million for 2000. Managed bankcard net charge-offs increased $230 million to
$1.2 billion, while the managed net charge-off ratio increased 10 basis points
to 4.76 percent for 2001. The increase in net charge-offs was primarily a result
of growth in the portfolio outstandings, an increase in personal bankruptcy
filings and a weaker economic environment. Bankcard loans past due 90 days or
more and still accruing interest were $332 million at December 31, 2001 compared
to $191 million at December 31, 2000.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
56
Other consumer loans, which include direct and indirect consumer and
foreign consumer loans, were $39.7 and $42.8 billion at December 31, 2001 and
2000, respectively. Direct and indirect consumer loan net charge-offs were $349
million for 2001 compared to $324 million for 2000. Foreign consumer loan net
charge-offs were $5 million and $3 million for 2001 and 2000, respectively.
Excluding bankcard, total consumer loans past due 90 days or more and still
accruing interest were $127 million at December 31, 2001, compared to $110
million at December 31, 2000.
Nonperforming Assets
As presented in Table Eleven, nonperforming assets decreased to $4.9
billion at December 31, 2001 from $5.5 billion at December 31, 2000.
Nonperforming loans decreased to $4.5 billion at December 31, 2001 from $5.2
billion at December 31, 2000. The decrease in nonperforming loans was primarily
due to the transfer of $1.2 billion of nonperforming subprime real estate loans
from the loans and leases portfolio to loans held for sale included in other
assets related to the decision to exit the subprime real estate lending business
in 2001 and due to sales of nonperforming commercial - domestic and residential
mortgage loans in 2001. These decreases were partially offset by nonperforming
net inflows in the commercial - domestic, residential mortgage and home equity
lines portfolios. Credit deterioration in loans continued as companies and
individuals were affected by the weakening economic environment. Foreclosed
properties increased to $402 million at December 31, 2001 compared to $249
million at December 31, 2000. This increase was driven by the exit of the
subprime real estate lending business in the third quarter of 2001.
Table 11 Nonperforming Assets/(1)/
At December 31
--------------------------------------------
(Dollars in millions) 2001 2000 1999 1998 1997
--------------------------------------------
Nonperforming loans
Commercial - domestic $ 3,123 $ 2,777 $ 1,163 $ 812 $ 563
Commercial - foreign 461 486 486 314 155
Commercial real estate - domestic 240 236 191 299 342
Commercial real estate - foreign 3 3 3 4 2
- --------------------------------------------------- ---- ---- ---- ---- ----
Total commercial 3,827 3,502 1,843 1,429 1,062
- --------------------------------------------------- ---- --- ---- ---- ----
Residential mortgage 556 551 529 722 744
Home equity lines 80 32 46 50 52
Direct/Indirect consumer 27 19 19 21 43
Consumer finance/(2)/ 9 1,095 598 246 210
Foreign consumer 7 9 7 14 -
- --------------------------------------------------- ---- ---- ---- ---- ----
Total consumer 679 1,706 1,199 1,053 1,049
--------------------------------------------------- ---- ---- ---- ---- ----
Total nonperforming loans 4,506 5,208 3,042 2,482 2,111
--------------------------------------------------- ---- ---- ---- ---- ----
Foreclosed properties 402 249 163 282 309
- --------------------------------------------------- ---- ---- ---- ---- ----
Total nonperforming assets $ 4,908 $ 5,457 $ 3,205 $ 2,764 $ 2,420
--------------------------------------------------- --- --- ---- --- ---
Nonperforming assets as a percentage of:
Total assets .79% .85% .51% .45% .42%
Loans, leases and foreclosed properties 1.49 1.39 .86 .77 .71
Nonperforming loans as a percentage of loans and leases 1.37 1.33 .82 .69 .62
- --------------------------------------------------- ---- ---- ---- ---- ----
(Dollars in millions) 2001 2000 1999 1998 1997
--------------------------------------------
Income that would have been recorded in accordance with $ 593 $ 666 $ 419 $ 367 $ 349
original terms
Less income actually recorded (256) (237) (123) (130) (130)
- --------------------------------------------------- ---- ---- ---- ---- ----
Loss of income $ 337 $ 429 $ 296 $ 237 $ 219
- --------------------------------------------------- --- --- ----- --- ---
Cost of carrying foreclosed properties $ 15 $ 12 $ 13 $ 16 $ 26
- --------------------------------------------------- --- --- ---- --- ---
/(1)/ Balance does not include $1.0 billion and $124 million of loans held for
sale, included in other assets at December 31, 2001 and 2000, respectively,
which would have been classified as non-performing had they been included in
loans. The Corporation had approximately $48 million and $390 million of
troubled debt restructured loans at December 31, 2001 and 2000, respectively,
which were accruing interest and were not included in nonperforming assets.
/(2)/ In 2001, $1.2 billion of nonperforming loans were transferred to loans
held for sale as a result of the exit of the subprime real estate lending
business.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
57
Table Twelve presents the additions to and reductions in nonperforming assets in
the commercial and consumer portfolios during the most recent five quarters.
Table 12 Nonperforming Assets Activity
Fourth Third Second First Fourth
Quarter Quarter Quarter Quarter Quarter
(Dollars in millions) 2001 2001 2001 2001 2000
----- ----- ----- ----- -----
Balance, beginning of period $ 4,523 $ 6,195 $ 5,897 $ 5,457 $ 4,403
- ----------------------------------------------------- ---- ---- ---- ---- ----
Commercial
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 1,345 761 1,376 1,315 1,954
Advances on loans 106 32 33 26 28
----------------------------------------------------- ----- ----- ----- ----- -----
Total commercial additions 1,451 793 1,409 1,341 1,982
----------------------------------------------------- ----- ----- ----- ----- -----
Reductions in nonperforming assets:
Paydowns, payoffs and sales (300) (635) (732) (398) (288)
Returns to performing status (82) (86) (19) (126) (73)
Charge-offs/(1)/ (784) (513) (525) (467) (774)
----------------------------------------------------- ----- ----- ----- ----- -----
Total commercial reductions (1,166) (1,234) (1,276) (991) (1,135)
----------------------------------------------------- ----- ----- ----- ----- -----
Total commercial net additions to (reductions in) 285 (441) 133 350 847
nonperforming assets
----------------------------------------------------- ----- ----- ----- ----- -----
Consumer
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 374 694 836 819 834
----------------------------------------------------- ----- ----- ----- ----- -----
Total consumer additions 374 694 836 819 834
----------------------------------------------------- ----- ----- ----- ----- -----
Reductions in nonperforming assets:
Paydowns, payoffs and sales (174) (413) (159) (135) (95)
Returns to performing status (181) (256) (440) (483) (391)
Charge-offs/(1)/ (22) (69) (69) (101) (135)
Transfers (to) from assets held for sale/(2)//(3)/ 103 (1,187) (3) (10) (6)
----------------------------------------------------- ----- ----- ----- ----- -----
Total consumer reductions (274) (1,925) (671) (729) (627)
----------------------------------------------------- ----- ----- ----- ----- -----
Total consumer net additions to (reductions in) 100 (1,231) 165 90 207
nonperforming assets
----------------------------------------------------- ----- ----- ----- ----- -----
Total net additions to (reductions in) nonperforming 385 (1,672) 298 440 1,054
assets
----------------------------------------------------- ----- ----- ----- ----- -----
Balance, end of period $ 4,908 $ 4,523 $ 6,195 $ 5,897 $ 5,457
- ----------------------------------------------------- ---- ---- ---- ---- ----
/(1)/ Certain loan products, including commercial bankcard, consumer bankcard
and other unsecured loans, are not classified as nonperforming; therefore, the
charge-offs on these loans are not included above.
/(2)/ Includes assets held for sale that were foreclosed and transferred to
foreclosed properties.
/(3)/ Primarily related to the exit of the subprime real estate lending business
in the third quarter of 2001.
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 focused collection strategies and a proactive
approach to managing overall problem assets expedites the disposition,
collection and renegotiation of nonperforming and other lower-quality assets.
During 2001, the Corporation realigned its operations that manage certain
distressed assets through the funding of Banc of America Strategic Solutions,
Inc. (SSI), a wholly-owned subsidiary. The purpose of this subsidiary is to
provide a more effective means of problem asset resolution and to coordinate
exit strategies, including bulk sales, collateralized debt obligations and other
resolutions of domestic commercial distressed assets. The assets and liabilities
transferred to SSI were consolidated with the Corporation at December 31, 2001.
During 2001, the Corporation sold approximately $2.1 billion of nonperforming
and poorly performing commercial and consumer loans. Net charge-offs of
approximately $400 million were recorded related to these sales. The Corporation
expects to continue to aggressively manage credit risk and to exit problem
credits where practical.
The Corporation's investment in specific loans that were considered to be
impaired was $3.9 billion at both December 31, 2001 and 2000. Commercial -
domestic impaired loans increased $247 million to $3.1 billion at December 31,
2001 compared to December 31, 2000. Commercial -foreign impaired loans decreased
$20 million to $501 million. Commercial real estate - domestic impaired loans
decreased $172 million to $240 million.
Loans Past Due 90 Days or More and Still Accruing Interest
Table Thirteen presents total loans past due 90 days or more and still accruing
interest. At December 31, 2001, loans past due 90 days or more and still
accruing interest were $680 million compared to $495 million at
December 31, 2000.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
58
Table 13 Loans Past Due 90 Days or More and Still Accruing Interest
At December 31, 2001 At December 31, 2000
(Dollars in millions) Amount Percent/(1)/ Amount Percent/(1)/
---------------- ----------------
Commercial - domestic $ 175 .15% $ 141 .10%
Commercial - foreign 6 .02 37 .12
Commercial real estate - domestic 40 .18 16 .06
- --------------------------------------------------------- ----- ----- ----- -----
Total commercial 221 .13 194 .10
--------------------------------------------------------- ----- ----- ----- -----
Residential mortgage 14 .02 17 .02
Direct/Indirect consumer 89 .24 89 .22
Consumer finance 24 .45 4 .02
Bankcard 332 1.67 191 1.36
- --------------------------------------------------------- ----- ----- ----- -----
Total consumer 459 .28 301 .16
--------------------------------------------------------- ----- ----- ----- -----
Total $ 680 .21% $ 495 .13%
--------------------------------------------------------- ----- ----- ----- -----
/(1)/ Represents amounts past due 90 days or more and still accruing interest as
a percentage of loans and leases for each loan category.
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its lending
portfolios to identify inherent risks and to assess the overall collectibility
of those portfolios. The allowance on certain homogeneous loan portfolios, which
generally consist of consumer loans, is based on aggregated portfolio segment
evaluations generally by loan type. Loss forecast models are utilized for these
segments which consider a variety of factors including, but not limited to
historical loss experience, anticipated defaults or foreclosures based on
portfolio trends, delinquencies and credit scores, and expected loss factors by
loan type. The remaining portfolios are reviewed on an individual loan basis.
Loans subject to individual reviews are analyzed and segregated by risk
according to the Corporation's internal risk rating scale. These risk
classifications, in conjunction with an analysis of historical loss experience,
current economic conditions and performance trends within specific portfolio
segments, and any other pertinent information (including individual valuations
on nonperforming loans in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan") result in
the estimation of specific allowances for credit losses. 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 credit losses in each loan and lease category based
on the results of the Corporation's detail review process described above. The
assigned portion continues to be weighted toward the commercial loan portfolio,
which reflected a higher level of nonperforming loans and the potential for
higher individual losses. The remaining or 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 allowances 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.
Additions to the allowance for credit losses are made by charges to the
provision for credit losses. Credit exposures deemed to be uncollectible are
charged against the allowance for credit losses. Recoveries of previously
charged off amounts are credited to the allowance for credit losses.
Excluding the impact of charges related to the exit of the subprime real
estate lending business, the provision for credit losses totaled $3.9 billion
for the year ended December 31, 2001 compared to $2.5 billion in 2000. The
increase in the provision for credit losses from last year was primarily due to
an increase in net charge-offs, which included $210 million in charge-offs
related to Enron. Additional provision expense was also recorded in 2001 to
increase the allowance for credit losses due to deterioration in credit quality
and the overall uncertainty in the economy. Excluding the impact of exit-related
charges, the provision for credit losses for 2001 was $283 million in excess of
net charge-offs. Total net charge-offs, excluding the impact of exit-related
charges, were $3.6 billion for the year ended December 31, 2001 compared to $2.4
billion in 2000. This increase was due to higher charge-offs in the
commercial-domestic portfolio and deterioration in credit quality stemming
from the weak economic environment. Bankcard charge-offs also increased due to
growth in the portfolio, an increase in personal bankruptcy filings and a
weaker economic environment.
An exit-related provision for credit losses of $395 million, combined with
an existing allowance for credit losses of $240 million, was used to write down
the subprime real estate loan portfolio to estimated market value in the third
quarter of 2001. This resulted in charge-offs of $635 million in the consumer
finance loan portfolio. Including the exit impact, the provision for credit
losses totaled $4.3 billion and total net charge-offs were $4.2 billion for the
year ended December 31, 2001.
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 December 31, 2001. Table
Fourteen presents the activity in the allowance for credit losses for the most
recent five years.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
59
Table 14 Allowance For Credit Losses
(Dollars in millions) 2001 2000 1999 1998 1997
----------------------------------------------------
Balance, January 1 $ 6,838 $ 6,828 $ 7,122 $ 6,778 $ 6,316
-------- -------- -------- -------- --------
Loans and leases charged off
Commercial - domestic (2,120) (1,412) (820) (714) (328)
Commercial - foreign (249) (117) (161) (262) (54)
Commercial real estate - domestic (46) (31) (19) (21) (59)
Commercial real estate - foreign - (1) (1) - -
--------- --------- --------- -------- --------
Total commercial (2,415) (1,561) (1,001) (997) (441)
--------- --------- --------- -------- --------
Residential mortgage (39) (36) (35) (33) (50)
Home equity lines (32) (29) (24) (27) (36)
Direct/Indirect consumer (522) (502) (545) (562) (582)
Consumer finance/(1)/ (1,006) (420) (387) (561) (426)
Bankcard (753) (392) (571) (857) (1,043)
Other consumer domestic (71) (51) 1 - (12)
Foreign consumer (6) (4) (20) (13) (13)
---------- --------- ---------- --------- --------
Total consumer (2,429) (1,434) (1,581) (2,053) (2,162)
---------- --------- ---------- --------- --------
Total loans and leases charged off (4,844) (2,995) (2,582) (3,050) (2,603)
---------- --------- ---------- --------- --------
Recoveries of loans and leases previously charged off
Commercial - domestic 171 125 109 97 226
Commercial - foreign 41 31 17 20 25
Commercial real estate - domestic 7 18 25 21 59
Commercial real estate - foreign - 3 - - -
---------- --------- ---------- --------- --------
Total commercial 219 177 151 138 310
---------- --------- ---------- --------- --------
Residential mortgage 13 9 7 4 5
Home equity lines 13 9 12 10 9
Direct/Indirect consumer 173 178 175 157 146
Consumer finance 77 154 158 178 155
Bankcard 81 54 76 93 124
Other consumer - domestic 23 13 - - -
Foreign consumer 1 1 3 3 2
----------- --------- ---------- --------- ---------
Total consumer 381 418 431 445 441
----------- --------- ---------- --------- --------
Total recoveries of loans and leases previously charged off 600 595 582 583 751
----------- --------- ---------- --------- --------
Net charge-offs (4,244) (2,400) (2,000) (2,467) (1,852)
----------- --------- ---------- ---------- --------
Provision for credit losses/(2)/ 4,287 2,535 1,820 2,920 1,904
Other, net (6) (125) (114) (109) 410
------------ ---------- ---------- --------- --------
Balance, December 31 $ 6,875 $ 6,838 $ 6,828 $ 7,122 $ 6,778
---------- --------- --------- --------- ----------
Loans and leases outstanding at December 31 $329,153 $392,193 $370,662 $357,328 $342,140
Allowance for credit losses as a percentage of loans and leases
outstanding at December 31 2.09% 1.74% 1.84% 1.99% 1.98%
Average loans and leases outstanding during the year $365,447 $392,622 $362,783 $347,840 $343,151
Net charge-offs as a percentage of average outstanding loans
and leases during the year 1.16% .61% .55% .71% .54%
Allowance for credit losses as a percentage of nonperforming
loans at December 31 152.58 131.30 224.48 287.01 321.03
Ratio of the allowance for credit losses at December 31 to net 1.62 2.85 3.41 2.89 3.66
charge-offs
----------- --------- --------- --------- ---------
/(1)/ Includes $635 million related to the exit of the subprime real estate
lending business in 2001.
/(2)/ Includes $395 million related to the exit of the
subprime real estate lending business in 2001.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
60
Table 15 Net Charge-offs
December 31
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- -------------------- ------------------ ------------------ -----------------
(Dollars in millions) Amount Percent/(1)/ Amount Percent/(1)/ Amount Percent/(1)/ Amount Percent/(1)/ Amount Percent/(1)/
------- ----------- ------- ------------ ------ ------------- ------ ------------ ------ ------------
Commercial - domestic $1,949 1.46% $1,287 .87% $ 711 .51% $ 617 .47% $ 102 .09%
Commercial - foreign 208 .78 86 .29 144 .49 242 .78 29 .10
Commercial real estate - 39 .16 13 .05 (6) n/m - - - -
domestic
Commercial real estate - - - (2) n/m 1 .39 - - - -
foreign
------- ---- ------ ---- ------ ---- ----- ----- ----- -----
Total commercial 2,196 1.19 1,384 .68 850 .44 859 .45 131 .07
------- ---- ------ ---- ------ ---- ----- ----- ----- -----
Residential mortgage 26 .03 27 .03 28 .04 29 .04 45 .06
Home equity lines 19 .09 20 .10 12 .07 17 .11 27 .18
Direct/Indirect consumer 349 .88 324 .78 370 .88 405 1.01 436 1.11
Consumer finance/(2)/ 929 5.01 266 1.09 229 1.22 383 2.67 271 1.96
Bankcard 672 4.04 338 3.29 495 5.08 764 6.03 919 5.90
Other consumer - domestic 48 n/m 38 n/m (1) n/m - - 12 n/m
Foreign consumer 5 .22 3 .13 17 .52 10 .31 11 .32
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Total consumer 2,048 1.14 1,016 .54 1,150 .68 1,608 1.02 1,721 1.03
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Total net charge-offs $4,244 1.16% $2,400 .61% $2,000 .55% $2,467 .71% $1,852 .54%
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Managed bankcard net
charge-offs and ratios(3) $1,174 4.76% $ 944 4.66% $1,077 5.57% $1,284 6.27% $1,254 6.19%
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
n/m = not meaningful
/(1)/ Percentage amounts are calculated as net charge-offs divided by average
outstanding loans and leases or managed loans for each loan category.
/(2)/ Includes $635 million related to the exit of the subprime real estate
lending business in 2001.
/(3)/ Includes both on-balance sheet and securitized loans.
Table 16 Allocation of the Allowance for Credit Losses
December 31
- ------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ------------------- -------------- --------------- ----------------
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ -------- ------- ---------- ------ --------- ------ --------- ------ --------
Commercial - domestic $1,974 28.7% $1,993 29.1% $1,875 27.4% $1,540 21.6% $1,580 23.4%
Commercial - foreign 766 11.1 796 11.6 930 13.6 1,327 18.6 1,013 14.9
Commercial real estate 924 13.5 989 14.5 927 13.6 925 13.0 847 12.5
- - domestic
Commercial real estate 8 .1 7 .1 11 .2 - - - -
- - foreign
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Total commercial 3,672 53.4 3,785 55.3 3,743 54.8 3,792 53.2 3,440 50.8
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Residential mortgage 145 2.1 151 2.2 160 2.3 137 1.9 181 2.7
Home equity lines 83 1.2 77 1.1 60 .9 46 .6 84 1.2
Direct/Indirect consumer 411 6.0 384 5.6 416 6.1 527 7.5 608 9.0
Consumer finance 389 5.7 658 9.7 651 9.5 658 9.2 785 11.6
Bankcard 821 11.9 549 8.0 348 5.1 501 7.0 790 11.7
Foreign consumer 10 .1 11 .2 11 .2 26 .4 23 .3
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Total consumer 1,859 27.0 1,830 26.8 1,646 24.1 1,895 26.6 2,471 36.5
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Unassigned 1,344 19.6 1,223 17.9 1,439 21.1 1,435 20.2 867 12.7
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
Total $6,875 100.0% $6,838 100.0% $6,828 100.0% $7,122 100.0% $6,778 100.0%
------ ----- ------ ---- ----- ---- ----- ----- ----- -----
The Corporation expects charge-offs in 2002 to meet or exceed annualized fourth
quarter 2001 net charge-offs of $3.9 billion, excluding Enron charge-offs of
$210 million. An increase in consumer charge-offs, mainly bankcard, is expected
to drive the increase for the year while commercial charge-offs are also
expected to remain at high levels. Provision expense is expected to track net
charge-offs in 2002. Nonperforming assets are expected to rise at least through
the first half of 2002, although levels will fluctuate depending on the level of
asset sales and charge-offs.
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 Seventeen, Eighteen, Nineteen and Twenty.
The Corporation maintains a diverse commercial loan portfolio, representing
50 percent of total loans and leases at December 31, 2001. The largest
concentration is in commercial real estate, which represents seven percent of
total loans and leases at December 31, 2001. The exposures presented in Table
Seventeen represent 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
exposures included in the table do 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 exposures presented do not include commercial loans secured by
owner-occupied real estate, except where the borrower is a real estate
developer.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
61
Table 17 Commercial Real Estate Loans, Foreclosed Properties and Other Real Estate Credit Exposure
December 31, 2001 Other
-------------------------------
Loans Foreclosed Credit
-------------------------------
(Dollars in millions) Outstanding Nonperforming Properties/(1)/ Exposure/(2)/
------------------------------------------------------------------
By Geographic Region/(3)/
California $ 5,225 $ 48 $ 1 $ 1,064
Southwest 3,239 24 1 952
Florida 2,399 29 - 509
Northwest 2,363 14 1 169
Geographically diversified 1,950 - - 381
Midwest 1,688 21 22 802
Carolinas 1,472 6 - 342
Mid-Atlantic 1,430 23 - 429
Midsouth 1,276 5 - 367
Northeast 750 51 - 558
Other states 478 19 43 199
Non-US 384 3 - 5
-------------- --------------- --------------- -----------
Total $ 22,654 $ 243 $ 68 $ 5,777
-------------- --------------- --------------- -----------
By Property Type
Office buildings $ 4,567 $ 14 $ - $ 667
Apartments 3,797 21 - 1,551
Residential 3,157 28 - 188
Shopping centers/retail 2,754 15 15 1,306
Industrial/warehouse 2,011 23 15 246
Land and land development 1,501 1 6 193
Hotels/motels 1,186 27 14 277
Multiple use 694 1 - 64
Unsecured 433 - - 454
Miscellaneous commercial 289 6 - 34
Other 1,881 104 18 792
Non-US 384 3 - 5
-------------- ---------------- ---------------- ------------
Total $ 22,654 $ 243 $ 68 $ 5,777
-------------- ---------------- ---------------- ------------
/(1)/ Foreclosed properties include commercial real estate loans only.
/(2)/ Other credit exposures include letters of credit and loans held for sale.
/(3)/ Distribution based on geographic location of collateral.
Table Eighteen presents the ten largest industries included in the commercial
loan and lease portfolio at December 31, 2001 and the respective balances at
December 31, 2000. Total commercial loans outstanding, excluding commercial real
estate loans, comprised 43 percent and 45 percent of total loans and leases at
December 31, 2001 and 2000, respectively. No commercial industry concentration
is greater than 3.1 percent of total loans and leases.
Table 18 Significant Industry Loans and Leases/(1)/
December 31, 2001 December 31, 2000
-------------------------------------------------------------
Percent of Total Percent of Total
(Dollars in millions) Outstanding Loans and Leases Outstanding Loans and Leases
--------------------------------------------------------------
Transportation $ 10,350 3.1% $ 11,704 3.0%
Business services 7,569 2.3 8,883 2.3
Media 6,704 2.0 9,322 2.4
Equipment and general manufacturing 6,648 2.0 8,982 2.3
Agribusiness 6,390 1.9 7,672 2.0
Healthcare(2) 5,444 1.7 8,110 2.1
Autos 5,290 1.6 6,741 1.7
Telecommunications 4,882 1.5 6,801 1.7
Retail 4,450 1.4 7,049 1.8
Education and government 4,198 1.3 3,671 0.9
Other 79,319 24.1 98,171 25.0
- --------------------------------------------------------------------------------------------------------
Total $ 141,244 42.9% $ 177,106 45.2%
------- ----------- --------- ---------- ---------
/(1)/ Includes only non-real estate commercial loans and leases.
/(2)/ During 2001, the Corporation revised its healthcare industry definition to
include pharmaceuticals. The December 31, 2000 outstanding balance and
percentage have been restated to reflect this change.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
62
International Exposure
Through its credit and market risk management activities, the Corporation has
been devoting particular attention to those countries that have been negatively
impacted by global economic pressure in all three regions where the Corporation
has exposure: Asia, Europe and Latin America.
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 Nineteen sets forth selected
regional foreign exposure at December 31, 2001 and is based on the FFIEC's
instructions for periodic reporting of foreign exposure. The countries selected
represent those that are considered as having higher credit and foreign exchange
risk. At December 31, 2001, the Corporation's total exposure to these select
countries was $21.9 billion, a decrease of $8.4 billion from December 31, 2000,
primarily due to reductions in exposure to Japan and to most other countries in
Asia, Europe and Latin America.
During 2001, Argentina began to experience significant economic turmoil and
deterioration. In response to this and as part of the Corporation's ongoing,
normal risk management process, the Corporation has reduced its credit exposure
to Argentina. At December 31, 2001, the Corporation had $745 million of credit
and other exposure in Argentina. Of this amount, $478 million represented
traditional credit exposure (loans, letters of credit, etc.) predominantly to
Argentine subsidiaries of foreign multinational companies. The Argentine
government has defaulted on its bonds. At December 31, 2001, the Corporation's
credit exposure related to Argentine government bonds was approximately $60
million. The Corporation continues to assess its credit exposure to Argentina.
Table 19 Selected Regional Foreign Exposure
Derivatives Total Increase/
(Net Total Gross Binding (Decrease)
Loans Positive Securities/ Cross- Local Exposure from
and Loan Other Mark-to- Other border Country December 31, December 31,
(Dollars in millions) Commitments Financing/(1)/ (Market) Investments Exposure/(2)/ (Exposure/(3)/ 2001 2000
--------------------------------------------------------------------------------------------------------
Region/Country
Asia
China $ 79 $ 41 $ 16 $ 58 $ 194 $ 81 $ 275 $ (45)
Hong Kong 169 128 45 112 454 3,801 4,255 (309)
India 621 73 58 42 794 986 1,780 (429)
Indonesia 234 - 16 17 267 8 275 (120)
Japan 715 51 784 1,334 2,884 361 3,245 (3,849)
Korea (South) 274 518 21 39 852 358 1,210 (1,010)
Malaysia 36 4 1 20 61 285 346 (176)
Pakistan 13 6 - - 19 - 19 1
Philippines 169 19 11 43 242 90 332 (59)
Singapore 191 9 48 16 264 1,134 1,398 (76)
Taiwan 265 64 33 - 362 551 913 (216)
Thailand 39 12 28 24 103 285 388 (19)
Other 2 18 - - 20 100 120 (12)
- --------------- --------- ------- -------- --------- -------- -------- -------- ---------
Total $2,807 $ 943 $1,061 $1,705 $ 6,516 $8,040 $14,556 $(6,319)
--------------- --------- ------- -------- --------- -------- -------- -------- ---------
Central and Eastern Europe
Russian Federation $ - $ - $ - $ - $ - $ - $ - $ (2)
Turkey 82 23 1 21 127 - 127 (205)
Other 43 16 17 186 262 4 266 22
- --------------- ---------- ------- -------- -------- --------- --------- --------- --------
Total $ 125 $ 39 $ 18 $ 207 $ 389 $ 4 $ 393 $ (185)
--------------- ---------- ------- -------- -------- --------- ---------- --------- ---------
Latin America
Argentina $ 361 $ 84 $ 53 $ 43 $ 541 $ 204 $ 745 $ (329)
Brazil 710 312 147 229 1,398 1,076 2,474 210
Chile 202 12 15 5 234 15 249 (731)
Colombia 113 8 12 6 139 - 139 (147)
Mexico 1,038 367 107 993 2,505 158 2,663 (773)
Venezuela 123 9 7 207 346 - 346 (133)
Other 160 61 8 99 328 - 328 (34)
- --------------- -------- ------- -------- ------- --------- -------- -------- ---------
Total $2,707 $ 853 $ 349 $1,582 $ 5,491 $1,453 $ 6,944 $(1,937)
--------------- -------- -------- -------- ------- --------- -------- -------- ---------
Total $5,639 $1,835 $1,428 $3,494 $12,396 $9,497 $ 21,893 $(8,441)
--------------- --------- -------- -------- -------- --------- -------- -------- ---------
/(1)/ Includes acceptances, standby letters of credit, commercial letters of
credit, and formal guarantees.
/(2)/ Cross-border exposure includes amounts payable to the Corporation by
residents of countries other than the one in which the credit is booked,
regardless of the currency in which the claim is denominated, consistent with
FFIEC reporting rules.
/(3)/ Gross local country exposure includes amounts payable to the Corporation
by residents of countries in which the credit is booked, regardless of the
currency in which the claim is denominated. Management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
63
At December 31, 2001, the Corporation had cross border exposure in excess of one
percent of total assets in the two countries detailed in Table Twenty. The
exposure in the United Kingdom and Germany reflects the Corporation's efforts to
diversify its portfolio in the industrialized countries where its clients
operate. In light of the increased risks perceived in Japan, the Corporation has
reduced its exposure to less than 0.5 percent of its total assets.
Table 20 Exposure Exceeding One Percent of Total Assets/(1)//(2)/
Exposure
Public Private Total as a Percentage
(Dollars in millions) December 31 Sector Banks Sector Exposure of Total Assets
-----------------------------------------------------------------------------------
United Kingdom 2001 $ 139 $ 2,807 $ 8,889 $ 11,835 1.90%
2000 355 1,962 6,167 8,484 1.32
- ---------------------- ----------- ------- ------- ------- --------- ---------------
Germany 2001 2,118 2,571 2,251 6,940 1.12
2000 2,188 2,249 2,062 6,499 1.01
- ---------------------- ----------- ------- ------- -------- --------- ---------------
Japan 2001 1,319 676 889 2,884 0.46
2000 4,925 599 883 6,407 1.00
- ---------------------- ----------- ------- ------- -------- --------- ---------------
/(1)/ Exposure includes cross-border claims by the Corporation's foreign offices
as follows: loans, accrued interest receivable, acceptances, time deposits
placed, trading account assets, available-for-sale (at fair value) and
held-to-maturity (at cost) securities, other interest-earning investments and
other monetary assets. Amounts also include derivative-dealer assets, unused
commitments, standby letters of credit, commercial letters of credit and formal
guarantees.
/(2)/ Sector definitions are based on the FFIEC instructions for preparing the
Country Exposure Report.
Market Risk Management
Overview
The Corporation is exposed to market risk as a consequence of the normal course
of conducting its business activities. Examples of these business activities
include market making, underwriting, proprietary trading, and asset/liability
management in interest rate, foreign exchange, equity, commodity and credit
markets, along with any associated derivative products. Market risk is the
potential of loss arising from adverse changes in market rates, prices and
liquidity. 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.
Trading Portfolio
The Board delegates responsibility for the day-to-day management of market risk
to the Finance Committee. The Finance Committee has structured a system of
independent checks, balances and reporting in order to ensure that the Board's
disposition toward market risk is not compromised.
The objective of the Corporation's Risk Management group (Risk Management)
is to provide senior management with independent, timely assessments of the
bottom line impacts of all market risks facing the Corporation and to monitor
those impacts against trading limits. Risk Management monitors the changing
aggregate position of the Corporation and projects the profit and loss levels
that would result from both normal and extreme market moves. In addition, Risk
Management is responsible for ensuring that appropriate policies and procedures
that conform to the Board's risk preferences are in place and enforced. These
policies and procedures encompass the limit process, risk reporting, new product
review and model review.
Trading account profits represent the net amount earned from the
Corporation's trading positions, which include trading account assets and
liabilities as well as derivative positions and mortgage banking assets. 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.
Histogram of Daily Market Risk-Related Revenue
Twelve Months Ended December 31, 2001
[GRAPHIC]
Daily Market Risk-Related Revenue Number
(Dollars in millions) of Days
- ----------------------------------------------------------
Less than $(10) 11
$(10) to $0 18
$0 to $10 47
$10 to $20 84
$20 to $30 61
$30 to $40 18
$40 to $50 7
Greater than $50 4
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
64
Market risk-related revenue includes trading account profits and
trading-related net interest income, which encompass both proprietary trading
and customer-related activities. During 2001, the Corporation has continued its
efforts to build on its client franchise and reduce the proportion of
proprietary trading revenue to total revenue. The results of these efforts can
be seen in the histogram above. In 2001, the Corporation recorded positive daily
market risk-related revenue for 221 of 250 trading days. Furthermore, of the 29
days that showed negative revenue, only 11 days were greater than $10 million.
Value at Risk
Value at Risk (VAR) is the key measure of market risk for the Corporation. VAR
represents the maximum amount that the Corporation has placed at risk of loss,
with a 99 percent degree of confidence, in the course of its risk taking
activities. Its purpose is to describe the amount of capital required to absorb
potential losses from adverse market movements. Given the 99 percent confidence
interval captured by VAR, market risk-related revenue or losses would be
expected to exceed VAR measures approximately once every 100 trading days, or
two to three times each year. The VAR model does not measure the degree of the
excess gain or loss, rather it produces a confidence level that gains or losses
will be within predicted ranges. Since the third quarter of 2000, the
Corporation has been migrating its trading books to a historical simulation
approach. This approach utilizes historical market conditions over the last
three years to derive estimates of trading risk and provides for the natural
aggregation of trading risks across different groups. The effects of correlation
and diversification are embedded in these calculations. The completion of the
migration is expected to take place during the first half of 2002. While the
transition is taking place, the square root of the sum of squares method is used
to aggregate risk.
VAR modeling on trading is subject to numerous limitations. In addition,
the Corporation recognizes that there are numerous assumptions and estimates
associated with modeling and actual results could differ from these assumptions
and estimates. The Corporation mitigates these uncertainties through close
monitoring and by examining and updating assumptions on an ongoing basis. The
continual trading risk management process considers the impact of unanticipated
risk exposure and updates assumptions to reduce loss exposure.
As the following graph shows, in 2001, actual market risk-related revenue
exceeded VAR measures three days out of 250 total trading days. During the same
period, actual market risk-related losses exceeded VAR measures one day out of
250 total trading days. This occurred immediately following the events of
September 11, 2001 due to extreme market conditions.
Trading Risk and Return
Daily VAR and Market Risk-Related Revenue
[GRAPHIC]
Line graph representation of Daily Market Risk-Related Revenue and VAR for
the twelve months ended December 31, 2001. During the period, the daily market
risk-related revenue ranged from $(58) million to $66 million. During the same
period, VAR ranged from $36 million to $70 million.
The following table summarizes the VAR in the Corporation's trading portfolios
for the years ended December 31, 2001 and 2000:
Table 21 Trading Activities Market Risk
2001 2000
------------------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR/(1)/ VAR/(2)/ VAR/(2)/ VAR/(1)/ VAR/(2)/ VAR/(2)/
------------------------------------------------------------------------------
Interest rate $34.3 $47.0 $23.0 $25.9 $42.2 $16.3
Foreign exchange 7.2 12.8 1.9 10.6 18.5 5.4
Commodities 4.3 10.9 .9 2.1 5.2 .5
Equities 15.4 25.1 8.9 26.7 41.5 5.5
Fixed income 10.9 17.3 3.0 10.1 17.4 3.2
Real estate/mortgage/(3)/ 33.2 55.5 8.8 7.5 11.3 2.5
Total trading portfolio 52.7 69.9 35.8 41.5 53.0 25.1
- ---------------------------------------- -------- ------ ------ ------ ------ -----
/(1)/ The average VAR for the total portfolio is less than the sum of the VARs
of the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
/(2)/ The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may have
occurred on different trading days.
/(3)/ The real estate/mortgage business is included in the fixed income category
in the Trading-Related Revenue table in Note Four of the consolidated financial
statements.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
65
Total trading portfolio VAR increased during 2001 relative to 2000. This
increase was due to increased activity in the interest rate business,
particularly in the United States, and the addition of mortgage banking assets
to the VAR calculation for the real estate/mortgage portfolio in the first
quarter of 2001.
Since the third quarter of 2000, the migration of trading books to a
historical simulation approach has resulted in a lower VAR in equities and
foreign exchange and a higher VAR in commodities. VAR was not restated for
previous quarters.
The following table summarizes the quarterly VAR in the Corporation's
trading portfolios for 2001:
Table 22 Quarterly Trading Activities Market Risk
2001
----------------------------------------------------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(US Dollar Average High Low Average High Low Average High Low Average High Low
equivalents VAR/(1)/ VAR/(2)/ VAR/(2)/ VAR/(1)/ VAR/(2)/ VAR/(2)/ VAR/(1)/ VAR/(2)/ VAR/(2)/ VAR/(1)/ VAR/(2)/ VAR/(2)/
in millions) ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Interest rate $ 31.9 $ 39.4 $ 24.4 $ 34.4 $ 47.0 $ 23.0 $ 38.8 $ 43.5 $ 32.6 $ 32.1 $ 46.2 $ 26.9
Foreign exchange 5.2 10.4 1.9 7.6 11.2 5.2 8.0 11.0 5.5 8.2 12.8 5.0
Commodities 7.8 10.9 5.7 4.8 8.2 1.5 2.7 5.7 1.3 1.8 3.8 .9
Equities 13.9 16.5 11.4 16.2 19.1 12.7 18.1 25.1 13.5 13.1 22.5 8.9
Fixed Income 13.9 17.3 8.8 13.0 15.8 10.3 10.7 16.9 6.6 6.2 8.0 3.0
Real estate/mortgage(3) 24.7 39.0 15.2 32.9 41.5 23.2 41.2 55.5 28.6 33.7 43.4 8.8
Total trading portfolio 46.0 57.0 35.8 53.1 63.3 45.4 61.3 69.9 55.2 50.0 59.6 42.4
- ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
/(1)/ The average VAR for the total portfolio is less than the sum of the VARs
of the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
/(2)/ The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may have
occurred on different trading days.
/(3)/ The real estate/mortgage business is included in the fixed income
category in the Trading-Related Revenue table in Note Four of the consolidated
financial statements.
Stress Testing
In order to determine the sensitivity of the Corporation's capital to the impact
of historically large market moves with low probability, stress scenarios are
run against the trading portfolios. This stress testing should verify that, even
under extreme market moves, the Corporation will preserve its capital. The
scenarios for each product are large standard deviation movements in the
relevant markets that are based on significant historical or hypothetical
events. These results are calculated daily and reported as part of the regular
reporting process.
In addition, specific stress scenarios are run regularly which represent
extreme hypothetical, but plausible, events that would be of concern given the
Corporation's current portfolio. The results of these specific scenarios are
presented to the Corporation's Trading Risk Committee as part of its regular
meetings. Examples of these specific stress scenarios include calculating the
effects on the overall portfolio of an extreme Federal Reserve Board tightening
or easing of interest rates, a severe credit deterioration in the U.S., and a
recession in Japan and the corresponding ripple effects globally.
Non-Exchange Traded Commodity Contracts at Fair Value
The use of non-exchange traded or over the counter commodity contracts provides
the Corporation with the ability to adapt to the varied requirements of a wide
customer base while efficiently mitigating its market risk. Non-exchange traded
commodity contracts are stated at fair value, which is generally based on dealer
price estimates. These contracts are primarily oil and gas commodities
contracts.
The table below summarizes the changes in the fair value for non-exchange
traded commodity contracts for 2001:
Asset Liability
(Dollars in millions) Positions Positions
-------- --------
Net fair value of contracts outstanding at January 1, 2001 $ 2,133 $ 1,881
Effects of legally enforceable master netting agreements 8,916 8,916
- ----------------------------------------------------------------- -------- --------
Gross fair value of contracts outstanding at January 1, 2001 11,049 10,797
Contracts realized or otherwise settled (8,542) (8,544)
Fair value of new contracts 3,032 2,699
Other changes in fair value (1,586) (1,317)
- ----------------------------------------------------------------- -------- --------
Gross fair value of contracts outstanding at December 31, 2001 3,953 3,635
Effects of legally enforceable master netting agreements (2,625) (2,625)
- ----------------------------------------------------------------- -------- --------
Net fair value of contracts outstanding at December 31, 2001 $ 1,328 $ 1,010
- ----------------------------------------------------------------- ------- -------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
66
The Corporation controls and manages its commodity risk through the use of VAR
limits. See Tables Twenty-One and Twenty-Two for further details. The following
table indicates the maturities of non-exchange traded commodity contracts at
December 31, 2001:
Asset Liability
(Dollars in millions) Positions Positions
--------- ---------
Maturity less than 1 year $ 3,118 $ 2,866
Maturity 1-3 years 304 172
Maturity 4-5 years 179 136
Maturity in excess of 5 years 352 461
- ---------------------------------------------------------------- --------- ---------
Gross fair value of contracts $ 3,953 $ 3,635
Effects of legally enforceable master netting agreements (2,625) (2,625)
- ---------------------------------------------------------------- --------- ---------
Net fair value of contracts $ 1,328 $ 1,010
- ---------------------------------------------------------------- -------- --------
Asset and Liability Management Activities
Non-Trading Portfolio
The Corporation's Asset and Liability Management (ALM) process, managed through
the Asset and Liability Committee of the Finance Committee, is used to manage
interest rate risk through structuring balance sheet portfolios and identifying
and linking derivative positions to specific hedged assets and liabilities.
Interest rate risk represents the only material market risk exposure to the
Corporation's non-trading financial instruments.
To effectively measure and manage interest rate risk, the Corporation uses
sophisticated computer simulations that determine the impact on net interest
income of numerous interest rate scenarios, balance sheet trends and strategies.
These simulations cover the following financial instruments: short-term
financial instruments, securities, loans, deposits, borrowings and ALM
derivative instruments. These simulations incorporate assumptions about balance
sheet dynamics, such as loan and deposit growth and pricing, changes in funding
mix and asset and liability repricing and maturity characteristics. Simulations
are run under various interest rate scenarios to determine the impact on net
income and capital. From these scenarios, interest rate risk is quantified and
appropriate strategies are developed and implemented. The overall interest rate
risk position and strategies are reviewed on an ongoing basis by senior
management. Additionally, duration and market value sensitivity measures are
selectively utilized where they provide added value to the overall interest rate
risk management process.
The Corporation specifically reviews the impact on net interest income of
parallel and non-parallel shifts in the yield curve over different time
horizons. At December 31, 2001, the Federal Funds rate was 1.75 percent and our
outlook did not anticipate additional easing from the Fed, with continued
uncertainty surrounding the timing and extent of future tightenings. As a
result, the interest rate risk position of the Corporation was relatively
neutral to parallel shifts upward in the yield curve as the impact on net
interest income of a 100 basis point parallel shift, up over either two months
(rapid) or twelve months (gradual) would be slightly favorable, but less than
one percent. While further material declines in interest rates are unlikely, the
impact on net interest income of a 100 basis point parallel shift down would be
negative three percent.
Table Twenty-Three summarizes the expected maturities, unrealized gains
and losses and weighted average effective yields and rates associated with
certain of the Corporation's significant non-trading financial instruments. Cash
and cash equivalents, time deposits placed and other short-term investments,
federal funds sold and purchased, resale and repurchase agreements, commercial
paper, other short-term borrowings and foreign deposits, which are similar in
nature to other short-term borrowings, are excluded from Table Twenty-Three as
their respective carrying values approximate fair values. These financial
instruments generally expose the Corporation to insignificant market risk as
they have either no stated maturities or an average maturity of less than 30
days and interest rates that approximate market rates. However, these financial
instruments could expose the Corporation to interest rate risk by requiring more
or less reliance on alternative funding sources, such as long-term debt. Loans
held for sale are also excluded as their carrying values approximate their fair
values, generally exposing the Corporation to insignificant market risk. For
further information on the fair value of financial instruments, see Note
Eighteen of the consolidated financial statements. The fair values and expected
maturities for ALM derivative instruments used for balance sheet management
purposes are presented in Table Twenty-Four.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
67
Table 23 Non-Trading Financial Instruments
December 31, 2001 Expected Maturity
--------------------------------------------------
Unrealized After
(Dollars in millions) Total/(3)/ Gains(Losses) 2002 2003 2004 2005 2006 2006
-------------- -------------- --------- ------ --------- --------- ------- ----------
Assets/(1)/
Available-for-sale securities
Fixed rate
Book value $ 74,849 $ (831) $ 982 $4,751 $9,950 $20,167 $ 11,432 $ 27,567
Weighted average effective yield 6.03%
Variable rate
Book value $ 9,601 188 543 141 189 1,637 39 7,052
Weighted average effective yield 3.12%
Held-to-maturity securities/(2)/
Fixed rate
Book value $ 1,001 (40) 21 30 32 15 17 886
Weighted average effective yield 7.52%
Variable rate
Book value $ 48 - 6 6 11 4 1 20
Weighted average effective yield 3.98%
Loans/(2)//(4)/
Fixed rate
Book value $113,521 4,573 31,775 15,186 12,416 8,686 6,688 38,770
Weighted average effective yield 7.33%
Variable rate
Book value $196,906 (196) 97,227 29,241 19,065 17,062 8,847 25,464
Weighted average effective yield 5.27%
Liabilities/(1)/
Total deposits/(5)//(6)/
Fixed rate
Book value $229,956 (716) 70,973 12,364 13,953 13,544 13,370 105,752
Weighted average effective rate 1.29%
Variable rate
Book value $105,739 (20) 27,464 14,810 12,555 11,489 9,135 30,286
Weighted average effective rate 1.34%
Long-term debt/(7)//(8)/
Fixed rate
Book value $ 34,567 (1,841) 4,613 3,507 5,089 3,185 5,292 12,881
Weighted average effective rate 6.86%
Variable rate
Book value $ 27,899 (224) 8,971 4,430 7,018 2,487 3,836 1,157
Weighted average effective rate 2.35%
Trust preferred securities/(7)/
Fixed rate
Book value $ 4,388 (82) 900 350 - - 2,640 498
Weighted average effective rate 7.89%
Variable rate
Book value $ 1,142 - 400 - - - - 742
Weighted average effective rate 2.96%
=============================================================================================================================
/(1)/ Fixed and variable rate classifications are based on contractual rates and
are not modified for the impact of asset and liability management
contracts.
/(2)/ Expected maturities reflect the impact of prepayment assumptions.
/(3)/ With the exception of available-for-sale securities, the book value does
not include unrealized gains (losses).
/(4)/ Excludes leases.
/(5)/ When measuring and managing market risk associated with domestic deposits,
such as savings and demand deposits, the Corporation considers that there
is value in its long-term relationships with depositors. The unrealized
loss on deposits in this table does not consider the value of these
long-term relationships; therefore, only certificates of deposits reflect
an unrealized gain or loss.
/(6)/ Excludes foreign time deposits.
/(7)/ Expected maturities of long-term debt and trust preferred securities
reflect the Corporation's ability to redeem such debt prior to contractual
maturities.
/(8)/ Excludes obligations under capital leases.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
68
Interest Rate and Foreign Exchange Contracts
Risk management interest rate contracts and foreign exchange contracts are
utilized in the Corporation's ALM process. The Corporation maintains an overall
interest rate risk management strategy that incorporates the use of interest
rate contracts to minimize significant unplanned fluctuations in earnings that
are caused by interest rate volatility. The Corporation's goal is to manage
interest rate sensitivity so that movements in interest rates do not adversely
affect net interest income. As a result of interest rate fluctuations, hedged
fixed-rate assets and liabilities appreciate or depreciate in market value.
Gains or losses on the derivative instruments that are linked to the hedged
fixed-rate assets and liabilities are expected to substantially offset this
unrealized appreciation or depreciation. Interest income on hedged
variable-rate assets, primarily variable rate commercial loans, and interest
expense on hedged variable rate liabilities, primarily short-term time deposits,
increases or decreases as a result of interest rate fluctuations. Gains and
losses on the derivative instruments that are linked to these hedged assets and
liabilities are expected to substantially offset this variability in earnings.
See Note Five of the consolidated financial statements for additional
information on the Corporation's hedging activities.
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 with foreign-denominated assets and liabilities, as well as the
Corporation's equity investments in foreign subsidiaries. Table Twenty-Four
reflects the notional amounts, fair value, weighted average receive and pay
rates, expected maturity and estimated duration of the Corporation's ALM
derivatives at December 31, 2001 and 2000. Fair values are based on the last
repricing and will change in the future primarily based on movements in one-,
three- and six-month LIBOR rates. 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 positions should not be viewed in isolation.
Consistent with the Corporation's strategy of managing interest rate
sensitivity, the net receive fixed interest rate swap position declined by $5.8
billion to $43.0 billion at December 31, 2001. This reduction primarily occurred
in the last half of 2001. Option products in the Corporation's ALM process may
include from time to time option collars or spread strategies, which involve the
buying and selling of options on the same underlying security or interest rate
index. These strategies may involve caps, floors and options on index futures
contracts.
The amount of unamortized net realized deferred gains associated with
closed ALM swaps was $966 million and $25 million at December 31, 2001 and 2000,
respectively. The amount of unamortized net realized deferred gains associated
with closed ALM options was $114 million and $95 million at December 31, 2001
and 2000, respectively. The amount of unamortized net realized deferred losses
associated with closed ALM futures and forward contracts was $9 million and $15
million at December 31, 2001 and 2000, respectively. There were no unamortized
net realized deferred gains or losses associated with closed foreign exchange
contracts at December 31, 2001 and 2000. Of these unamortized net realized
deferred gains, $1.0 billion was included in accumulated other comprehensive
income at December 31, 2001.
Table 24 Asset and Liability Management Interest Rate and Foreign
Exchange Contracts
December 31, 2001
Expected Maturity
----------------------------------------------------------------- Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2002 2003 2004 2005 2006 2006 Duration
----- ----- ----- ---- ---- ---- ---- ----- -------
Open interest rate contracts
Total receive fixed swaps $ 784 4.68
Notional value $ 64,472 $ 1,510 $ 266 $ 10,746 $ 8,341 $ 9,608 $ 34,001
Weighted average receive 5.74% 7.04% 8.27% 5.31% 5.79% 5.37% 5.89%
rate
Total pay fixed swaps (322) 2.26
Notional value $ 21,445 $ 11,422 $ 4,319 $ 122 $ 2,664 $ 60 $ 2,858
Weighted average pay rate 3.97% 2.61% 4.21% 6.09% 6.77% 5.83% 6.34%
Basis swaps -
Notional value $ 15,700 $ - $ - $ 9,000 $ 500 $ 4,400 $ 1,800
Total swaps 462
------------------------ ----- ------- ------ ------ ------ ------ ------ ------ -----
Option products 105
Notional amount $ 7,000 $ - $7,000
Futures and forward rate -
contracts
Notional amount $ -
------------------------ ----- ----- ---- ---- ---- ---- ---- ----- -----
Total open interest rate 567
contracts
------------------------ ----- ----- ---- ---- ---- ---- ---- ----- -----
Closed interest rate 1,071
contracts(1)
- ------------------------ ----- ----- ---- ---- ---- ---- ---- ----- -----
Net interest rate 1,638
contract position
------------------------ ----- ----- ---- ---- ---- ---- ---- ----- -----
Open foreign exchange contracts (285)
Notional amount $ 6,968 $ 465 $ 283 $ 576 $ 1,180 $ 2,335 $ 2,129
------------------------ ----- ---- ---- ---- ---- ----- ----- ----- -----
Total ALM contracts $ 1,353
------------------------ -----
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
69
Table 24 Asset and Liability Management Interest Rate and Foreign Exchange
Contracts (continued)
December 31, 2000
Expected Maturity
------------------------------------------------------ Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2001 2002 2003 2004 2005 2005 Duration
----------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $ 900 3.65
Notional amount $ 62,485 $ 4,001 $ 7,011 $ 9,787 $ 12,835 $ 15,853 $ 12,998
Weighted average receive 6.39% 6.28% 6.71% 5.53% 6.45% 6.76% 6.41%
rate
Total pay fixed swaps (529) 5.66
Notional amount $ 13,640 $ 1,878 $ 1,064 $ 114 $ 20 $ 2,584 $ 7,980
Weighted average pay rate 6.72% 5.86% 6.39% 7.14% 5.85% 7.05% 6.82%
Basis swaps (7)
Notional amount
$ 14,739 $ 576 $ 1,669 $ 442 $ 7,700 $ 4,317 $ 35
-----
Total swaps 364
- -----------------------------------------------------------------------------------------------------------------------------
Option products (157)
Notional amount $ 22,477 $ 2,087 $ 868 $ 1,575 $ 7,882 $ 4,101 $ 5,964
Futures and forward rate (52)
contracts
Notional amount $ 24,818 $ 19,068 $ 5,750 $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------
Total open interest rate
contracts 155
- -----------------------------------------------------------------------------------------------------------------------------
Closed interest rate
contracts/(1)/ 105
- -----------------------------------------------------------------------------------------------------------------------------
Net interest rate 260
contract position
- -----------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (199)
Notional amount $ 9,373 $ 1,597 $ 2,091 $ 253 $ 572 $ 2,983 $ 1,877
- -----------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $ 61
- -----------------------------------------------------------------------------------------------------------------------------
/(1)/ Represents the unamortized net realized deferred gains associated with
closed contracts. As a result, no notional amount is reflected for
expected maturity.
The Corporation adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(SFAS 133) on January 1, 2001. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. The
Corporation has not significantly altered its overall interest rate risk
management objective and strategy as a result of adopting SFAS 133. For
further information on SFAS 133, see Note One of the consolidated
financial statements.
In conducting its mortgage production activities, the Corporation is
exposed to interest rate risk for the periods between the loan commitment
date and the date the loan is delivered to the secondary market. To manage
this risk, the Corporation enters into various financial instruments
including forward delivery contracts, Euro dollar futures and option
contracts. The notional amount of such contracts was $27.8 billion at
December 31, 2001 with associated net unrealized gains of $69 million. At
December 31, 2000, the notional amount of such contracts was $9.7 billion
with associated net unrealized losses of $53 million. These contracts have
an average expected maturity of less than 90 days.
The Corporation manages risk associated with the impact of changes in
prepayment rates on certain mortgage banking assets using various
financial instruments including purchased options and swaps. The notional
amounts of such contracts at December 31, 2001 and 2000 were $65.1 billion
and $42.1 billion, respectively. The related unrealized gain was $301
million at December 31, 2001 and the unrealized gain was $424 million at
December 31, 2000. The 2001 amounts are included in the Derivative Assets
table in Note Five of the consolidated financial statements.
Liquidity Risk Management
The Corporation manages liquidity risk by assessing all on- and off-balance
sheet funding demands and alternatives. Funding requirements are impacted by
loan repayments and originations, liability settlements and issuances,
off-balance sheet funding commitments (including commercial and consumer loans)
and the level of asset securitizations utilized by the Corporation. The
Corporation also complies with various regulatory guidelines regarding required
liquidity levels and periodically monitors its liquidity position in light of
the changing economic environment and customer activity. Based on these periodic
assessments, the Corporation will alter, as deemed appropriate, its assets and
liabilities and off-balance sheet positions. The Corporation currently maintains
various shelf registrations with the Securities and Exchange Commission, whereby
additional short-term and long-term debt may be issued. See Note Ten of the
consolidated financial statements for additional information.
The Corporation employs various liquidity modeling techniques and metrics.
Throughout 2001, the Corporation's liquidity position has improved significantly
to its best position in many years. A commonly used measure of banking liquidity
is the loan to deposit ratio. The Corporation's loan to core deposit ratio was
99 percent and 128 percent at December 31, 2001 and 2000, respectively. The loan
to core deposit ratio at December 31, 2001 was the lowest ratio since the
Corporation's merger with First Republic Bank Corporation in 1988. In addition,
average short-term borrowings decreased $39.0 billion, or 30 percent, in 2001.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
70
Table 25 Selected Quarterly
Financial Data
2001 Quarters 2000 Quarters
-----------------------------------------------------------------------------
(Dollars in millions, except per Fourth Third Second First Fourth Third Second First
share information) -----------------------------------------------------------------------------
As Reported
Income statement
Net interest income $ 5,417 $ 5,204 $ 5,030 $ 4,639 $ 4,664 $ 4,563 $ 4,617 $ 4,505
Noninterest income 3,398 3,429 3,741 3,780 3,328 3,675 3,514 4,065
Total revenue 8,815 8,633 8,771 8,419 7,992 8,238 8,131 8,570
Provision for credit losses 1,401 1,251 800 835 1,210 435 470 420
Gains (losses) on sales of securities 393 97 (7) (8) 2 11 6 6
Business exit costs - 1,305 - - - - - -
Restructuring charges - - - - - 550 - -
Other noninterest expense 5,324 4,606 4,821 4,654 4,637 4,410 4,413 4,623
Income before income taxes 2,483 1,568 3,143 2,922 2,147 2,854 3,254 3,533
Income tax expense 426 727 1,120 1,052 762 1,025 1,191 1,293
Net income 2,057 841 2,023 1,870 1,385 1,829 2,063 2,240
- ---------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.25% .52% 1.24% 1.17% .81% 1.06% 1.23% 1.38%
Return on average common
shareholders' equity 16.70 6.78 16.67 15.86 11.57 15.25 17.63 19.59
Total equity to total assets 7.80 7.83 7.88 8.02 7.42 6.98 6.75 6.90
(period-end)
Total average equity to total 7.50 7.66 7.43 7.38 7.03 6.97 7.00 7.07
average assets
Dividend payout ratio 45.53 106.49 44.35 48.14 65.58 44.83 39.94 37.16
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.31 $ .52 $ 1.26 $ 1.16 $ .85 $ 1.11 $ 1.25 $ 1.34
Diluted earnings 1.28 .51 1.24 1.15 .85 1.10 1.23 1.33
Cash dividends paid .60 .56 .56 .56 .56 .50 .50 .50
Book value 31.07 31.66 30.75 30.47 29.47 28.69 27.82 27.28
- ----------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data/(1)/
Earnings $ 2,270 $ 1,060 $ 2,246 $ 2,093 $ 1,599 $ 2,044 $ 2,281 $ 2,457
Earnings per common share 1.45 .66 1.40 1.30 .98 1.25 1.38 1.47
Diluted earnings per common share 1.42 .65 1.38 1.28 .98 1.23 1.36 1.46
Return on average assets 1.38% .65% 1.37% 1.31% .94% 1.18% 1.36% 1.52%
Return on average common
shareholders' equity 18.43 8.55 18.52 17.75 13.36 17.01 19.49 21.49
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Basis/(2)/
Income statement
Net interest income $ 5,417 $ 5,204 $ 5,030 $ 4,639 $ 4,664 $ 4,563 $ 4,617 $ 4,505
Net interest income 5,505 5,290 5,117 4,721 4,758 4,642 4,695 4,576
(taxable-equivalent basis)
Noninterest income 3,398 3,429 3,741 3,780 3,328 3,675 3,514 4,065
Total revenue 8,815 8,633 8,771 8,419 7,992 8,238 8,131 8,570
Total revenue (taxable-equivalent 8,903 8,719 8,858 8,501 8,086 8,317 8,209 8,641
basis)
Provision for credit losses 1,401 856 800 835 1,210 435 470 420
Gains (losses) on sales of 393 97 (7) (8) 2 11 6 6
securities
Other noninterest expense 5,324 4,606 4,821 4,654 4,637 4,410 4,413 4,623
Income before income taxes 2,483 3,268 3,143 2,922 2,147 3,404 3,254 3,533
Income tax expense 426 1,177 1,120 1,052 762 1,229 1,191 1,293
Net income 2,057 2,091 2,023 1,870 1,385 2,175 2,063 2,240
Average diluted common shares
issued and outstanding (in thousands) 1,602,886 1,634,063 1,632,964 1,631,099 1,638,863 1,661,031 1,676,089 1,688,318
- ----------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.25% 1.29% 1.24% 1.17% .81% 1.26% 1.23% 1.38%
Return on average common
shareholders' equity 16.70 16.87 16.67 15.86 11.57 18.15 17.63 19.59
Efficiency ratio 59.80 52.82 54.44 54.73 57.35 53.01 53.77 53.49
Net interest yield 3.95 3.78 3.61 3.39 3.21 3.10 3.23 3.26
Dividend payout ratio 45.53 42.79 44.35 48.14 65.58 37.68 39.94 37.16
Shareholder value added $ 793 $ 824 $ 791 $ 679 $ 164 $ 953 $ 878 $ 1,086
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.31 $ 1.31 $ 1.26 $ 1.16 $ .85 $ 1.33 $ 1.25 $ 1.34
Diluted earnings 1.28 1.28 1.24 1.15 .85 1.31 1.23 1.33
- ----------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data/(1)/
Earnings $ 2,270 $ 2,310 $ 2,246 $ 2,093 $ 1,599 $ 2,390 $ 2,281 $ 2,457
Earnings per common share 1.45 1.44 1.40 1.30 .98 1.46 1.38 1.47
Diluted earnings per common share 1.42 1.41 1.38 1.28 .98 1.44 1.36 1.46
Return on average assets 1.38% 1.43% 1.37% 1.31% .94% 1.39% 1.36% 1.52%
Return on average common
shareholders' equity 18.43 18.64 18.52 17.75 13.36 19.94 19.49 21.49
Efficiency ratio 57.40 50.32 51.92 52.11 54.70 50.43 51.12 50.98
- ----------------------------------------------------------------------------------------------------------------------------------
Average balance sheet
Total loans and leases $ 333,354 $ 357,726 $ 383,500 $ 387,889 $ 399,549 $402,763 $ 391,404 $ 376,584
Total assets 651,797 642,184 655,557 648,698 677,458 685,017 672,588 651,019
Total deposits 368,171 363,328 363,348 355,618 357,554 356,734 353,426 345,374
Common shareholders' equity 48,850 49,134 48,640 47,794 47,565 47,660 47,036 45,953
Total shareholders' equity 48,916 49,202 48,709 47,866 47,639 47,735 47,112 46,030
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios
(period-end)
Tier 1 capital 8.30% 7.95% 7.90% 7.65% 7.50% 7.32% 7.40% 7.42%
Total capital 12.67 12.12 12.09 11.84 11.04 10.80 11.03 11.00
Leverage ratio 6.56 6.59 6.50 6.41 6.12 6.06 6.11 6.17
- ----------------------------------------------------------------------------------------------------------------------------------
Market price per share of common
stock
Closing $ 62.95 $ 58.40 $ 60.03 $ 54.75 $ 45.88 $ 52.38 $ 43.00 $ 52.44
High 64.99 65.54 62.18 55.94 54.75 57.63 61.00 55.19
Low 52.10 50.25 48.65 45.00 36.31 43.63 42.98 42.31
- ----------------------------------------------------------------------------------------------------------------------------------
/(1)/ Cash basis calculations exclude goodwill and other intangible amortization
expense.
/(2)/ Operating basis excludes provision for credit losses of $395 million and
noninterest expense of $1,305 million related to the exit of certain consumer
finance businesses in the third quarter of 2001 and restructuring charges of
$550 million in the third quarter of 2000.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
71
Table 26 Quarterly Average Balances and Interest Rates-Taxable-Equivalent Basis
Fourth Quarter 2001
---------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
---------------------------------------
Earning assets
Time deposits placed and other short-term investments $ 7,255 $ 64 3.47%
Federal funds sold and securities purchased under agreements to resell 38,825 253 2.60
Trading account assets 67,535 920 5.43
Securities/(1)/ 71,454 1,090 6.10
Loans and leases/(2)/:
Commercial - domestic 121,399 2,138 6.99
Commercial - foreign 23,789 278 4.63
Commercial real estate - domestic 23,051 316 5.45
Commercial real estate - foreign 375 4 4.49
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 168,614 2,736 6.44
- ----------------------------------------------------------------------------------------------------------------------
Residential mortgage 78,366 1,385 7.05
Home equity lines 22,227 340 6.07
Direct/Indirect consumer 38,074 752 7.83
Consumer finance 5,324 127 9.55
Bankcard 18,656 498 10.58
Foreign consumer 2,093 21 4.02
- ----------------------------------------------------------------------------------------------------------------------
Total consumer 164,740 3,123 7.54
- ----------------------------------------------------------------------------------------------------------------------
Total loans and leases 333,354 5,859 6.99
- ----------------------------------------------------------------------------------------------------------------------
Other earning assets 36,782 707 7.67
- ----------------------------------------------------------------------------------------------------------------------
Total earning assets/(3)/ 555,205 8,893 6.37
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 23,182
Other assets, less allowance for credit losses 73,410
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 651,797
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $ 20,132 42 0.83
NOW and money market deposit accounts 121,758 426 1.39
Consumer CDs and IRAs 71,895 898 4.96
Negotiable CDs, public funds and other time deposits 5,196 44 3.39
- ----------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 218,981 1,410 2.56
- ----------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits/(4)/:
Banks located in foreign countries 20,771 170 3.22
Governments and official institutions 2,965 20 2.74
Time, savings and other 21,858 113 2.06
- ----------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 45,594 303 2.63
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 264,575 1,713 2.57
- ----------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under
agreements to repurchase and other short-term borrowings 87,291 700 3.18
Trading account liabilities 29,921 268 3.55
Long-term debt/(5)/ 68,141 707 4.15
- ----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities(6) 449,928 3,388 2.99
- ----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 103,596
Other liabilities 49,357
Shareholders' equity 48,916
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 651,797
- ----------------------------------------------------------------------------------------------------------------------
Net interest spread 3.38
Impact of noninterest-bearing sources .57
Net interest income/yield on earning assets $ 5,505 3.95%
- ----------------------------------------------------------------------------------------------------------------------
/(1)/ The average balance and yield on securities are based on the average of
historical amortized cost balances.
/(2)/ Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
/(3)/ Interest income includes taxable-equivalent basis adjustments of $88, $86,
$87 and $82 in the fourth, third, second and first quarters of 2001 and
$94 in the fourth quarter of 2000, respectively. Interest income also
includes the impact of risk management interest rate contracts, which
increased (decreased) interest income on the underlying assets $473,
$284, $194 and $27 in the fourth, third, second and first quarters of 2001
and $(31) in the fourth quarter of 2000, respectively. These amounts were
substantially offset by corresponding decreases or increases in the income
earned on the underlying assets. For further information on interest rate
contracts, see "Asset and Liability Management Activities" beginning on
page 67.
/(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 $(40), $31, $49 and $23 in the fourth, third, second and first
quarters of 2001 and $(7) in the fourth quarter of 2000, respectively.
These amounts were substantially offset by corresponding decreases or
increases in the interest paid on the underlying liabilities. For further
information on interest rate contracts, see "Asset and Liability
Management Activities" beginning on page 67.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
72
Third Quarter 2001 Second Quarter 2001 First Quarter 2001 Fourth Quarter 2000
- ------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------
$ 5,881 $ 71 4.84% $ 7,085 $ 81 4.58% $ 6,675 $ 102 6.17% $ 5,663 $ 99 6.96%
36,133 321 3.54 33,859 405 4.79 31,903 435 5.48 37,936 551 5.79
68,258 937 5.46 67,311 944 5.62 62,491 852 5.49 53,251 758 5.68
58,930 902 6.12 55,719 909 6.53 55,221 860 6.26 79,501 1,205 6.05
129,673 2,343 7.17 139,096 2,585 7.45 144,404 2,813 7.90 147,336 3,034 8.19
25,267 353 5.54 27,449 421 6.14 29,540 515 7.06 30,408 560 7.32
24,132 395 6.50 25,293 459 7.28 25,989 530 8.27 27,220 622 9.09
366 5 5.78 352 5 6.64 300 6 7.82 264 6 8.44
- ------------------------------------------------------------------------------------------------------------------------------
179,438 3,096 6.85 192,190 3,470 7.24 200,233 3,864 7.82 205,228 4,222 8.18
- ------------------------------------------------------------------------------------------------------------------------------
80,526 1,457 7.22 84,346 1,546 7.34 82,710 1,532 7.43 92,679 1,733 7.47
22,115 394 7.06 21,958 424 7.75 21,744 467 8.71 21,117 483 9.11
39,481 753 7.56 40,117 736 7.35 40,461 784 7.86 40,390 843 8.30
16,358 359 8.77 26,843 608 9.06 25,947 589 9.08 25,592 570 8.91
17,632 493 11.11 15,755 445 11.32 14,464 443 12.41 12,295 384 12.43
2,176 28 5.28 2,291 35 6.20 2,330 43 7.54 2,248 48 8.49
- ------------------------------------------------------------------------------------------------------------------------------
178,288 3,484 7.78 191,310 3,794 7.94 187,656 3,858 8.29 194,321 4,061 8.34
- ------------------------------------------------------------------------------------------------------------------------------
357,726 6,580 7.31 383,500 7,264 7.59 387,889 7,722 8.05 399,549 8,283 8.26
- ------------------------------------------------------------------------------------------------------------------------------
30,180 597 7.89 20,154 409 8.11 17,248 352 8.28 14,828 335 9.00
- ------------------------------------------------------------------------------------------------------------------------------
557,108 9,408 6.72 567,628 10,012 7.07 561,427 10,323 7.42 590,728 11,231 7.58
20,753 23,232 23,020 23,458
64,323 64,697 64,251 63,272
- ------------------------------------------------------------------------------------------------------------------------------
$ 642,184 $ 655,557 $ 648,698 $ 677,458
- ------------------------------------------------------------------------------------------------------------------------------
$ 20,076 53 1.04 $ 20,222 57 1.14 $ 20,406 61 1.21 $ 22,454 80 1.42
116,638 588 2.00 113,031 676 2.40 107,015 808 3.06 101,376 788 3.09
73,465 918 4.95 74,777 969 5.20 77,772 1,068 5.57 78,298 1,105 5.62
5,085 57 4.44 6,005 81 5.37 7,137 108 6.16 7,570 127 6.68
- ------------------------------------------------------------------------------------------------------------------------------
215,264 1,616 2.98 214,035 1,783 3.34 212,330 2,045 3.91 209,698 2,100 3.98
- ------------------------------------------------------------------------------------------------------------------------------
24,097 257 4.22 24,395 294 4.82 24,358 332 5.53 26,223 424 6.43
3,533 35 3.90 3,983 45 4.53 3,993 52 5.27 5,884 61 4.14
23,847 189 3.16 23,545 241 4.13 22,506 284 5.11 24,064 339 5.62
- ------------------------------------------------------------------------------------------------------------------------------
51,477 481 3.71 51,923 580 4.49 50,857 668 5.32 56,171 824 5.84
- ------------------------------------------------------------------------------------------------------------------------------
266,741 2,097 3.12 265,958 2,363 3.57 263,187 2,713 4.18 265,869 2,924 4.38
- ------------------------------------------------------------------------------------------------------------------------------
89,042 869 3.87 98,898 1,221 4.95 94,792 1,377 5.89 122,680 1,942 6.30
30,913 285 3.66 30,710 312 4.07 28,407 290 4.14 27,548 285 4.13
67,267 867 5.15 69,416 999 5.76 73,752 1,222 6.63 73,041 1,322 7.24
- ------------------------------------------------------------------------------------------------------------------------------
453,963 4,118 3.61 464,982 4,895 4.22 460,138 5,602 4.92 489,138 6,473 5.27
- ------------------------------------------------------------------------------------------------------------------------------
96,587 97,390 92,431 91,685
42,432 44,476 48,263 48,996
49,202 48,709 47,866 47,639
- ------------------------------------------------------------------------------------------------------------------------------
$ 642,184 $ 655,557 $ 648,698 $ 677,458
- ------------------------------------------------------------------------------------------------------------------------------
3.11 2.85 2.50 2.31
.67 .76 .89 .90
- ------------------------------------------------------------------------------------------------------------------------------
$ 5,290 3.78% $ 5,117 3.61% $ 4,721 3.39% $ 4,758 3.21%
- ------------------------------------------------------------------------------------------------------------------------------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
73
2000 Compared to 1999
The following discussion and analysis provides a comparison of the Corporation's
results of operations for the years ended December 31, 2000 and 1999. This
discussion should be read in conjunction with the consolidated financial
statements and related notes on pages 78 through 119.
Overview
Net income totaled $7.5 billion, or $4.52 per common share (diluted), in 2000
compared to $7.9 billion, or $4.48 per common share (diluted), in 1999. The
return on average common shareholders' equity was 15.96 percent, a decrease of
97 basis points.
The Corporation's operating earnings, which excluded merger and
restructuring charges, totaled $7.9 billion, or $4.72 per common share
(diluted), in 2000 compared to $8.2 billion, or $4.68 per common share (diluted)
in 1999. Excluding merger and restructuring charges, the return on average
common shareholders' equity decreased 100 basis points to 16.70 percent in 2000.
SVA, excluding merger and restructuring charges, decreased $463 million to $3.1
billion in 2000.
Business Segment Operations
Consumer and Commercial Banking
Revenue remained essentially unchanged at $20.0 billion, as growth in
noninterest income was offset by a decline in net interest income. Net interest
income declined $231 million, or two percent, to $12.6 billion as loan growth
was offset by spread compression. Strong card income growth and higher service
charges were partially offset by lower mortgage banking income, resulting in a
$196 million, or three percent, increase in noninterest income. Cash basis
earnings remained essentially flat at $5.2 billion. SVA increased $121 million,
or four percent, driven by the decline in the cost of capital.
Asset Management
Revenue increased $190 million, or eight percent, driven by increases in both
net interest income and noninterest income. Net interest income increased $56
million, or nine percent, due to strong loan growth in the commercial loan
portfolio. The $134 million, or eight percent, increase in noninterest income
was primarily due to increased investment and brokerage fees driven by new asset
management business and market growth combined with productivity increases in
consumer brokerage, partially offset by gains in 1999 on the disposition of
certain businesses. Cash basis earnings increased $109 million, or 21 percent,
primarily driven by higher revenue. SVA increased $110 million, or 35 percent,
driven by the increase in cash basis earnings.
Global Corporate and Investment Banking
Revenue increased $658 million, or nine percent, driven by increases in both net
interest income and noninterest income. Net interest income increased $318
million, or nine percent, as a result of higher trading-related activities and
increases in the commercial-domestic loan portfolio. The $340 million, or
eight percent, increase in noninterest income was due to continued growth in
equities and equity derivatives trading, equity underwriting and advisory
services. Cash basis earnings decreased $163 million, or eight percent, as the
increase in revenue was more than offset by increases in the provision for
credit losses and noninterest expense. The provision for credit losses increased
$538 million due to credit quality deterioration in the commercial-domestic
loan portfolio. Noninterest expense increased $357 million, or eight percent,
primarily from higher revenue-related incentive compensation and costs related
to the rationalization of operations in Colombia and Venezuela. SVA declined
$182 million, or 35 percent, primarily driven by the decline in cash basis
earnings.
Equity Investments
Revenue increased $174 million, or 25 percent, as the increase in noninterest
income more than offset the decrease in net interest income. Net interest
income, which primarily consists of the funding cost associated with the
carrying value of investments, decreased $56 million. Equity investment gains
increased $247 million to $993 million, with $832 million in Principal Investing
and $161 million in the strategic investments portfolio. Cash basis earnings
increased $130 million as a result of the increase in revenue. SVA increased $71
million, as the increase in cash basis earnings was partially offset by an
increase in the cost of capital.
Net Interest Income
Net interest income on a taxable-equivalent basis increased $329 million to
$18.7 billion. Managed loan growth, particularly in consumer products, and
higher levels of customer-based deposits and equity were partially offset by
spread compression, the cost of share repurchases and a decrease in auto lease
financing contributions.
The net interest yield decreased 25 basis points to 3.20 percent in 2000
compared to 3.45 percent in 1999, mainly due to spread compression, the cost of
share repurchases and deterioration in auto lease residual values.
Noninterest Income
Noninterest income increased three percent to $14.6 billion in 2000 compared to
$14.2 billion in 1999, primarily reflecting higher levels of trading account
profits, card income, equity investment gains, service charges, investment and
brokerage services and investment banking income, partially offset by declines
in other income and mortgage banking income.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
74
Provision for Credit Losses
The provision for credit losses was $2.5 billion in 2000 compared to $1.8
billion in 1999. The increase in the provision for credit losses was primarily
due to an increase in net charge-offs. Net charge-offs were $2.4 billion in 2000
compared to $2.0 billion in 1999. The increase was primarily driven by
deterioration of credit quality in the commercial-domestic loan portfolio and
overall portfolio growth.
Noninterest Expense
Noninterest expense remained essentially unchanged at $18.6 billion in 2000 as
increases due to inflation and business growth were offset by productivity and
investment initiatives.
Income Taxes
The Corporation's income tax expense for both 2000 and 1999 was $4.3 billion.
The effective tax rates for 2000 and 1999 were 36.2 percent and 35.5 percent,
respectively.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 was effective for business combinations
initiated after June 30, 2001. SFAS 141 requires that all business combinations
completed after its adoption be accounted for under the purchase method of
accounting and establishes specific criteria for the recognition of intangible
assets separately from goodwill. SFAS 142 became effective for the Corporation
on January 1, 2002 and primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS 142 requires that
goodwill be recorded at the reporting unit level. Reporting units are defined as
an operating segment or one level below. The Corporation has determined its
reporting units and assigned goodwill to them. The Corporation has evaluated the
lives of intangible assets as required by SFAS 142 and determined that no change
will be made regarding lives upon adoption. SFAS 142 prohibits the amortization
of goodwill but requires that it be tested for impairment at least annually at
the reporting unit level. The impairment test will be performed in two phases.
The first step of the goodwill impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of a reporting unit exceeds its fair value an
additional procedure must be performed. That additional procedure compares the
implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill. An impairment loss is recorded to the extent that the carrying
amount of goodwill exceeds its implied fair value. Management does not
anticipate that an impairment charge will be recorded as a result of the
adoption of SFAS 142. Based on amortization expense recorded in 2001, the
Corporation estimates that the elimination of goodwill amortization expense will
increase net income by approximately $600 million, or approximately $0.37 per
common share (diluted).
In June 2001, the FASB also issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Corporation does not expect the adoption
of this pronouncement to have a material impact on its results of operations or
financial condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Corporation does not expect the adoption of this pronouncement to have a
material impact on its results of operations or financial condition.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
75
Report of Management
The management of Bank of America Corporation is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of the Corporation. The consolidated financial statements and notes have been
prepared by the Corporation in accordance with accounting principles generally
accepted in the United States of America and, in the judgment of management,
present fairly the Corporation's financial position and results of operations.
The financial information contained elsewhere in this report is consistent with
that in the consolidated financial statements. The financial statements and
other financial information in this report include amounts that are based on
management's best estimates and judgments giving due consideration to
materiality.
The Corporation maintains a system of internal accounting controls to
provide reasonable assurance that assets are safeguarded and that transactions
are executed in accordance with management's authorization and recorded properly
to permit the preparation of consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America.
Management recognizes that even a highly effective internal control system has
inherent risks, including the possibility of human error and the circumvention
or overriding of controls, and that the effectiveness of an internal control
system can change with circumstances. However, management believes that the
internal control system provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected on a timely basis and corrected through the
normal course of business. As of December 31, 2001, management believes that the
internal controls are in place and operating effectively.
The Internal Audit Division of the Corporation reviews, evaluates, monitors
and makes recommendations on both administrative and accounting control and acts
as an integral, but independent, part of the system of internal controls.
The independent accountants were engaged to perform an independent audit of
the consolidated financial statements. In determining the nature and extent of
their auditing procedures, they have evaluated the Corporation's accounting
policies and procedures and the effectiveness of the related internal control
system. An independent audit provides an objective review of management's
responsibility to report operating results and financial condition. Their report
appears on page 77.
The Board of Directors discharges its responsibility for the Corporation's
consolidated financial statements through its Audit Committee. The Audit
Committee meets periodically with the independent accountants, internal auditors
and management. Both the independent accountants and internal auditors have
direct access to the Audit Committee to discuss the scope and results of their
work, the adequacy of internal accounting controls and the quality of financial
reporting.
[GRAPHIC]
Kenneth D. Lewis
Chairman of the Board and Chief Executive Officer
[GRAPHIC]
Vice Chairman and Chief Financial Officer
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
76
Report of Independent Accountants
To the Board of Directors and Shareholders of Bank of America Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Bank of America Corporation and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
[GRAPHIC]
Charlotte, North Carolina January 18, 2002
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
77
Consolidated Statement of Income
Bank of America Corporation and Subsidiaries
Year Ended December 31
-------------------------------
(Dollars in millions, except per share information) 2001 2000 1999
-------------------------------
Interest income
Interest and fees on loans and leases $ 27,166 $ 31,818 $ 27,588
Interest and dividends on securities 3,706 5,006 4,708
Federal funds sold and securities purchased under agreements to
resell 1,414 2,354 1,666
Trading account assets 3,623 2,725 2,077
Other interest income 2,384 1,262 1,174
- ----------------------------------------------------------------------------------------------------
Total interest income 38,293 43,165 37,213
- ----------------------------------------------------------------------------------------------------
Interest expense
Deposits 8,886 11,007 9,002
Short-term borrowings 4,167 7,957 5,826
Trading account liabilities 1,155 892 658
Long-term debt 3,795 4,960 3,600
- ----------------------------------------------------------------------------------------------------
Total interest expense 18,003 24,816 19,086
- ----------------------------------------------------------------------------------------------------
Net interest income 20,290 18,349 18,127
Noninterest income
Consumer service charges 2,866 2,654 2,550
Corporate service charges 2,078 1,889 1,790
- ----------------------------------------------------------------------------------------------------
Total service charges 4,944 4,543 4,340
- ----------------------------------------------------------------------------------------------------
Consumer investment and brokerage services 1,546 1,466 1,334
Corporate investment and brokerage services 566 463 414
- ----------------------------------------------------------------------------------------------------
Total investment and brokerage services 2,112 1,929 1,748
- ----------------------------------------------------------------------------------------------------
Mortgage banking income 593 512 648
Investment banking income 1,579 1,512 1,411
Equity investment gains 291 1,054 833
Card income 2,421 2,229 2,006
Trading account profits/(1)/ 1,842 1,923 1,605
Other income 566 880 1,588
- ----------------------------------------------------------------------------------------------------
Total noninterest income 14,348 14,582 14,179
- ----------------------------------------------------------------------------------------------------
Total revenue 34,638 32,931 32,306
Provision for credit losses 4,287 2,535 1,820
Gains on sales of securities 475 25 240
Noninterest expense
Personnel 9,829 9,400 9,308
Occupancy 1,774 1,682 1,627
Equipment 1,115 1,173 1,346
Marketing 682 621 537
Professional fees 564 452 630
Amortization of intangibles 878 864 888
Data processing 776 667 763
Telecommunications 484 527 549
Other general operating 2,687 2,114 1,820
General administrative and other 615 583 518
Business exit costs 1,305 - -
Merger and restructuring charges - 550 525
- ----------------------------------------------------------------------------------------------------
Total noninterest expense 20,709 18,633 18,511
- ----------------------------------------------------------------------------------------------------
Income before income taxes 10,117 11,788 12,215
Income tax expense 3,325 4,271 4,333
- ----------------------------------------------------------------------------------------------------
Net income $ 6,792 $ 7,517 $ 7,882
- ----------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 6,787 $ 7,511 $ 7,876
- ----------------------------------------------------------------------------------------------------
Per share information
Earnings per common share $ 4.26 $ 4.56 $ 4.56
- ----------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 4.18 $ 4.52 $ 4.48
- ----------------------------------------------------------------------------------------------------
Dividends per common share $ 2.28 $ 2.06 $ 1.85
- ----------------------------------------------------------------------------------------------------
Average common shares issued and outstanding (in thousands) 1,594,957 1,646,398 1,726,006
- ----------------------------------------------------------------------------------------------------
/(1)/ Trading account profits for 2001 included the $83 million transition
adjustment loss resulting from the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS 133) on January 1, 2001.
See accompanying notes to consolidated financial statements.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
78
Consolidated Balance Sheet
Bank of America Corporation and Subsidiaries
December 31
------------------------------
(Dollars in millions) 2 0 0 1 2 0 0 0
------------------------------
Assets
Cash and cash equivalents $ 26,837 $ 27,513
Time deposits placed and other short-term investments 5,932 5,448
Federal funds sold and securities purchased under agreements to resell(includes $27,910
and $24,622 pledged as collateral) 28,108 28,055
Trading account assets (includes $22,550 and $21,216 pledged as collateral) 47,344 43,041
Derivative assets 22,147 15,534
Securities:
Available-for-sale (includes $37,422 and $40,674 pledged as collateral) 84,450 64,651
Held-to-maturity, at cost (market value - $1,009 and $1,133) 1,049 1,187
----------------------------------------------------------- ---------- ---------
Total securities 85,499 65,838
-------------------- ---------- ---------
Loans and leases 329,153 392,193
Allowance for credit losses (6,875) (6,838)
- -------------------------------- ---------- ----------
Loans and leases, net of allowance for credit losses 322,278 385,355
----------------------------------------------------- ---------- ----------
Premises and equipment, net 6,414 6,433
Interest receivable 2,800 4,432
Mortgage banking assets 3,886 3,762
Goodwill 10,854 11,643
Core deposits and other intangibles 1,294 1,499
Other assets 58,371 43,638
- -------------- ----------- ----------
Total assets $621,764 $642,191
-------------- ----------- ----------
Liabilities
Deposits in domestic offices:
Noninterest-bearing $112,064 $ 98,722
Interest-bearing 220,703 211,978
Deposits in foreign offices:
Noninterest-bearing 1,870 1,923
Interest-bearing 38,858 51,621
---------------- ----------- ----------
Total deposits 373,495 364,244
--------------- ----------- ----------
Federal funds purchased and securities sold under agreements to repurchase 47,727 49,411
Trading account liabilities 19,452 20,947
Derivative liabilities 14,868 22,402
Commercial paper 1,558 6,955
Other short-term borrowings 20,659 35,243
Accrued expenses and other liabilities 27,459 22,859
Long-term debt 62,496 67,547
Trust preferred securities 5,530 4,955
- -------------------------------- ----------- -----------
Total liabilities 573,244 594,563
-------------------------------- ----------- -----------
Commitments and contingencies (Notes Twelve and Fifteen)
Shareholders' equity
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and
outstanding -1,514,478 and 1,692,172 shares 65 72
Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and
outstanding - 1,559,297,220 and 1,613,632,036 shares 5,076 8,613
Retained earnings 42,980 39,815
Accumulated other comprehensive income (loss) 437 (746)
Other (38) (126)
- ------- ----------- -----------
Total shareholders' equity 48,520 47,628
--------------------------- ----------- -----------
Total liabilities and shareholders' equity $621,764 $642,191
-------------------------------------------- ----------- -----------
See accompanying notes to consolidated financial statements.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Consolidated Statement of Changes in Shareholders' Equity
Bank of America Corporation and Subsidiaries
Accumulated Total
Other Share-
Preferred Common Stock Retained Comprehensive holders'Comprehensive
--------------
(Dollars in millions, shares in thousands) Stock Shares Amount Earnings Income(Loss)/(1)/ Other Equity Income
-----------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 83 1,724,484 $14,837 $30,998 $ 152 $(132) $45,938
Net income 7,882 7,882 $ 7,882
Other comprehensive loss, net of
tax:
Net unrealized losses on
available-for-sale and
marketable
equity securities (2,773) (2,773) (2,773)
Net unrealized losses on foreign
currency translation adjustments (37) (37) (37)
--------
Comprehensive income $ 5,072
--------
Cash dividends:
Common (3,193) (3,193)
Preferred (6) (6)
Common stock issued under
employee plans 30,501 1,423 (265) 1,158
Common stock repurchased (78,000) (4,858) (4,858)
Conversion of preferred stock (6) 284 6
Other 4 263 58 321
- ------------------------------------ ----- ---------- -------- -------- -------- ------- --------
Balance, December 31, 1999 $ 77 1,677,273 $11,671 $35,681 $(2,658) $(339) $44,432
- ---------------------------- ----- ---------- -------- -------- -------- ------- --------
Net income 7,517 7,517 $ 7,517
Other comprehensive income, net of tax:
Net unrealized gains on
available-for-sale and marketable
equity securities 1,910 1,910 1,910
Net unrealized gains on foreign
currency translation adjustment 2 2 2
--------
Comprehensive income $ 9,429
--------
Cash dividends:
Common (3,382) (3,382)
Preferred (6) (6)
Common stock issued under
employee plans 3,781 68 226 294
Common stock repurchased (67,577) (3,256) (3,256)
Conversion of preferred stock (5) 177 5
Other (22) 125 5 (13) 117
- ---------------------------- ------ ----------- -------- -------- --------- ------- --------
Balance, December 31, 2000 $ 72 1,613,632 $ 8,613 $39,815 $ (746) $(126) $47,628
- ---------------------------- ------ ----------- -------- -------- --------- ------- --------
Net income 6,792 6,792 $ 6,792
Other comprehensive income, net of tax:
tax:
Net unrealized gains on
available-for-sale and marketable
equity securities 80 80 80
Net unrealized gains on foreign
currency translation adjustments 15 15 15
Net gains on derivatives 1,088 1,088 1,088
--------
Comprehensive income $ 7,975
--------
Cash dividends:
Common (3,627) (3,627)
Preferred (5) (5)
Common stock issued under
employee plans 27,301 1,059 62 1,121
Common stock repurchased (81,939) (4,716) (4,716)
Conversion of preferred stock (7) 298 7
Other 5 113 5 26 144
- ---------------------------- ------- ----------- -------- -------- --------- ------ --------
Balance, December 31, 2001 $ 65 1,559,297 $ 5,076 $42,980 $ 437 $(38) $48,520
- ---------------------------- ------- ----------- ------- -------- --------- ------ --------
/(1)/ Accumulated Other Comprehensive Income (Loss) consists of the after-tax
valuation allowance for available-for-sale and marketable equity
securities of $(480), $(560) and $(2,470) at December 31, 2001, 2000,
and 1999, respectively; foreign currency translation adjustments of
$(171), $(186) and $(188) at December 31, 2001, 2000, and 1999,
respectively; and net gains on derivatives of $1,088 at December 31,
2001.
See accompanying notes to consolidated financial statements.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Consolidated Statement of Cash Flows
Bank of America Corporation and Subsidiaries
Year Ended December 31
----------------------------
(Dollars in millions) 2001 2000 1999
----------------------------
Operating activities
Net income $ 6,792 $ 7,517 $ 7,882
Reconciliation of net income to net cash provided by (used in)
operating activities:
Provision for credit losses 4,287 2,535 1,820
Gains on sales of securities (475) (25) (240)
Business exit costs 1,305 - -
Merger and restructuring charges - 550 525
Depreciation and premises improvements amortization 854 920 1,029
Amortization of intangibles 878 864 888
Deferred income tax (benefit) expense (563) 647 2,459
Net (increase) decrease in trading and hedging instruments (19,865) 2,119 7,640
Net (increase) decrease in interest receivable 1,632 (658) (51)
Net (increase) decrease in other assets (10,911) (10,055) 2,611
Net increase (decrease) in interest payable (1,254) 575 332
Net increase (decrease) in accrued expenses and other liabilities 6,323 1,234 (13,326)
Other operating activities, net (1,829) (2,489) (1,746)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (12,826) 3,734 9,823
- -------------------------------------------------------------------------------------------------------
Investing activities
Net (increase) decrease in time deposits placed and other short-term
investments (484) (685) 1,625
Net (increase) decrease in federal funds sold and securities purchased
under agreements to resell (53) 9,857 (10,782)
Proceeds from sales of available-for-sale securities 125,824 34,671 38,587
Proceeds from maturities of available-for-sale securities 11,722 6,396 10,003
Purchases of available-for-sale securities (126,537) (19,132) (48,917)
Proceeds from maturities of held-to-maturity securities 145 380 575
Proceeds from sales and securitizations of loans and leases 10,781 15,751 15,717
Other changes in loans and leases, net 18,201 (43,070) (32,302)
Purchases and originations of mortgage banking assets (1,148) (208) (2,258)
Net purchases of premises and equipment (835) (642) (465)
Proceeds from sales of foreclosed properties 353 260 350
(Acquisition) and divestiture of business activities, net (417) 843 (1,212)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 37,552 4,421 (29,079)
- -------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits 9,251 17,155 (8,299)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (1,684) (25,150) 7,018
Net increase (decrease) in commercial paper and other short-term
borrowings (19,981) (5,376) 16,214
Proceeds from issuance of long-term debt 14,853 23,451 17,630
Retirement of long-term debt (20,619) (11,078) (7,763)
Proceeds from issuance of common stock 1,121 294 1,158
Common stock repurchased (4,716) (3,256) (4,858)
Cash dividends paid (3,632) (3,388) (3,199)
Other financing activities, net 62 (218) 12
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,345) (7,566) 17,913
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (57) (65) 55
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (676) 524 (1,288)
Cash and cash equivalents at January 1 27,513 26,989 28,277
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at December 31 $ 26,837 $ 27,513 $ 26,989
- -------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures
Cash paid for interest $ 19,257 $ 24,241 $ 18,754
Cash paid for income taxes 3,121 2,130 1,595
- -------------------------------------------------------------------------------------------------------
Net loans and leases transferred to (from) loans held for sale amounted to $428
and $(247) in 2001 and 2000, respectively. There were no transfers during 1999.
Loans transferred to foreclosed properties amounted to $533, $380 and $305 in
2001, 2000 and 1999, respectively.
Loans and loans held for sale securitized and retained in the available-for-sale
securities portfolio amounted to $29,985, $2,483 and $6,682 in 2001, 2000 and
1999, respectively. There were no material noncash assets acquired or
liabilities assumed in acquisitions in 2001 and 2000. The fair value of noncash
assets acquired and liabilities assumed in acquisitions during 1999 was
approximately $1,557 and $74, respectively, net of cash acquired.
See accompanying notes to consolidated financial statements.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Notes to Consolidated Financial Statements
Bank of America Corporation and Subsidiaries
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.
At December 31, 2001, the Corporation operated its banking activities primarily
under two charters: Bank of America, N.A. and Bank of America, N.A. (USA).
Note 1 Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Results of operations of companies purchased
are included from the dates of acquisition. Certain prior period amounts have
been reclassified to conform to current year classifications. Assets held in an
agency or fiduciary capacity are not included in the consolidated financial
statements.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts and
disclosures. Actual results could differ from those estimates. Significant
estimates made by management are discussed in these notes as applicable.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) as amended by 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," and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133," was adopted by the
Corporation on January 1, 2001. The impact of adopting SFAS 133 to net income
was a loss of $52 million (net of related income tax benefits of $31 million),
and a net transition gain of $9 million (net of related income taxes of $5
million) included in other comprehensive income on January 1, 2001. Because the
transition adjustment was not material to the Corporation's overall results, the
before-tax charge to earnings was included in trading account profits in
noninterest income rather than shown separately as the cumulative effect of an
accounting change. Further, the initial adoption of SFAS 133 resulted in the
Corporation recognizing on the balance sheet $577 million of derivative assets
and $514 million of derivative liabilities.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - a replacement of FASB Statement No. 125"
(SFAS 140). SFAS 140 was effective for transfers occurring after March 31, 2001
and for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The adoption of SFAS 140 did not
have a material impact on the Corporation's results of operations or financial
condition.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (SFAS 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 was effective for business combinations initiated after June 30, 2001.
SFAS 141 requires that all business combinations completed after its adoption be
accounted for under the purchase method of accounting and establishes specific
criteria for the recognition of intangible assets separately from goodwill. SFAS
142 became effective for the Corporation on January 1, 2002 and primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. SFAS 142 requires that goodwill be recorded at the reporting unit
level. Reporting units are defined as an operating segment or one level below.
The Corporation has determined its reporting units and assigned goodwill to
them. The Corporation has evaluated the lives of intangible assets as required
by SFAS 142 and determined that no change will be made regarding lives upon
adoption. SFAS 142 prohibits the amortization of goodwill but requires that it
be tested for impairment at least annually at the reporting unit level. The
impairment test will be performed in two phases. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired; however, if the carrying amount of a
reporting unit exceeds its fair value an additional procedure must be performed.
That additional procedure compares the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. An impairment loss is
recorded to the extent that the carrying amount of goodwill exceeds its implied
fair value. Management does not anticipate that an impairment charge will be
recorded as a result of the adoption of SFAS 142. Based on amortization expense
recorded in 2001, the Corporation estimates that the elimination of goodwill
amortization expense will increase net income by approximately $600 million, or
approximately $0.37 per common share (diluted).
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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In June 2001, the FASB also issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Corporation does not expect the adoption
of this pronouncement to have a material impact on its results of operations or
financial condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Corporation does not expect the adoption of this pronouncement to have a
material impact on its results of operations or financial condition.
Cash and Cash Equivalents
Cash on hand, cash items in the process of collection and amounts due from
correspondent banks and the Federal Reserve Bank are included in cash and cash
equivalents.
Securities Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions
and are recorded at the amounts at which the securities were acquired or sold
plus accrued interest. The Corporation's policy is to obtain the use of
securities purchased under agreements to resell. The market value of the
underlying securities, which collateralize the related receivable on agreements
to resell, is monitored, including accrued interest, and additional collateral
is requested when deemed appropriate.
Collateral
The Corporation has accepted collateral that it is permitted by contract or
custom to sell or repledge. At December 31, 2001, the fair value of this
collateral was approximately $30.4 billion of which $21.5 billion was sold or
repledged. At December 31, 2000, the fair value of this collateral was
approximately $25.1 billion of which $22.7 billion was sold or repledged. The
primary source of this collateral is reverse repurchase agreements. The
Corporation pledges securities as collateral in transactions that are primarily
repurchase agreements, public and trust deposits, treasury tax and loan and
other short-term borrowings. This collateral can be sold or repledged by the
counterparties to the transactions.
In addition, the Corporation obtains collateral in connection with its
derivative activities. Required collateral levels vary depending on the credit
risk rating and the type of counterparty. Generally, the Corporation accepts
collateral in the form of cash, U.S. Treasury securities and other marketable
securities.
Trading Instruments
Financial instruments utilized in trading activities are stated at fair value.
Fair value is generally based on quoted market prices. If quoted market prices
are not available, fair values are estimated based on dealer quotes, pricing
models or quoted prices for instruments with similar characteristics. Realized
and unrealized gains and losses are recognized in trading account profits.
Derivatives and Hedging Activities
All derivatives are recognized on the balance sheet at fair value, taking into
consideration the effects of legally enforceable master netting agreements which
allow the Corporation to settle positive and negative positions with the same
counterparty on a net basis. For exchange traded contracts, fair value is based
on quoted market prices. For non-exchange traded contracts, fair value is based
on dealer quotes, pricing models or quoted prices for instruments with similar
characteristics. The Corporation designates a derivative as held for trading or
hedging purposes when it enters into a derivative contract. Derivatives
designated as held for trading activities are included in the Corporation's
trading portfolio with changes in fair value reflected in trading account
profits.
The Corporation uses its derivatives designated for hedging activities as
either fair value hedges, cash flow hedges, or hedges of net investments in
foreign operations. The Corporation primarily manages interest rate and foreign
currency exchange rate sensitivity through the use of derivatives. Fair value
hedges are used to limit the Corporation's exposure to changes in the fair value
of its interest-bearing assets or liabilities that are due to interest rate
volatility. Cash flow hedges are used to minimize the variability in cash flows
of interest-bearing assets or liabilities or anticipated transactions caused by
interest rate fluctuations. Changes in the fair value of derivatives designated
for hedging activities that are highly effective as hedges are recorded in
earnings or other comprehensive income, depending on whether the hedging
relationship satisfies the criteria for a fair value or cash flow hedge,
respectively. A highly effective hedging relationship is one in which the
Corporation achieves offsetting changes in fair value or cash flows between 80
percent and 120 percent for the risk being hedged. Hedge ineffectiveness and
gains and losses on the excluded component of a derivative in assessing hedge
effectiveness are recorded in earnings. SFAS 133 retains certain concepts under
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation," (SFAS 52) for foreign currency exchange hedging. Consistent with
SFAS 52, the Corporation records changes in the fair value of derivatives used
as hedges of the net investment in foreign operations as a component of other
comprehensive income.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
83
The Corporation occasionally purchases or issues financial instruments
containing embedded derivatives. The embedded derivative is separated from the
host contract and carried at fair value if the economic characteristics of the
derivative are not clearly and closely related to the economic characteristics
of the host contract. To the extent that the Corporation cannot reliably
identify and measure the embedded derivative, the entire contract is carried at
fair value on the balance sheet with changes in fair value reflected in
earnings.
The Corporation formally documents at inception all relationships between
hedging instruments and hedged items, as well as its risk management objectives
and strategies for undertaking various hedge transactions. Additionally, the
Corporation uses regression analysis at the hedge's inception and quarterly
thereafter to assess whether the derivative used in its hedging transaction is
expected to be or has been highly effective in offsetting changes in the fair
value or cash flows of the hedged items. The Corporation discontinues hedge
accounting when it is determined that a derivative is not expected to be or has
ceased to be highly effective as a hedge, and then reflects changes in fair
value in earnings.
If a derivative instrument in a fair value hedge is terminated or the hedge
designation removed, the difference between a hedged item's then carrying amount
and its face amount is recognized into income over the original hedge period.
Similarly, if a derivative instrument in a cash flow hedge is terminated or the
hedge designation removed, related amounts accumulated in other comprehensive
income are reclassified into earnings in the same period during which the hedged
item affects income.
Securities
Debt securities are classified based on management's intention on the date of
purchase. Debt securities which management has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost.
Securities that are bought and held principally for the purpose of resale in the
near term are classified as trading instruments and are stated at fair value
with unrealized gains and losses included in trading account profits. All other
debt securities are classified as available-for-sale and carried at fair value
with net unrealized gains and losses included in shareholders' equity on an
after-tax basis. Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest income. Realized
gains and losses from the sales of securities are determined using the specific
identification method.
Marketable equity securities, which are included in other assets, are
carried at fair value. Net unrealized gains and losses are included in
shareholders' equity, net of tax; income is included in noninterest income.
Venture capital investments for which there are active market quotes are carried
at estimated fair value, subject to liquidity discounts, sales restrictions or
regulatory rules. Net unrealized gains and losses are recorded in non-interest
income. Venture capital investments for which there are not active market quotes
are initially valued at cost. Subsequently, these investments are adjusted to
reflect changes in valuation as a result of initial public offerings or
other-than-temporary declines in value.
Loans and Leases
Loans are reported at their outstanding principal balances net of any unearned
income, charge-offs, unamortized deferred fees and costs on originated loans and
premiums or discounts on purchased loans. Loan origination fees and certain
direct origination costs are deferred and recognized as adjustments to income
over the lives of the related loans. Unearned income, discounts and premiums are
amortized to income using methods that approximate the interest method.
The Corporation provides equipment financing to its customers through a
variety of lease arrangements. Direct financing leases are carried at the
aggregate of lease payments receivable plus estimated residual value of the
leased property, less unearned income. Leveraged leases, which are a form of
financing lease, are carried net of nonrecourse debt. Unearned income on
leveraged and direct financing leases is amortized over the lease terms by
methods that approximate the interest method.
Allowance for Credit Losses
The allowance for credit losses is management's estimate of probable incurred
credit losses in the lending portfolios. Additions to the allowance for credit
losses are made by charges to the provision for credit losses. Credit exposures
deemed to be uncollectible are charged against the allowance for credit losses.
Recoveries of previously charged off amounts are credited to the allowance for
credit losses.
The Corporation performs periodic and systematic detailed reviews of its
lending portfolios to identify inherent risks and to assess the overall
collectibility of those portfolios. The allowance on certain homogeneous loan
portfolios, which generally consist of consumer loans, is based on aggregated
portfolio segment evaluations generally by loan type. Loss forecast models are
utilized for these segments which consider a variety of factors including, but
not limited to, historical loss experience, anticipated defaults or foreclosures
based on portfolio trends, delinquencies and credit scores, and expected loss
factors by loan type. The remaining portfolios are reviewed on an individual
loan basis. Loans subject to individual reviews are analyzed and segregated by
risk according to the Corporation's internal risk rating scale. These risk
classifications, in conjunction with an analysis of historical loss experience,
current economic conditions and performance trends within specific portfolio
segments, and any other pertinent information (including individual valuations
on nonperforming loans in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114)) result in the estimation of specific allowances for credit losses.
If necessary, an allowance for credit losses is established for individual
impaired loans. 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. Once a loan has been identified as individually
impaired, management measures impairment in accordance with
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
84
SFAS 114. Individually 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.
Portions of the allowance for credit losses are assigned to cover the
estimated probable incurred credit losses in each loan and lease category based
on the results of the Corporation's detail review process described above. The
assigned portion 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 or 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.
Nonperforming Loans
Commercial loans and leases that are past due 90 days or more as to principal or
interest, or where reasonable doubt exists as to timely collection, including
loans that are individually identified as being impaired, are generally
classified as nonperforming loans unless well-secured and in the process of
collection. Loans whose contractual terms have been restructured in a manner
which grants a concession to a borrower experiencing financial difficulties are
classified as nonperforming until the loan is performing for an adequate period
of time under the restructured agreement. Interest accrued but not collected is
reversed when a commercial loan is classified as nonperforming. Interest
collections on commercial nonperforming loans and leases for which the ultimate
collectibility of principal is uncertain are applied as principal reductions;
otherwise, such collections are credited to income when received.
Credit card loans are charged off at 180 days past due or 60 days from
notification of bankruptcy filing and are not classified as nonperforming.
Unsecured loans and deficiencies in personal property secured loans are charged
off at 120 days past due and not classified as nonperforming. Real estate
secured consumer loans are classified as nonperforming at 90 days past due. The
amount deemed uncollectible on real estate secured loans is charged off at 180
days past due.
Loans Held for Sale
Loans held for sale include consumer finance, residential mortgage, commercial
real estate and other loans and are carried at the lower of aggregate cost or
market value. Loans held for sale are included in other assets.
Foreclosed Properties
Assets are classified as foreclosed properties and included in other assets upon
actual foreclosure or when physical possession of the collateral is taken
regardless of whether foreclosure proceedings have taken place.
Foreclosed properties are carried at the lower of the recorded amount of
the loan or lease for which the property previously served as collateral, or the
fair value of the property less estimated costs to sell. Prior to foreclosure,
any write-downs, if necessary, are charged to the allowance for credit losses.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of foreclosed properties are credited or charged to
expense. Net costs of maintaining and operating foreclosed properties are
expensed as incurred.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are recognized principally using the
straight-line method over the estimated useful lives of the assets.
Mortgage Banking Assets
In the first quarter of 2001, the Corporation amended certain of its Mortgage
Selling and Servicing Contracts whereby its previously reported mortgage
servicing rights were bifurcated into two components: servicing assets and
Excess Spread Certificates (the Certificates). The servicing component
represents the contractually specified servicing fees net of the fair market
value of the cost to service, and the Certificates represent a retained
financial interest in certain cash flows of the underlying mortgage loans. The
Certificates and the new de minimis servicing asset are classified as mortgage
banking assets (MBA). The Certificates are carried at estimated fair value with
the corresponding adjustment reported in trading account profits. The
Corporation seeks to manage changes in value of the Certificates due to changes
in prepayment rates by entering into derivative financial instruments such as
purchased options and interest rate swaps. The derivative instruments are
carried at estimated fair value with the corresponding adjustment reported in
trading account profits. The Corporation values the Certificates using an
option-adjusted spread model which requires several key components including,
but not limited to, proprietary prepayment models and term structure modeling
via Monte Carlo simulation. The fair value of MBA was $3.9 billion at December
31, 2001. Total loans serviced approximated $320.8 billion, $335.9 billion and
$314.3 billion at December 31, 2001, 2000, and 1999, respectively, including
loans serviced on behalf of the Corporation's banking subsidiaries.
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The Corporation allocated the total cost of mortgage loans originated for
sale or purchased between the cost of the loans, and when applicable, the
Certificates and the mortgage servicing rights (MSR) based on the relative fair
values of the loans, the Certificates and the MSR. MSR acquired separately are
capitalized at cost. The Corporation capitalized $1.1 billion, $836 million and
$1.6 billion of MBA during 2001, 2000 and 1999, respectively. The cost of MSR
was amortized in proportion to and over the estimated period that servicing
revenues were recognized. Amortization was $540 million and $566 million during
2000 and 1999, respectively. The fair value of capitalized MSR was $3.8 billion
at December 31, 2000.
Mortgage banking income includes servicing fees, gains from selling
originated mortgages, ancillary servicing income, mortgage production fees,
gains and losses on sales to the secondary market, and income on the
Certificates.
Goodwill and Other Intangibles
Net assets of companies acquired in purchase transactions are recorded at fair
value at the date of acquisition. Identified intangibles are amortized on an
accelerated or straight-line basis over the period benefited. Goodwill is
amortized on a straight-line basis over a period not to exceed 25 years. The
recoverability of goodwill and other intangibles is evaluated if events or
circumstances indicate a possible impairment. Such evaluation is based on
various analyses, including undiscounted cash flow projections. See "Recently
Issued Accounting Pronouncements" on page 82 for information related to changes
in accounting for goodwill and other intangibles which were effective
January 1, 2002.
Off-Balance Sheet Financing Entities
In the ordinary course of business, the Corporation supports its customers
financing needs by facilitating these customers' access to different funding
sources, assets and risks. In addition, the Corporation utilizes certain
financing arrangements to meet its balance sheet management, funding, liquidity,
and market or credit risk management needs. These financing entities may be in
the form of corporations, partnerships or limited liability companies, or trusts
and are not consolidated in the Corporation's balance sheet. The majority of
these activities are basic term or revolving securitization vehicles. These
vehicles are generally funded through term-amortizing debt structures designed
to be paid off based on the underlying cash flows of the assets securitized.
Other, lesser used vehicles, are generally funded with short-term commercial
paper and are similarly paid down through the cash flow or sale of the
underlying assets. Securitization activities are further discussed in more
detail in the Securitizations section below and Note Eight.
These financing entities are usually contractually limited to a narrow
range of activities that facilitate the transfer of or access to various types
of assets or financial instruments. In certain situations, the Corporation
provides liquidity commitments and/or loss protection agreements. See Note
Twelve for further discussion.
The Corporation evaluates whether these entities should be consolidated by
applying various generally accepted accounting principles and interpretations
that generally provide that a financing entity is not consolidated if both the
control and risks and rewards of the assets in the financing entity are not
retained by the Corporation. In determining whether the financing entity should
be consolidated, the Corporation considers whether the entity is a qualifying
special-purpose entity (QSPE) as defined in SFAS 140. For non-consolidation,
SFAS 140 requires that the financing entity be legally isolated, bankruptcy
remote and beyond the control of the seller, which generally applies to
securitizations. For non-securitization structures, the Securities and Exchange
Commission and the Emerging Issues Task Force also have issued guidance
regarding consolidation of financing entities. Such guidance applies to certain
transactions and requires an assessment of whether sufficient risks and rewards
of ownership have passed based on assessing the voting rights, control of the
entity and the existence of substantive third party equity investment.
Securitizations
The Corporation securitizes, sells and services interests in residential
mortgage, consumer finance, commercial and bankcard loans. When the Corporation
securitizes assets, it may retain interest-only strips, one or more subordinated
tranches and, in some cases, a cash reserve account, all of which are considered
retained interests in the securitized assets. Gains upon sale of the assets
depend, in part, on the Corporation's allocation of the previous carrying amount
of the assets to the retained interests. Previous carrying amounts are allocated
in proportion to the relative fair values of the assets sold and interests
retained.
Quoted market prices, if available, are used to obtain fair values.
Generally, quoted market prices for retained interests are not available;
therefore, the Corporation estimates fair values based upon the present value of
the associated expected future cash flows. This requires management to estimate
credit losses, prepayment speeds, forward yield curves, discount rates and other
factors that impact the value of retained interests.
The excess cash flows expected to be received over the amortized cost of
the retained interest is recognized as interest income using the effective yield
method. If the fair value of the retained interest has declined below its
carrying amount and there has been an adverse change in estimated cash flows (as
defined), then such decline is determined to be other-than-temporary and the
retained interest is written down to fair value with a corresponding adjustment
to earnings.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Income Taxes
There are two components of income tax expense: current and deferred. Current
income tax expense approximates cash to be paid or refunded for taxes for the
applicable period. Deferred tax assets and liabilities are recognized due to
differences in the bases of assets and liabilities as measured by tax laws and
their bases as reported in the financial statements. Deferred tax expense or
benefit is then recognized for the change in deferred tax liabilities or assets
between periods.
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain temporary
differences, tax operating loss carryforwards and tax credits will be realized.
A valuation allowance is recorded for the amount of the deferred tax items for
which it is more likely than not that realization will not occur.
Retirement Benefits
The Corporation has established qualified retirement plans covering
substantially all full-time employees and certain part-time employees. Pension
expense under these plans is charged to current operations and consists of
several components of net pension cost based on various actuarial assumptions
regarding future experience under the plans.
In addition, the Corporation and its subsidiaries have established unfunded
supplemental benefit plans and supplemental executive retirement plans for
selected officers of the Corporation and its subsidiaries that provide benefits
that cannot be paid from a qualified retirement plan due to Internal Revenue
Code restrictions. These plans are nonqualified under the Internal Revenue Code,
and assets used to fund benefit payments are not segregated from other assets of
the Corporation; therefore, in general, a participant's or beneficiary's claim
to benefits under these plans is as a general creditor.
In addition, the Corporation and its subsidiaries have established several
postretirement healthcare and life insurance benefit plans.
Other Comprehensive Income
The Corporation records unrealized gains and losses on available-for-sale debt
securities and marketable equity securities, foreign currency translation
adjustments, related hedges of net investments in foreign operations and gains
and losses on cash flow hedges in other comprehensive income in shareholders'
equity. Gains and losses on available-for-sale securities are reclassified to
net income as the gains or losses are realized upon sale of the securities.
Other-than-temporary impairment charges are reclassified to net income at the
time of the charge. Translation gains or losses on foreign currency translation
adjustments are reclassified to net income upon the sale or liquidation of
investments in foreign operations. Gains or losses on derivatives are
reclassified to net income as the hedged item affects earnings.
Earnings Per Common Share
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 effects of convertible preferred stock and stock options are excluded from
the computation of diluted earnings per common share in periods in which the
effect would be antidilutive. Dilutive potential common shares are calculated
using the treasury stock method.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries are
recorded based on the functional currency of each entity. For certain of the
foreign operations, the functional currency is the local currency, in which case
the assets, liabilities and operations are translated, for consolidation
purposes, at current exchange rates from the local currency to the reporting
currency, the U.S. dollar. The resulting gains or losses are reported as a
component of accumulated other comprehensive income (loss) within shareholders'
equity on an after-tax basis. When the foreign entity is not a free-standing
operation or is in a hyperinflationary economy, the functional currency used to
measure the financial statements of a foreign entity is the U.S. dollar. In
these instances, the resulting gains and losses are included in income.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Note 2 Exit and Restructuring Charges
Exit Charges
On August 15, 2001, the Corporation announced that it was exiting its auto
leasing and subprime real estate lending businesses. As a result of this
strategic decision, the Corporation recorded pre-tax exit charges in the third
quarter of 2001 of $1.7 billion ($1.3 billion after-tax) consisting of provision
for credit losses of $395 million and noninterest expense of $1.3 billion.
Business exit costs within noninterest expense consisted of the write-off of
goodwill of $685 million, auto lease residual charges of $400 million, real
estate servicing asset charges of $145 million and other transaction costs of
$75 million. See Note Six for additional information on the exit-related
provision for credit losses.
During the fourth quarter of 2001, $17.5 billion of subprime loans were
securitized and retained in the available-for-sale securities portfolio.
Approximately $1 billion of subprime real estate loans remain in loans held for
sale in other assets. The run off of the auto lease portfolio is occurring as
expected. At the exit date, the auto lease portfolio was approximately 495,000
units with total residual exposure of $6.8 billion. At December 31, 2001,
approximately 401,000 units remained with a residual exposure of $5.4 billion.
Merger and Restructuring Charges
As part of its productivity and investment initiatives announced on July 28,
2000, the Corporation recorded a pre-tax charge of $550 million ($346 million
after-tax) in the third quarter of 2000. Of the $550 million restructuring
charge, approximately $475 million was used to cover severance and related costs
and approximately $75 million was used for other costs related to process change
and channel consolidation. At December 31, 2000 the reserve balance was $293
million. At December 31, 2001, the restructuring reserve had been substantially
utilized.
In connection with the 1998 merger of BankAmerica Corporation and Bank of
America Corporation, formerly NationsBank Corporation, the Corporation recorded
pre-tax merger charges of $525 million ($358 million after-tax) in 1999 which
consisted of approximately $219 million 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. At
December 31, 2000, the merger reserve balance was $32 million. The merger
reserve was substantially utilized at December 31, 2001.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
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Note 3 Securities
The amortized cost, gross unrealized gains and losses, and fair value of
available-for-sale and held-to-maturity debt securities at December 31, 2001,
2000 and 1999 were:
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
---- ----- ----- ----
Available-for-sale securities
2001
U.S. Treasury securities and agency $ 1,271 $ 17 $ 8 $ 1,280
debentures
Mortgage-backed securities 73,546 381 826 73,101
Foreign sovereign securities 3,213 54 123 3,144
Other taxable securities 4,739 11 108 4,642
- ---------------------------- ---- ----- ----- ----
Total taxable 82,769 463 1,065 82,167
Tax-exempt securities 2,324 5 46 2,283
- ---------------------------- ---- ----- ----- ----
Total $85,093 $468 $1,111 $84,450
---------------------------- ---- ----- ----- ----
2000
U.S. Treasury securities and agency $17,318 $ 12 $ 520 $16,810
debentures
Mortgage-backed securities 37,745 54 372 37,427
Foreign sovereign securities 4,252 7 108 4,151
Other taxable securities 4,786 6 104 4,688
- ---------------------------- ---- ----- ----- ----
Total taxable 64,101 79 1,104 63,076
Tax-exempt securities 1,541 43 9 1,575
- ---------------------------- ---- ----- ----- ----
Total $65,642 $122 $1,113 $64,651
---------------------------- ---- ----- ----- ----
1999
U.S. Treasury securities and agency $30,085 $ - $1,800 $28,285
debentures
Mortgage-backed securities 43,673 21 1,709 41,985
Foreign sovereign securities 4,607 16 256 4,367
Other taxable securities 4,985 - 29 4,956
- ---------------------------- ---- ----- ----- ----
Total taxable 83,350 37 3,794 79,593
Tax-exempt securities 2,135 21 102 2,054
- ---------------------------- ---- ----- ----- ----
Total $85,485 $ 58 $3,896 $81,647
---------------------------- ---- ----- ----- ----
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
---- ----- ----- ----
Held-to-maturity securities
2001
U.S. Treasury securities and agency $ 5 $ - $ - $ 5
debentures
Mortgage-backed securities 5 - - 5
Foreign sovereign securities 797 5 54 748
Other taxable securities 26 1 - 27
- ---------------------------- ---- ----- ----- ----
Total taxable 833 6 54 785
Tax-exempt securities 216 9 1 224
- ---------------------------- ---- ----- ----- ----
Total $ 1,049 $ 15 $ 55 $ 1,009
---------------------------- ---- ----- ----- ----
2000
U.S. Treasury securities and agency $ 39 $ - $ - $ 39
debentures
Mortgage-backed securities 66 - - 66
Foreign sovereign securities 800 5 69 736
Other taxable securities 27 - - 27
- ---------------------------- ---- ----- ----- ----
Total taxable 932 5 69 868
Tax-exempt securities 255 11 1 265
- ---------------------------- ---- ----- ----- ----
Total $ 1,187 $ 16 $ 70 $ 1,133
---------------------------- ---- ----- ----- ----
1999
U.S. Treasury securities and agency $ 87 $ - $ - $ 87
debentures
Mortgage-backed securities 106 - - 106
Foreign sovereign securities 902 - 157 745
Other taxable securities 26 - 2 24
- ---------------------------- ---- ----- ----- ----
Total taxable 1,121 - 159 962
Tax-exempt securities 301 11 4 308
- ---------------------------- ---- ----- ----- ----
Total $ 1,422 $ 11 $ 163 $ 1,270
---------------------------- ---- ----- ----- ----
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The expected maturity distribution and yields (computed on a taxable-equivalent
basis) of the Corporation's securities portfolio at December 31, 2001 are
summarized below. Actual maturities may differ from contractual maturities or
expected maturities shown below since borrowers may have the right to prepay
obligations with or without prepayment penalties.
Due after 1 Due after 5
Due in 1 year year through years through Due after
or less 5 years 10 years 10 years Total
-----------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------------------------
(Dollars in millions)
Fair value of available-for-sale
securities
U.S. Treasury securities
and agency debentures $ 40 5.36% $ 496 5.34% $ 21 5.90% $ 723 6.20% $ 1,280 5.83%
Mortgage-backed securities 274 6.59 44,668 5.93 26,058 5.32 2,101 6.38 73,101 5.73
Foreign sovereign securities 1,104 2.51 132 4.91 212 3.84 1,696 5.70 3,144 4.42
Other taxable securities 61 6.35 2,945 4.86 63 5.75 1,573 6.30 4,642 5.38
- ------------------------------- ---- ---- ----- ---- -- ---- ----- ---- ----- ----
Total taxable 1,479 3.50 48,241 5.86 26,354 5.31 6,093 6.15 82,167 5.66
Tax-exempt securities 46 7.40 65 7.88 600 6.80 1,572 7.38 2,283 7.24
- ------------------------------- ---- ---- ------ ---- --- ---- ----- ---- ----- ----
Total $ 1,525 3.62% $ 48,306 5.86% $ 26,954 5.34% $ 7,665 6.40% $ 84,450 5.70%
------------------------------- ----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Amortized cost of available-
for-sale securities $ 1,512 $ 48,627 $ 27,177 $ 7,777 $ 85,093
------------------------------- ----- ------ ------- ------ ------
Amortized cost of held-to-maturity
securities
U.S. Treasury securities
and agency debentures $ - -% $ 5 4.22% $ - -% $ - -% $ 5 0.84%
Mortgage-backed securities 1 2.36 4 2.37 - - - - 5 2.37
Foreign sovereign securities 5 4.96 18 4.87 11 4.91 763 7.17 797 7.08
Other taxable securities - - - - - - 26 6.38 26 6.38
- ------------------------------- -- -- -- -- -- ---- --- ---- -- ----
Total taxable 6 4.53 27 4.38 11 4.91 789 7.15 833 7.01
Tax-exempt securities 21 9.27 89 10.02 59 8.31 47 6.48 216 8.71
- ------------------------------- --- ---- -- ----- -- ---- -- ---- --- ----
Total $ 27 8.22% $ 116 8.71% $ 70 7.78% $ 836 7.11% $ 1,049 7.34%
------------------------------- --- ---- --- ---- -- ---- --- ---- ----- ----
Fair value of held-to-maturity $ 27 $ 119 $ 74 $ 789 $ 1,009
securities -- --- -- --- -----
- -------------------------------
The components of gains and losses on sales of securities for the years ended
December 31, 2001, 2000 and 1999 were:
(Dollars in millions) 2001 2000 1999
-------------------------------
Gross gains on sales of securities $ 1,074 $ 123 $ 289
Gross losses on sales of securities 599 98 49
- ------------------------------- ----- --- ---
Net gains on sales of securities $ 475 $ 25 $ 240
- ------------------------------- --- -- ---
Excluding securities issued by the U.S. government and its agencies and
corporations, there were no investments in securities from one issuer that
exceeded 10 percent of consolidated shareholders' equity at December 31, 2001 or
2000.
The income tax expense attributable to realized net gains on securities sales
was $166 million, $9 million and $84 million in 2001, 2000 and 1999,
respectively.
Securities are pledged or assigned to secure borrowed funds, government and
trust deposits and for other purposes. The carrying value of pledged securities
was $37.4 billion and $40.7 billion at December 31, 2001 and 2000, respectively.
At December 31, 2001, the valuation allowance for available-for-sale debt
securities and marketable equity securities included in shareholders' equity
reflected unrealized net losses of $480 million, net of related income taxes of
$311 million. At December 31, 2000, the valuation allowance included in
shareholders' equity reflected unrealized net losses of $560 million, net of
related income taxes of $330 million.
Note 4 Trading Activities
Trading-Related Revenue
Trading account profits represent the net amount earned from the Corporation's
trading positions, which include trading account assets and liabilities as well
as derivative positions and mortgage banking assets. 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 Consolidated Statement of Income, does not include the net interest income
recognized on
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
90
interest-earning and interest-bearing trading positions or 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
rates, forward and cross-currency contracts, fixed income and equity securities
and derivative contracts in interest rates, equities, credit and commodities.
Trading account profits for the year ended December 31, 2001 included an $83
million transition adjustment net loss recorded as a result of the
implementation of SFAS 133 as discussed in Note One of the consolidated
financial statements.
(Dollars in millions) 2001 2000 1999
-------------------------------
Trading account profits - as reported $ 1,842 $ 1,923 $ 1,605
Net interest income 1,566 1,023 662
- -------------------------------------------- -------- -------- --------
Total trading-related revenue $ 3,408 $ 2,946 $ 2,267
-------------------------------------------- ------- ------- -------
Trading-related revenue by product
Foreign exchange contracts $ 541 $ 536 $ 549
Interest rate contracts 753 773 716
Fixed income 1,033 392 460
Equities and equity derivatives 916 1,174 495
Commodities 165 71 47
- -------------------------------------------- -------- -------- --------
Total trading-related revenue $ 3,408 $ 2,946 $ 2,267
-------------------------------------------- ------- ------- -------
Trading Account Assets and Liabilities
The fair values of the components of trading account assets and liabilities at
December 31, 2001 and 2000 were:
Fair Value
------------------------------------
(Dollars in millions) 2001 2000
------------------------------------
Trading account assets
U.S. Government & Agency securities $ 15,009 $ 10,545
Foreign sovereign debt 6,809 10,432
Corporate & other debt securities 11,596 7,841
Equity securities 2,976 6,363
Mortgage-backed securities 3,070 1,713
Other 7,884 6,147
- ----------------------------------------- --------- ---------
Total $ 47,344 $ 43,041
----------------------------------------- -------- --------
Trading account liabilities
U.S. Government & Agency securities $ 4,121 $ 10,906
Foreign sovereign debt 3,096 1,860
Corporate & other debt securities 1,501 2,215
Equity securities 6,151 5,712
Mortgage-backed securities 12 37
Other 4,571 217
- ----------------------------------------- --------- ---------
Total $ 19,452 $ 20,947
----------------------------------------- -------- --------
See Note Five below for additional information on derivative positions,
including credit risk.
Note 5 Derivatives
The Corporation designates a derivative as held for trading or hedging purposes
when it enters into a derivative contract. Derivatives utilized by the
Corporation include swaps, financial futures and forward settlement contracts
and option contracts. A swap agreement is a contract between two parties to
exchange cash flows based on specified underlying notional amounts, assets
and/or indices. Financial futures and forward settlement contracts are
agreements to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined future date and rate or price. An option
contract is an agreement that conveys to the purchaser the right, but not the
obligation, to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined rate or price during a period or at a time in
the future. Option agreements can be transacted on organized exchanges or
directly between parties.
Credit Risk Associated with Derivative Activities
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. In managing derivative credit
risk, both the current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
91
of the potential change in value of contracts over their remaining lives are
considered. In managing credit risk associated with its derivative activities,
the Corporation deals primarily with commercial banks, broker-dealers and
corporations. To minimize credit risk, the Corporation enters into legally
enforceable master netting arrangements, which reduce risk by permitting the
closeout and netting of transactions with the same counterparty upon occurrence
of certain events. In addition, the Corporation reduces credit risk by obtaining
collateral where appropriate. Required collateral levels vary depending on the
credit risk rating and the type of counterparty. Generally, the Corporation
accepts collateral in the form of cash, U.S. Treasury securities, and other
marketable securities. Collateral of $10.8 billion was held on derivative assets
of $22.1 billion at December 31, 2001.
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
December 31, 2001 and 2000 primarily consisted of credit default swaps and total
return swaps.
A portion of the derivative activity involves exchange-traded instruments.
Because exchange-traded instruments conform to standard terms and are subject to
policies set by the exchange involved, including counterparty approval, margin
requirements and security deposit requirements, the credit risk is considered
minimal.
The following table presents the notional or contract and credit risk
amounts at December 31, 2001 and 2000 of the Corporation's derivative asset
positions held for trading and hedging purposes. These derivative positions are
primarily executed in the over-the-counter market. The credit risk amounts
presented in the following table do not consider the value of any collateral
held but take into consideration the effects of legally enforceable master
netting agreements.
Derivative Assets/(1)/
December 31, 2001 December 31, 2000/(2)/
----------------------------------------------------------
Contract/ Credit Contract/ Credit
(Dollars in millions) Notional Risk Notional Risk
----------------------------------------------------------
Interest rate contracts
Swaps $ 5,267,608 $ 9,550 $ 3,256,992 $ 3,236
Futures and forwards 1,663,109 67 1,227,537 57
Written options 678,242 - 664,108 -
Purchased options 704,159 2,165 601,828 145
Foreign exchange contracts
Swaps 140,778 2,274 61,035 1,424
Spot, futures and forwards 654,026 2,496 682,665 3,215
Written options 57,963 - 35,161 -
Purchased options 55,050 496 32,639 380
Equity contracts
Swaps 14,504 562 17,482 637
Futures and forwards 46,970 44 61,004 353
Written options 21,009 - 30,976 -
Purchased options 28,902 2,511 36,304 3,670
Commodity contracts
Swaps 6,600 1,152 9,126 1,902
Futures and forwards 2,176 - 2,098 81
Written options 8,231 - 12,603 -
Purchased options 8,219 199 10,515 228
Credit derivatives 57,182 631 40,638 206
- ------------------------------ ------------- --------- ------------- ---------
Net replacement cost $ 22,147 $ 15,534
------------------------------ -------- --------
/(1)/ Includes both long and short derivative positions.
/(2)/The amounts at December 31, 2000 do not reflect derivative positions that
were off-balance sheet prior to the adoption of SFAS 133.
The average fair value of derivative assets for 2001 and 2000 was $19.8 billion
and $17.9 billion, respectively. The average fair value of derivative
liabilities for 2001 and 2000 was $17.4 billion and $19.8 billion, respectively.
Asset and Liability Management (ALM) Activities
Risk management interest rate contracts and foreign exchange contracts are
utilized in the Corporation's ALM process. The Corporation maintains an overall
interest rate risk management strategy that incorporates the use of interest
rate contracts to minimize significant unplanned fluctuations in earnings that
are caused by interest rate volatility. The Corporation's goal is to manage
interest rate sensitivity so that movements in interest rates do not adversely
affect net interest income. As a result of interest rate fluctuations, hedged
fixed-rate assets and liabilities appreciate or depreciate in market value.
Gains or losses on the derivative instruments that are linked to the hedged
fixed-rate assets and liabilities are expected to substantially offset this
unrealized appreciation or depreciation. Interest income and interest expense on
hedged variable-rate assets and liabilities, respectively, increases or
decreases as a result of interest rate fluctuations. Gains and losses on the
derivative instruments that are linked to these hedged assets and liabilities
are expected to substantially offset this variability in earnings.
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92
Interest rate contracts, which are generally non-leveraged generic interest
rate and basis swaps, options and futures, allow the Corporation to effectively
manage its interest rate risk position. Generic interest rate swaps involve the
exchange of fixed-rate and variable-rate interest payments based on the
contractual underlying notional amount. Basis swaps involve the exchange of
interest payments based on the contractual underlying notional amounts, where
both the pay rate and the receive rate are floating rates based on different
indices. Option products primarily consist of caps, floors, swaptions and
options on index futures contracts. Futures contracts used for ALM activities
are primarily index futures providing for cash payments based upon the movements
of an underlying rate index.
The Corporation uses foreign currency contracts to manage the foreign
exchange risk associated with certain foreign-denominated assets and
liabilities, as well as the Corporation's equity investments in foreign
subsidiaries. Foreign exchange contracts, which include spot, futures and
forward contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price on an agreed-upon
settlement date. Foreign exchange option contracts are similar to interest rate
option contracts except that they are based on currencies rather than interest
rates. Exposure to loss on these contracts will increase or decrease over their
respective lives as currency exchange and interest rates fluctuate.
Fair Value Hedges
The Corporation uses various types of interest rate and foreign currency
exchange rate derivative contracts to protect against changes in the fair value
of its fixed rate assets and liabilities due to fluctuations in interest rates
and exchange rates. In 2001, the Corporation recognized in the Consolidated
Statement of Income a net loss of $6 million, which represented the ineffective
portion and excluded component in assessing hedge effectiveness of fair value
hedges.
Cash Flow Hedges
The Corporation also uses various types of interest rate and foreign currency
exchange rate derivative contracts to protect against changes in cash flows of
its variable rate assets and liabilities and anticipated transactions. In 2001,
the Corporation recognized in the Consolidated Statement of Income a net gain of
$0.2 million, which represented the ineffective portion and excluded component
in assessing hedge effectiveness of cash flow hedges. The Corporation has
determined that there are no hedging positions where it is probable that certain
forecasted transactions may not occur within the originally designated time
period.
For cash flow hedges, gains and losses on derivative contracts reclassified
from accumulated other comprehensive income to current period earnings are
included in the line item in the Consolidated Statement of Income in which the
hedged item is recorded and in the same period the hedged item affects earnings.
Deferred net gains on derivative instruments of approximately $272 million
included in accumulated other comprehensive income at December 31, 2001 are
expected to be reclassified into earnings during the next twelve months. These
net gains reclassified into earnings are expected to increase income or reduce
expense on the hedged items. The maximum term over which the Corporation is
hedging its exposure to the variability of future cash flows for all forecasted
transactions (excluding interest payments on variable-rate debt) is thirty years
with an associated notional amount of $60 million. The weighted-average term
over which the Corporation is hedging its exposure to this variability in cash
flows is 4.63 years.
Hedges of Net Investments in Foreign Operations
The Corporation uses forward exchange contracts, currency swaps, and
nonderivative hedging instruments to hedge its net investments in foreign
operations against adverse movements in foreign currency exchange rates. In
2001, net gains of $132 million related to these derivatives and non-derivative
hedging instruments were recorded as a component of the foreign currency
translation adjustment in other comprehensive income. These net gains were
largely offset by losses in the Corporation's net investments in foreign
operations. In 2001, the Corporation recognized in the Consolidated Statement of
Income a net loss of $10 million, which represented the excluded component in
assessing effectiveness of hedges of net investments in foreign operations.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
93
Note 6 Loans and Leases
Loans and leases at December 31, 2001 and 2000 were:
2001 2000
---------------------------------------
(Dollars in millions) Amount Percent Amount Percent
--------- ------ --------- ------
Commercial - domestic $ 118,205 35.9% $ 146,040 37.2%
Commercial - foreign 23,039 7.0 31,066 7.9
Commercial real estate - domestic 22,271 6.8 26,154 6.7
Commercial real estate - foreign 383 .1 282 .1
- --------------------------------------------------- --------- ------ --------- ------
Total commercial 163,898 49.8 203,542 51.9
--------------------------------------------------- --------- ------ --------- ------
Residential mortgage 78,203 23.8 84,394 21.5
Home equity lines 22,107 6.7 21,598 5.5
Direct/Indirect consumer 37,638 11.5 40,457 10.3
Consumer finance 5,331 1.6 25,800 6.6
Bankcard 19,884 6.0 14,094 3.6
Foreign consumer 2,092 .6 2,308 .6
- --------------------------------------------------- --------- ------ --------- ------
Total consumer 165,255 50.2 188,651 48.1
--------------------------------------------------- --------- ------ --------- ------
Total loans and leases $ 329,153 100.0% $ 392,193 100.0%
--------------------------------------------------- -------- ------ -------- ------
As part of the strategic decision to exit the subprime real estate lending
business in the third quarter of 2001, the Corporation recorded a provision for
credit losses of $395 million which, combined with an existing allowance for
credit losses of $240 million, was used to write the loan portfolio down to
estimated market value. As a result, charge-offs of $635 million were recorded
in the subprime real estate loan portfolio. The entire subprime real estate loan
portfolio of approximately $21.4 billion, which was included in consumer finance
loans, was transferred from the loans and leases portfolio to loans held for
sale included in other assets.
The following table presents the recorded investment in specific loans that
were considered individually impaired in accordance with SFAS 114 at
December 31, 2001 and 2000:
(Dollars in millions) 2001 2000
--------------------
Commercial - domestic $ 3,138 $ 2,891
Commercial - foreign 501 521
Commercial real estate - domestic 240 412
Commercial real estate - foreign - 2
- -------------------------------------- -------- --------
Total impaired loans $ 3,879 $ 3,826
-------------------------------------- ------- -------
The average recorded investment in certain impaired loans for the years ended
December 31, 2001, 2000 and 1999 was approximately $3.7 billion, $3.0 billion
and $2.0 billion, respectively. At December 31, 2001 and 2000, the recorded
investment in impaired loans requiring an allowance for credit losses was $3.1
billion and $2.1 billion, and the related allowance for credit losses was $763
million and $640 million, respectively. For the years ended December 31, 2001,
2000 and 1999, interest income recognized on impaired loans totaled $195
million, $174 million and $84 million, respectively, all of which was recognized
on a cash basis.
At December 31, 2001 and 2000, nonperforming loans, including certain loans
which were considered impaired, totaled $4.5 billion and $5.2 billion,
respectively. Included in other assets was $1.0 billion and $124 million of
loans held for sale which would have been classified as nonperforming had they
been included in loans at December 31, 2001 and 2000, respectively. The decrease
in nonperforming loans was primarily due to the transfer of approximately $1.2
billion of nonperforming subprime real estate loans to loans held for sale in
2001 as a result of the decision to exit the subprime real estate lending
business. The decrease was also due to sales of nonperforming commercial -
domestic and residential mortgage loans in 2001. The net amount of interest
income recorded during each year on loans that were classified as nonperforming
or restructured at December 31, 2001, 2000 and 1999 was $256 million, $237
million and $123 million, respectively. If these loans had been accruing
interest at their originally contracted rates, related income would have been
$593 million, $666 million and $419 million in 2001, 2000 and 1999,
respectively.
Foreclosed properties amounted to $402 million and $249 million at December
31, 2001 and 2000, respectively. The cost of carrying foreclosed properties
amounted to $15 million, $12 million, and $13 million in 2001, 2000 and 1999,
respectively.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
94
Note 7 Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses on
loans and leases for 2001, 2000 and 1999:
(Dollars in millions) 2001 2000 1999
----------------------------
Balance, January 1 $ 6,838 $ 6,828 $ 7,122
- ---------------------------------------------------------- ------ ------ ------
Loans and leases charged off/(1)/ (4,844) (2,995) (2,582)
Recoveries of loans and leases previously charged off 600 595 582
- ---------------------------------------------------------- ------- ------- -------
Net charge-offs (4,244) (2,400) (2,000)
---------------------------------------------------------- ------- ------- -------
Provision for credit losses/(2)/ 4,287 2,535 1,820
Other, net (6) (125) (114)
- ---------------------------------------------------------- ------- ------- -------
Balance, December 31 $ 6,875 $ 6,838 $ 6,828
---------------------------------------------------------- ------ ------ ------
/(1)/ Includes $635 million related to the exit of the subprime real estate
lending business in 2001.
/(2)/ Includes $395 million related to the exit of the
subprime real estate lending business in 2001.
Note 8 Securitizations
The Corporation securitizes, sells and services interests in consumer finance,
commercial and bankcard loans and residential mortgage loans. When the
Corporation securitizes assets, it may retain a portion or all of the
securities, subordinated tranches, interest only strips and, in some cases, a
cash reserve account, all of which are considered retained interests in the
securitized assets. See Note One for a more detailed discussion of
securitizations.
In conjunction with or shortly after closing, the Corporation securitizes
the majority of its mortgage loan originations. In 2001, the Corporation
converted a total of $52.9 billion of residential first mortgages into
mortgage-backed securities issued through Fannie Mae, Freddie Mac, Ginnie Mae
and Bank of America Mortgage Securities. Of the total securities issued in 2001,
the Corporation retained $4.6 billion at December 31, 2001 with an additional
$5.1 billion retained of securities issued prior to 2001 for a total of $9.7
billion. At December 31, 2000, the Corporation had retained $7.8 billion in
securities. These retained interests are valued using quoted market values. The
Corporation reported $637 million in income on loans converted into securities
and sold, of which $449 million was from loans originated by the Corporation and
$188 million was from loans originated by other entities on behalf of the
Corporation. In addition to the retained interests in the securities, the
Corporation has retained the servicing asset and Excess Spread Certificates from
securitized mortgage loans (see the Mortgage Banking Assets section of Note One)
and has limited recourse obligations on $1.8 billion of the securities issued in
2001. Of this amount, $1.5 billion has recourse limited to one year, and $318
million has recourse of five to seven years. Mortgage servicing fee income on
all loans serviced, including securitizations, was $1.1 billion in 2001.
Excess Spread Certificates of $3.9 billion at December 31, 2001 are
classified as mortgage banking assets and marked to market with the unrealized
gains or losses recorded in trading account profits. At December 31, 2001, key
economic assumptions and the sensitivities of the fair value of the Excess
Spread Certificates to immediate changes in those assumptions were analyzed. The
sensitivity analysis included the impact on fair value of modeled prepayment and
interest rate changes under favorable and adverse conditions. A decrease of 10
percent and 20 percent in modeled prepayments would result in an increase in
value ranging from $189 million to $397 million, and an increase in modeled
prepayments of 10 percent and 20 percent would result in a decrease in value
ranging from $174 million to $333 million. An increase of 100 and 200 basis
points in interest rates would result in an increase in value ranging from $167
million to $348 million, and a decrease in interest rates of 100 and 200 basis
points would result in a decrease in value ranging from $154 million to $297
million. See Note One for additional disclosures related to the Excess Spread
Certificates.
In December 2001, the Corporation securitized $17.5 billion of sub-prime
real estate loans in two bond-insured transactions. At December 31, 2001, the
Corporation retained both the AAA-rated securities in the available-for-sale
portfolio and $178 million of residual interests created in these
securitizations. The Corporation sold the servicing rights on these loans.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
95
Key economic assumptions used in measuring the fair value of certain
residual interests (included in other assets) in securitizations and the
sensitivity of the current fair value of residual cash flows to changes in those
assumptions are as follows:
Commercial-Domestic/(1)/ Bankcard Consumer Finance/(2)/
-------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
-------------------------------------------------------------------
Carrying amount of residual interests (at fair value) $ 77.9 $ 113.4 $ 146.1 $ 183.8 $ 468.6 $ 717.6
Balance of unamortized securitized loans/(3)/ 1,954 2,198 7,302 8,736 5,347 7,167
Weighted-average remaining life (in years) 0.22 1.74 1.88 2.27 3.25 3.29
Revolving structures - annual payment rate 30.0% 25.0% 14.4% 14.8%
Amortizing structures - annual constant prepayment
rate:
Fixed rate loans 8.1-24.5% 8.7-25.0%
Adjustable rate loans 27.0% 32.0%
Impact on fair value of 100 bps favorable change - 0.1 4.4 5.6 15.2 9.9
Impact on fair value of 200 bps favorable change 0.1 0.2 8.8 11.8 33.0 21.4
Impact on fair value of 100 bps adverse change - (0.1) (3.3) (4.7) (11.3) (8.1)
Impact on fair value of 200 bps adverse change (0.1) (0.2) (6.7) (9.3) (17.8) (14.5)
Expected credit losses/(4)/ 1.5% 0.5% 7.8% 6.1% 1.2-10.0% 1.1-10.6%
Impact on fair value of 10% favorable change 7.0 0.4 15.0 13.8 41.5 23.6
Impact on fair value of 25% favorable change 7.9 0.9 37.3 34.5 119.7 59.4
Impact on fair value of 10% adverse change (7.0) (0.4) (15.0) (13.8) (34.7) (23.1)
Impact on fair value of 25% adverse change (7.9) (0.9) (37.3) (34.5) (76.9) (56.9)
Residual cash flows discount rate (annual rate) 6.0% 7.5% 6.0% 7.5% 15.0-30.0% 13.9-16.0%
Impact on fair value of 100 bps favorable change 0.2 0.4 0.3 0.4 16.1 13.9
Impact on fair value of 200 bps favorable change 0.4 0.7 0.6 0.7 33.0 28.7
Impact on fair value of 100 bps adverse change (0.2) (0.4) (0.3) (0.4) (15.0) (13.0)
Impact on fair value of 200 bps adverse change (0.4) (0.7) (0.6) (0.7) (29.2) (25.3)
----------------------------------------- --- --- --- --- ---- ----
/(1)/ Commercial - domestic includes the Corporation's 1997 securitization of
commercial loans.
/(2)/ Consumer finance includes subprime real estate loan and manufactured
housing loan securitizations.
/(3)/ Balances represent securitized loans that were
off-balance sheet at December 31, 2001 and 2000.
/(4)/ Annual rates of expected credit losses are presented for commercial -
domestic and bankcard securitizations. Cumulative lifetime rates of expected
credit losses (incurred plus projected) are presented for the consumer finance
loans.
The sensitivities in the preceding table and related to the Excess Spread
Certificates are hypothetical and should be used with caution. As the amounts
indicate, changes in fair value based on variations in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to
the change in fair value may not be linear. Also, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption. In reality, changes in one factor may
result in changes in another, which might magnify or counteract the
sensitivities. Additionally, the Corporation has the ability to hedge interest
rate risk associated with retained residual positions. The above sensitivities
do not reflect any hedge strategies that may be undertaken to mitigate such
risk.
Static pool net credit losses are considered in determining the value of
retained interests. Static pool net credit losses include actual incurred plus
projected credit losses divided by the original balance of each securitization
pool. No consumer finance securitizations were transacted in 2000. Expected
static pool net credit losses at December 31, 2001 and 2000 were:
Year of Consumer Finance Loan Securitization
------------------------------------------------------
2001 1999 1998 1997 1996 1995 1994 1993
----- ----- ----- ----- ----- ----- ----- -----
December 31, 2001 6.86% 4.93% 5.06% 3.68% 3.27% 4.15% 1.60%
December 31, 2000 4.12 4.47 3.78 3.34 3.75 1.96 1.18%
----- ----- ----- ----- ----- ----- ----- -----
For revolving securitizations, the table below summarizes certain cash flows
received from securitization trusts in 2001 and 2000:
Commercial-Domestic Bankcard
------------------------------------
(Dollars in millions) 2001 2000 2001 2000
------ ------ ------ ----
Proceeds from collections reinvested in revolving securitizations $ 15,789 $ 19,732 $ 19,418 $ 21,247
Other cash flows received on retained interests/(1)/ 18 53 605 767
- ----------------------------------------------------- ------ ------ ------ ------
/(1)/ Other cash flows represents amounts received on retained interests by the
transferor other than servicing fees (e.g., cash flows from interest-only
strips).
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
96
The Corporation reviews its loan and lease portfolio on a managed basis.
Managed loans and leases include on-balance sheet loans and leases as well as
securitized loans originated by the Corporation for which the possibility exists
that the loans will return to the Corporation at the end of the securitization.
Portfolio balances, delinquency and historical loss amounts for the managed loan
and lease portfolio for 2001 and 2000 were as follows:
December 31, 2001 December 31, 2000/(1)/
------------------------------------------------------------------------------------------------
Principal
Total Total Amount of
Principal Principal Principal Principal Loans Principal
Amount of Amount of Loans Amount of Amount of Past Due Amount of
Loans and Past Due Nonperforming Loans and 90 Days or Nonperforming
(Dollars in millions) Leases 90 Days or More/(2)/ Loans Leases More/(2)/ Loans
------------------------------------------------------------------------------------------------
Commercial - domestic $ 120,159 $ 175 $ 3,123 $ 145,990 $ 141 $ 2,777
Commercial - foreign 23,039 6 461 30,285 37 486
Commercial real estate - domestic 22,271 40 240 26,154 16 236
Commercial real estate - foreign 384 - 3 282 - 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 165,853 221 3,827 202,711 194 3,501
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 80,071 14 564 72,393 17 557
Home equity lines 22,107 - 80 21,598 - 33
Direct/Indirect consumer 38,037 92 27 39,714 85 19
Consumer finance 5,331 24 9 5,898 5 2
Bankcard 27,185 475 - 22,830 358 -
Foreign consumer 2,092 - 7 2,308 - 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 174,823 605 687 164,741 465 620
- ------------------------------------------------------------------------------------------------------------------------------------
Total managed loans and leases 340,676 $ 826 $ 4,514 $ 367,452 $ 659 $ 4,121
- ------------------------------------------------------------------------------------------------------------------------------------
Securitized loans 11,523
- ------------------------------------------------------------------------------------------------------------------------------------
Total held loans and leases $ 329,153
====================================================================================================================================
Year Ended December 31, 2001 Year Ended December 31, 2000/(1)/
--------------------------------------------------------------------------------------------------
Average Average
Loans and Loans and Loans and Loans and
Leases Leases Net Net Loss Leases Leases Net Net Loss
(Dollars in millions) Outstanding Losses Ratio/(3)/ Outstanding Losses Ratio/(3)/
--------------------------------------------------------------------------------------------------
Commercial - domestic $ 135,750 $ 1,949 1.44% $ 147,947 $ 1,287 0.87%
Commercial - foreign 26,492 208 0.79 28,880 86 0.30
Commercial real estate - domestic 24,607 39 0.16 25,381 13 0.06
Commercial real estate - foreign 348 - n/m 304 (2) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 187,197 2,196 1.17 202,512 1,384 0.68
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 84,005 26 0.03 79,440 27 0.03
Home equity lines 22,013 19 0.09 19,492 20 0.10
Direct/Indirect consumer 40,051 409 1.02 39,743 376 0.95
Consumer finance 18,555 1,066 5.75 16,219 266 1.64
Bankcard 24,637 1,174 4.76 20,222 944 4.66
Foreign consumer 2,222 5 0.23 2,223 3 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 191,483 2,699 1.41 177,339 1,636 0.92
- ------------------------------------------------------------------------------------------------------------------------------------
Total managed loans and leases 378,680 $ 4,895 1.29% $ 379,851 $ 3,020 0.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Securitized loans 13,233
- ------------------------------------------------------------------------------------------------------------------------------------
Total held loans and leases $ 365,447
====================================================================================================================================
n/m = not meaningful
/(1)/ Prior periods are restated for comparison (e.g., acquisitions,
divestitures, sales, securitizations and the transfer of the subprime
real estate loan portfolio to loans held for sale in the third quarter
of 2001).
/(2)/ Excluding residential mortgages, loans are performing and still accruing
interest.
/(3)/ The net loss ratio is calculated by dividing managed loans and leases
net losses by average managed loans and leases outstanding for each
loans and leases category.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
97
Note 9 Deposits
At December 31, 2001, the Corporation had domestic certificates of deposit of
$100 thousand or greater totaling $27.1 billion compared to $33.3 billion at
December 31, 2000. At December 31, 2001, the Corporation had $14.6 billion of
domestic certificates of deposit of $100 thousand or greater maturing within
three months, $5.0 billion maturing within three to six months, $3.7 billion
maturing within six to twelve months and $3.8 billion maturing after twelve
months. The Corporation had other domestic time deposits of $100 thousand or
greater totaling $904 million and $866 million at December 31, 2001 and 2000,
respectively. At December 31, 2001, the Corporation had $117 million of other
domestic time deposits of $100 thousand or greater maturing within three months,
$135 million maturing within three to six months, $125 million maturing within
six to twelve months and $527 million maturing after twelve months. Foreign
office certificates of deposit and other time deposits of $100 thousand or
greater totaled $28.0 billion and $39.4 billion at December 31, 2001 and 2000,
respectively.
At December 31, 2001, the scheduled maturities for time deposits were as
follows:
(Dollars in millions)
Due in 2002 $ 101,679
Due in 2003 5,634
Due in 2004 1,639
Due in 2005 2,214
Due in 2006 1,089
Thereafter 585
----------------------------------------------
Total $ 112,840
----------------------------------------------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
98
Note 10 Short-Term Borrowings and Long-Term Debt
The contractual maturities of long-term debt at December 31, 2001 and 2000 were:
2001 2000
-------------------------------------------------------------------------
Various Various
Fixed-Rate Debt Floating-Rate Debt Amount Amount
(Dollars in millions) Obligations/(1)/ Obligations/(1)/ Outstanding Outstanding
-------------------------------------------------------------------------
Parent company
Senior debt:
Due in 2001 $ - $ - $ - $ 4,101
Due in 2002 133 3,185 3,318 3,288
Due in 2003 499 2,380 2,879 2,791
Due in 2004 - 6,505 6,505 3,853
Due in 2005 150 2,942 3,092 3,072
Due in 2006 176 3,713 3,889 1,406
Thereafter 71 3,801 3,872 3,453
- ------------------------------------------------------------------------------------------------------------------------------------
1,029 22,526 23,555 21,964
- ------------------------------------------------------------------------------------------------------------------------------------
Subordinated debt:
Due in 2001 - - - 1,342
Due in 2002 2,199 26 2,225 2,225
Due in 2003 1,711 323 2,034 2,034
Due in 2004 650 - 650 650
Due in 2005 1,085 35 1,120 1,145
Due in 2006 800 820 1,620 1,626
Thereafter 3,481 9,591 13,072 8,060
- ------------------------------------------------------------------------------------------------------------------------------------
9,926 10,795 20,721 17,082
- ------------------------------------------------------------------------------------------------------------------------------------
Total parent company long-term debt 10,955 33,321 44,276 39,046
- ------------------------------------------------------------------------------------------------------------------------------------
Bank and other subsidiaries
Senior debt:
Due in 2001 - - - 13,610
Due in 2002 393 5,656 6,049 6,017
Due in 2003 520 1,763 2,283 2,283
Due in 2004 12 4,018 4,030 4,028
Due in 2005 10 1,650 1,660 1,660
Due in 2006 - 3,494 3,494 -
Thereafter 99 167 266 262
- ------------------------------------------------------------------------------------------------------------------------------------
1,034 16,748 17,782 27,860
- ------------------------------------------------------------------------------------------------------------------------------------
Subordinated debt:
Due in 2001 - - - 200
Due in 2002 - - - -
Due in 2003 100 - 100 100
Due in 2004 300 - 300 300
Due in 2005 - - - -
Due in 2006 - - - -
Thereafter - 8 8 8
- ------------------------------------------------------------------------------------------------------------------------------------
400 8 408 608
- ------------------------------------------------------------------------------------------------------------------------------------
Total bank and other subsidiaries long-term debt 1,434 16,756 18,190 28,468
- ------------------------------------------------------------------------------------------------------------------------------------
Total parent company, bank and other subsidiaries
long-term debt $12,389 $50,077 62,466 67,514
- ------------------------------------------------------------------------------------------------------------------------------------
Notes payable to finance the purchase of leased vehicles - 2
Obligations under capital leases 30 31
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 62,496 $ 67,547
---------------------------------------------------------------------------------------------------------------------------------
/(1)/ Fixed-rate and floating-rate classifications of long-term debt include the
effect of interest rate swap contracts.
The majority of the floating rates are based on three- and six-month London
InterBank Offered Rates (LIBOR). At December 31, 2001, the interest rates on
floating-rate long-term debt ranged from 1.91 percent to 3.55 percent compared
to 4.84 percent to 8.64 percent at December 31, 2000. These obligations were
denominated primarily in U.S. dollars. The interest rates on fixed-rate
long-term debt ranged from 2.13 percent to 10.88 percent and 5.16 percent to
12.50 percent at December 31, 2001 and 2000, respectively.
Bank of America Corporation had the authority to issue approximately $11.0
billion and $13.8 billion of additional corporate debt and other securities
under its existing shelf registration statements at December 31, 2001 and 2000,
respectively.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
99
Bank of America Corporation has a 300 billion yen-denominated
(approximately U.S. $3 billion) shelf registration in Japan to be used
exclusively for primary offerings to non-United States residents. In addition,
Bank of America Corporation allocated $2 billion of a joint Euro medium-term
note program to be used exclusively for secondary offerings to non-United States
residents for a shelf registration statement filed in Japan. The Corporation had
$420 million outstanding under these programs at December 31, 2001. At December
31, 2000, the Corporation had no notes outstanding under these programs.
Bank of America, N.A. maintains a domestic program to offer up to a maximum
of $50.0 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 $2.5 billion at December 31,
2001 compared to $14.5 billion at December 31, 2000. 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 $4.5 billion at
December 31, 2001 compared to $17.6 billion at December 31, 2000. During 2001,
Bank of America N.A. issued $1.2 billion in senior long-term bank notes maturing
in 2002 through 2007. Of the $1.2 billion issued, $377 million bears interest at
fixed rates ranging from 4.00 percent to 4.88 percent. The remaining $812
million bears interest at floating rates ranging from 8 basis points below
three-month LIBOR to 20 basis points over three-month LIBOR.
Bank of America Corporation and Bank of America, N.A. maintain a joint Euro
medium-term note program to offer up to $25.0 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 $6.3 billion at December 31, 2001 compared to $5.2 billion at December
31, 2000. Bank of America, N.A.'s notes outstanding under this program totaled
$1.4 billion at December 31, 2001 and December 31, 2000. Of the $25.0 billion
authorized at December 31, 2001, Bank of America Corporation and Bank of
America, N.A. had remaining authority to issue approximately $8.7 billion and
$8.6 billion, respectively. At December 31, 2001 and 2000, $2.0 billion and $2.7
billion, respectively, were outstanding under the former BankAmerica Corporation
(BankAmerica) Euro medium-term note program. No additional debt securities will
be offered under that program.
At December 31, 2001, Bank of America Oregon, N.A. maintained approximately
$6.0 billion in Federal Home Loan Bank borrowings from the Home Loan Bank in
Seattle, Washington. During 2001, Bank of America Oregon, N.A. accepted $463
million in Federal Home Loan Bank, Seattle advances with maturities ranging from
2004 to 2031. Of the $463 million accepted, $450 million was converted from
fixed rates ranging from 5.72 percent to 5.89 percent to floating rates through
interest rate swaps at a spread of 11 basis points below three-month LIBOR. The
remaining $13 million bears interest at fixed rates ranging from 5.44 percent to
6.44 percent.
During 2001, Bank of America Georgia, N.A. accepted $2.3 billion in
advances from the Federal Home Loan Bank in Atlanta, Georgia. All of the $2.3
billion matures in 2006 and bears interest at spreads to three-month LIBOR.
The Corporation had $1.5 billion of mortgage-backed bonds outstanding at
December 31, 2001 and 2000. These bonds were collateralized by $3.0 billion and
$4.5 billion of mortgage loans and cash at December 31, 2001 and 2000,
respectively.
As part of its interest rate risk management activities, the Corporation
enters into interest rate contracts for certain long-term debt issuances. At
December 31, 2001 and 2000, through the use of interest rate swaps, $22.1
billion and $16.7 billion of fixed-rate debt, with rates ranging primarily from
4.75 percent to 8.57 percent, had been effectively converted to floating rates
primarily at spreads to LIBOR.
Including the effects of interest rate contracts for certain long-term debt
issuances, the weighted average effective interest rates for total long-term
debt, total fixed-rate debt and total floating-rate debt (based on the rates in
effect at December 31, 2001) were 3.44 percent, 7.26 percent and 2.40 percent,
respectively, at December 31, 2001 and (based on the rates in effect at December
31, 2000) were 7.00 percent, 7.51 percent, and 6.84 percent, respectively, at
December 31, 2000. These obligations were denominated primarily in U.S. dollars.
As described below, certain debt obligations outstanding at December 31,
2001 may be redeemed prior to maturity at the option of Bank of America
Corporation:
(Dollars in millions)
Year Redeemable Year of Maturities Amount Outstanding
------------------------ -------------------- ---------------------
Currently redeemable 2002-2028 $ 1,638
2002 2009-2023 530
2003-2004 2005-2018 2,006
2005-2008 2007-2028 1,232
------------------------ -------------------- ---------------------
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
100
Note 11 Trust Preferred Securities
Trust preferred securities are Corporation obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely Junior Subordinated
Deferrable Interest Notes of the Corporation (the Notes).
Since October 1996, the Corporation has formed fourteen wholly-owned
grantor trusts to issue trust preferred securities to the public. The grantor
trusts have invested the proceeds of such trust preferred securities in junior
subordinated notes of the Corporation. Certain of the trust preferred securities
were issued at a discount. Such trust preferred securities may be redeemed prior
to maturity at the option of the Corporation. The sole assets of each of the
grantor trusts are the Notes held by such grantor trusts. Each issue of the
Notes has an interest rate equal to the corresponding trust preferred securities
distribution rate. The Corporation has the right to defer payment of interest on
the Notes at any time or from time to time for a period not exceeding five years
provided that no extension period may extend beyond the stated maturity of the
relevant Notes. During any such extension period, distributions on the trust
preferred securities will also be deferred and the Corporation's ability to pay
dividends on its common and preferred stock will be restricted.
The trust preferred securities are subject to mandatory redemption upon
repayment of the related Notes at their stated maturity dates or their earlier
redemption at a redemption price equal to their liquidation amount plus accrued
distributions to the date fixed for redemption and the premium, if any, paid by
the Corporation upon concurrent repayment of the related Notes.
Periodic cash payments and payments upon liquidation or redemption with
respect to trust preferred securities are guaranteed by the Corporation to the
extent of funds held by the grantor trusts (the Preferred Securities Guarantee).
The Preferred Securities Guarantee, when taken together with the Corporation's
other obligations, including its obligations under the Notes, will constitute a
full and unconditional guarantee, on a subordinated basis, by the Corporation of
payments due on the trust preferred securities.
The Corporation is required by the Federal Reserve Board to maintain
certain levels of capital for bank regulatory purposes. The Federal Reserve
Board has determined that certain cumulative preferred securities having the
characteristics of trust preferred securities qualify as minority interest,
which is included in Tier 1 capital for bank and financial holding companies.
Such Tier 1 capital treatment provides the Corporation with a more
cost-effective means of obtaining capital for bank regulatory purposes than if
the Corporation were to issue preferred stock.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
101
The following table is a summary of the outstanding trust preferred securities
and the Notes at December 31, 2001 and 2000:
Aggregate Aggregate
Principal Principal
Amount of Amount of
Trust Preferred Trust Preferred Aggregate Per Annum
Securities Securities Principal Stated Interest Interest
Issuance December 31, December 31, Amount of Maturity of Rate of Payment Redemption
(Dollars in millions) Date 2001 2000 the Notes the Notes the Notes Dates Period
----------------------------------------------------------------------------------------------------------------
NationsBank
Capital Trust I December 1996 $600 $600 $619 December 2026 7.84% 3/31,6/30, On or after
9/30,12/31 2/31/01/(1)/
Capital Trust II December 1996 365 365 376 December 2026 7.83 6/15,12/15 On or after
12/15/06/(2,4)/
Capital Trust III February 1997 494 494 516 January 2027 3-mo.LIBOR 1/15,4/15 On or after
+55 bps 7/15,10/15 1/15/07/(2)/
Capital Trust IV April 1997 498 498 516 April 2027 8.25 4/15,10/15 On or after
4/15/07/(2,6)/
BankAmerica
Institutional
Capital A November 1996 450 450 464 December 2026 8.07 6/30,12/31 On or after
12/31/06/(3,7)/
Institutional
Capital B November 1996 299 299 309 December 2026 7.70 6/30,12/31 On or after
12/31/06/(3,8)/
Capital I December 1996 300 300 309 December 2026/(9)/ 7.75 3/31,6/30, On or after
9/30,12/31 12/20/01/(5)/
Capital II December 1996 450 450 464 December 2026 8.00 6/15,12/15 On or after
12/15/06/(3,10)/
Capital III January 1997 399 399 412 January 2027 3-mo. LIBOR 1/15,4/15, On or after
+57 bps 7/15,10/15 1/15/02/(3)/
Capital IV February 1998 350 350 361 March 2028 7.00 3/31,6/30, On or after
9/30,12/31 2/24/03/(3)/
Barnett
Capital I November 1996 300 300 309 December 2026 8.06 6/1,12/1 On or after
12/1/06/(2,11)/
Capital II December 1996 200 200 206 December 2026 7.95 6/1,12/1 On or after
12/1/06/(2,12)/
Capital III January 1997 250 250 258 February 2027 3-mo. LIBOR 2/1,5/1, On or after
+62.5 bps 8/1,11/1 2/1/07/(2)/
Bank of America
Capital I December 2001 575 - 593 December 2031 7.00 3/15,6/15, On or after
9/15,12/15 12/15/06/(13)/
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,530 $ 4,955 $ 5,712
====================================================================================================================================
/(1)/ The Corporation has announced the redemption of these notes on March 15,
2002, with a redemption price of $25 per security plus accrued and
unpaid distributions, if any, up to but excluding the redemption date of
March 15, 2002.
/(2)/ The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence of certain events relating to tax treatment
of the related trust or the Notes or relating to capital treatment of
the trust preferred securities or relating to a change in the treatment
of the related trust under the Investment Company Act of 1940, as
amended, at a redemption price at least equal to the principal amount of
the Notes.
/(3)/ The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence of certain events relating to tax treatment
of the related trust or the Notes or relating to capital treatment of
the trust preferred securities at a redemption price at least equal to
the principal amount of the Notes.
/(4)/ The Notes may be redeemed on or after December 15, 2006 and prior to
December 15, 2007 at 103.915% of the principal amount, and thereafter at
prices declining to 100% on December 15, 2016 and thereafter.
/(5)/ The Corporation has announced the redemption of these notes on March 15,
2002, with a redemption price of $25 per security plus accrued and
unpaid distributions, if any, up to but excluding the redemption date of
March 15, 2002.
/(6)/ The Notes may be redeemed on or after April 15, 2007 and prior to April
14, 2008 at 103.85% of the principal amount, and thereafter at prices
declining to 100% on April 15, 2017 and thereafter.
/(7)/ The Notes may be redeemed on or after December 31, 2006 and prior to
December 31, 2007 at 104.035% of the principal amount, and thereafter at
prices declining to 100% on December 31, 2016 and thereafter.
/(8)/ The Notes may be redeemed on or after December 31, 2006 and prior to
December 31, 2007 at 103.779% of the principal amount, and thereafter at
prices declining to 100% on December 31, 2016 and thereafter.
/(9)/ At the option of the Corporation, the stated maturity may be shortened
to a date not earlier than December 20, 2001 or extended to a date not
later than December 31, 2045, in each case if certain conditions are
met.
/(10)/ The Notes may be redeemed on or after December 15, 2006 and prior to
December 15, 2007 at 103.969% of the principal amount, and thereafter at
prices declining to 100% on December 15, 2016 and thereafter.
/(11)/ The Notes may be redeemed on or after December 1, 2006 and prior to
December 1, 2007 at 104.030% of the principal amount, and thereafter at
prices declining to 100% on December 1, 2016 and thereafter.
/(12)/ The Notes may be redeemed on or after December 1, 2006 and prior to
December 1, 2007 at 103.975% of the principal amount, and thereafter at
prices declining to 100% on December 1, 2016 and thereafter.
/(13)/ The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence and certification of a tax event, an
investment company event or a capital treatment event. The Corporation
may extend the stated maturity date of the junior subordinated notes to
a date no later than December 15, 2050.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
102
Note 12 Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of
off-balance sheet commitments. These commitments expose the Corporation to
varying degrees of credit and market risk and are subject to the same credit and
risk limitation reviews as those recorded on the balance sheet.
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters of
credit (SBLC) and commercial letters of credit to meet the financing needs of
its customers. The unfunded commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial institutions
of $2.7 billion and $2.8 billion at December 31, 2001 and 2000, respectively.
The following table summarizes outstanding unfunded commitments to extend credit
at December 31, 2001 and 2000:
(Dollars in millions) 2001 2000
-----------------------------
Credit card commitments $ 73,644 $ 72,058
Other loan commitments 221,529 243,124
Standby letters of credit and financial guarantees 40,374 33,420
Commercial letters of credit 3,957 3,327
- -------------------------------------------------------------------------------------------------------
Total $ 339,504 $ 351,929
- -------------------------------------------------------------------------------------------------------
Commitments to extend credit are legally binding, generally have specified rates
and maturities and are for specified purposes. The Corporation manages the
credit risk on these commitments by subjecting these commitments to normal
credit approval and monitoring processes. Certain commitments have adverse
change clauses which help to protect the Corporation against deterioration in
the borrowers' ability to pay. Other loan commitments include equity commitments
of approximately $2.7 billion which primarily relate to obligations to fund
existing venture capital equity investments. At December 31, 2001 and 2000,
there were no unfunded commitments to any industry or foreign country greater
than 10 percent of total unfunded commitments to lend. Credit card lines are
unsecured commitments, which are reviewed at least annually by management. Upon
evaluation of the customers' creditworthiness, the Corporation has the right to
terminate or change the terms of the credit card lines.
SBLC and financial guarantees are issued to support the debt obligations
of customers. If an SBLC or financial guarantee is drawn upon, the Corporation
looks to its customer for payment. SBLCs and financial guarantees are subject
to the same approval and collateral policies as other extensions of credit.
Commercial letters of credit, issued primarily to facilitate customer trade
finance activities, are collateralized by the underlying goods being shipped by
the customer and are generally short-term.
The following table summarizes the contractual maturity distribution of
unfunded commitments at December 31, 2001:
Expire in Expires After Expires After
1 Year 1 Year Through 3 Years Through Expires After
(Dollars in millions) or Less 3 Years 5 Years 5 Years Total
------ --------- ---------- --------- ------
Credit card commitments $ 73,644 $ - $ - $ - $ 73,644
Other loan commitments 97,570 50,891 37,359 35,70 221,529
Standby letters of credit and financial
guarantees 28,268 8,790 829 2,487 40,374
Commercial letters of credit 3,243 518 49 147 3,957
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 202,725 $ 60,199 $ 38,237 $ 38,343 $ 339,504
- ----------------------------------------------------------------------------------------------------------------------------
For each of these types of instruments, the Corporation's maximum exposure to
credit loss is represented by the contractual amount of these instruments. Many
of the commitments are collateralized and most are expected to expire without
being drawn upon; therefore, the total commitment amounts do not necessarily
represent risk of loss or future cash requirements.
The Corporation has entered into operating leases for certain of its
premises and equipment. Commitments under these leases approximate $1 billion
per year for each of the years 2002 through 2006 and $2.5 billion for all years
thereafter.
When-Issued Securities
When-issued securities are commitments to purchase or sell securities during the
time period between the announcement of a securities offering and the issuance
of those securities. Changes in market price between commitment date and
issuance are reflected in trading account profits. At December 31, 2001, the
Corporation had commitments to purchase and sell when-issued securities of $45.0
billion and $39.6 billion, respectively. At December 31, 2000, the Corporation
had commitments to purchase and sell when-issued securities of $26.4 billion and
$20.6 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, claims for
substantial monetary damages are asserted against the Corporation and its
subsidiaries and certain of these actions and proceedings are based on
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
103
alleged violations of consumer protection, securities, environmental, banking
and other laws.
In view of the inherent difficulty of predicting the outcome of such
matters, the Corporation cannot state what the eventual outcome of pending
matters will be; however, based on current knowledge, Management does not
believe that liabilities arising from pending litigation, if any, will have a
material adverse effect on the consolidated financial position, operations or
liquidity of the Corporation.
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. ("D.E. Shaw")
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 (the "Proxy Statement"), falsely stated
that the merger between NationsBank Corporation (NationsBank) and BankAmerica
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
(the "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. Discovery has been completed. A
former NationsBank stockholder who opted out of the NationsBank shareholder
Class has commenced an action in the Missouri federal court (the "Opt-Out
Action") asserting claims substantially similar to the claims related to D.E.
Shaw set forth in the consolidated action. Similar class actions have been filed
in California state courts. Plaintiffs in one such class action, brought on
behalf of California residents who owned BankAmerica stock, claim that the Proxy
Statement falsely stated that the merger would be one of equals. Plaintiffs in
that matter have recently been included in the federal action as part of the
BankAmerica shareholder Class and will not be proceeding in California state
court. Other California state court class actions (the "Other Actions") were
consolidated, but have not been certified as class actions. The Missouri federal
court enjoined prosecution of those consolidated cases as a class action. The
plaintiffs who were enjoined appealed to the United States Court of Appeals for
the Eighth Circuit, which upheld the district court's injunction. Those
plaintiffs have sought review in the United States Supreme Court.
Subsequent to December 31, 2001, the Corporation announced that it had
reached an agreement in principle to settle the Class actions. The proposed
settlement provides for payment of $333 million to the NationsBank Classes and
$157 million to the BankAmerica Classes. The proposed settlement is subject to a
number of conditions, including judicial approval. The Corporation agreed to the
proposed settlement without admitting liability. The proposed settlement will be
paid from existing litigation reserves and insurance and will not have an impact
on the Corporation's financial results.
On July 30, 2001, the Securities and Exchange Commission issued a
cease-and-desist order finding violations of Section 13(a) of the Securities
Exchange Act of 1934 and Rules 13a-1, 13a-11, 13a-13 and 12b-20 promulgated
thereunder, with respect to BankAmerica's accounting for, and the disclosures
relating to, the D.E. Shaw relationship. The Corporation consented to the order
without admitting or denying the findings. In the Matter of BankAmerica Corp.,
Exch. Act Rel. No. 44613, Acctg & Audit. Enf. Rel. No. 1249, Admin. Proc. No.
3-10541.
Terrorist Attacks of September 11, 2001
The Corporation incurred certain costs and losses associated with the terrorist
attacks of September 11, 2001, such as property losses and costs to re-establish
business operations. Management believes that these costs and losses will not be
material to the Corporation's financial position or results of operations.
Note 13 Shareholders' Equity and Earnings Per Common Share
On December 11, 2001, the Corporation's Board of Directors (the Board)
authorized a new stock repurchase program of up to 130 million shares of the
Corporation's common stock at an aggregate cost of up to $10.0 billion. No
shares had been repurchased under the 2001 program at December 31, 2001. On July
26, 2000, the Board authorized a 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. At December 31, 2001, the remaining buyback authority for common stock
under the 2000 program totaled $2.1 billion, or two million shares. On June 23,
1999, 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. The 1999
stock repurchase plan was completed in 2000. During 2001, the Corporation
repurchased approximately 82 million shares of its common stock in open market
repurchases at an average per-share price of $57.58, which reduced shareholders'
equity by $4.7 billion. During 2000, the Corporation repurchased approximately
68 million shares of its common stock in open market repurchases at an average
per-share price of $48.17, which reduced shareholders' equity by $3.3 billion.
Management anticipates it will continue to repurchase shares at least equal to
shares issued under its various stock option plans.
Other shareholders' equity at December 31, 2001 consisted of premiums
written on put options of $14 million and restricted stock award plan deferred
compensation of $52 million. At December 31, 2000, other shareholders' equity
consisted of premiums written on put options of $20 million, restricted stock
award plan deferred compensation of $114 million and a loan to the employee
stock ownership plan (ESOP) trust of $32 million.
In September 1999, the Corporation began selling put options on its common
stock to independent third parties. The put option program was designed to
partially offset the cost of share repurchases. The put options give the holders
the right to sell shares of the Corporation's common stock to the Corporation on
certain dates at specified prices. The put option contracts allow the
Corporation to determine the method of settlement, and
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
104
the premiums received are reflected as a component of other shareholders'
equity. At December 31, 2001, there were two million put options outstanding
with exercise prices ranging from $61.82 per share to $61.84 per share, all of
which expire in September 2002. At December 31, 2000, there were three million
put options outstanding with exercise prices ranging from $45.22 per share to
$50.37 per share, which expired from January 2001 to April 2001.
As of December 31, 2001, the Corporation had 1.5 million shares issued and
outstanding of ESOP Convertible Preferred Stock, Series C (ESOP Preferred
Stock). The ESOP Preferred Stock has a stated and liquidation value of $42.50
per share, provides for an annual cumulative dividend of $3.30 per share and
each share is convertible into 1.68 shares of the Corporation's common stock.
ESOP Preferred Stock in the amounts of $7 million, $5 million and $6 million was
converted into the Corporation's common stock in 2001, 2000 and 1999,
respectively.
In November 1989, Barnett incorporated ESOP provisions into its existing
401(k) employee benefit plan (Barnett ESOP). The Barnett ESOP acquired $141
million of common stock using the proceeds of a loan from the Corporation. This
loan was repaid in 2000. The terms of the loan included equal monthly payments
of principal and interest through September 2015. Interest was at 9.75 percent
and prepayments of principal were allowed. The loan was generally repaid from
contributions to the plan by the Corporation and dividends on unallocated shares
held by the Barnett ESOP. Shares held by the Barnett ESOP were allocated to plan
participants as the loan was repaid. At December 31, 2001 and 2000, there were
no shares of unallocated common stock remaining in the Barnett ESOP. During 2000
and 1999, the Barnett ESOP released and allocated common stock amounting to $32
million and $15 million, respectively.
The Corporation issues new shares of common stock under employee
compensation plans which are discussed in Note Sixteen of the consolidated
financial statements. During 2001 and 2000, approximately 27 million and 4
million shares were issued under these plans primarily due to stock option
exercises and restricted stock activity, increasing shareholders' equity by $1.1
billion and $294 million, respectively.
Gains (losses) of $1.9 billion, $2.8 billion and $(3.9) billion were
recorded in other comprehensive income in 2001, 2000 and 1999, respectively.
Reclassification adjustments to net income of $715 million, $105 million and
$240 million were recorded in 2001, 2000 and 1999, respectively. The related
income tax expense (benefit) was $30 million, $800 million and $(1.4) billion in
2001, 2000 and 1999, respectively.
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 effects of convertible preferred stock and
stock options are excluded from the computation of diluted earnings per common
share in periods in which the effect would be antidilutive.
In 2001, 2000 and 1999, options to purchase 79 million, 102 million and 44
million shares, respectively, were outstanding but not included in the
computation of earnings per share because they were antidilutive.
The calculation of earnings per common share and diluted earnings per
common share for 2001, 2000 and 1999 is presented below:
(Dollars in millions, except per share information; shares in thousands) 2001 2000 1999
-------------------------------------
Earnings per common share
Net income $ 6,792 $ 7,517 $ 7,882
Preferred stock dividends (5) (6) (6)
- ----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 6,787 $ 7,511 $ 7,876
- ----------------------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,594,957 1,646,398 1,726,006
- ----------------------------------------------------------------------------------------------------------------
Earnings per common share $ 4.26 $ 4.56 $ 4.56
================================================================================================================
Diluted earnings per common share
Net income available to common shareholders $ 6,787 $ 7,511 $ 7,876
Preferred stock dividends 5 6 6
- ----------------------------------------------------------------------------------------------------------------
Net income available to common shareholders and assumed conversions $ 6,792 $ 7,517 $ 7,882
- ----------------------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,594,957 1,646,398 1,726,006
- ----------------------------------------------------------------------------------------------------------------
Incremental shares from assumed conversions:
Convertible preferred stock 2,666 2,926 3,006
Stock options 28,031 15,605 31,046
- ----------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 30,697 18,531 34,052
- ----------------------------------------------------------------------------------------------------------------
Total diluted average common shares issued and outstanding 1,625,654 1,664,929 1,760,058
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 4.18 $ 4.52 $ 4.48
================================================================================================================
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
105
Note 14 Regulatory Requirements and Restrictions
The Federal Reserve Board requires the Corporation's banking subsidiaries to
maintain reserve balances based on a percentage of certain deposits. Average
daily reserve balances required by the Federal Reserve Board were $4.0 billion
and $4.1 billion for 2001 and 2000, respectively. Currency and coin residing in
branches and cash vaults (vault cash) are used to partially satisfy the reserve
requirement. The average daily reserve balances, in excess of vault cash, held
with the Federal Reserve Bank amounted to $128 million and $3 million for 2001
and 2000, respectively.
The primary source of funds for cash distributions by the Corporation to
its shareholders is dividends received from its banking subsidiaries. The
subsidiary national banks can initiate aggregate dividend payments in 2002,
without prior regulatory approval, of $4.0 billion plus an additional amount
equal to their net profits for 2002, as defined by statute, up to the date of
any such dividend declaration. The amount of dividends that each subsidiary bank
may declare in a calendar year without approval by the Office of the Comptroller
of the Currency (OCC) is the subsidiary bank's net profits for that year
combined with its net retained profits, as defined, for the preceding two years.
The Federal Reserve Board, the OCC, the Federal Deposit Insurance
Corporation and the Office of Thrift Supervision (collectively, the Agencies)
have issued regulatory capital guidelines for U.S. banking organizations.
Failure to meet the capital requirements can initiate certain mandatory and
discretionary actions by regulators that could have a material effect on the
Corporation's financial statements. At December 31, 2001 and 2000, the
Corporation and Bank of America, N.A. were classified as well-capitalized under
this regulatory framework. There have been no conditions or events since
December 31, 2001 that management believes have changed either the Corporation's
or Bank of America, N.A.'s capital classifications.
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. At December 31, 2001 and 2000, the Corporation had no
subordinated debt that qualified as Tier 3 capital.
To meet minimum, adequately capitalized regulatory requirements, an
institution must maintain a Tier 1 Capital ratio of four percent and a Total
Capital ratio of eight percent. A well-capitalized institution must maintain a
Tier 1 Capital ratio of six percent and a Total Capital ratio of ten percent.
The risk-based capital rules have been further supplemented by a leverage ratio,
defined as Tier 1 capital divided by average total assets, after certain
adjustments. The leverage ratio guidelines establish a minimum of 100 to 200
basis points above three percent. Banking organizations must maintain a leverage
capital ratio of at least five percent to be classified as well-capitalized.
The valuation allowance for available-for-sale securities and marketable
equity securities included in shareholders' equity at December 31, 2001 and 2000
and the net gains on derivatives included in shareholders' equity at December
31, 2001 are excluded from the calculations of Tier 1 Capital, Total Capital and
leverage ratios.
On September 12, 1996, the Agencies amended their regulatory capital
guidelines to incorporate a measure for market risk. In accordance with the
amended guidelines, the Corporation and any of its banking subsidiaries with
significant trading activity, as defined in the amendment, must incorporate a
measure for market risk in their regulatory capital calculations effective for
reporting periods after January 1, 1998. The revised guidelines have not had a
material impact on the Corporation or its subsidiaries' regulatory capital
ratios or their well-capitalized status.
The following table presents the actual capital ratios and amounts and
minimum required capital amounts for the Corporation and Bank of America, N.A.
at December 31, 2001 and 2000:
2001 2000
--------------------------------- -----------------------------------
Actual Minimum Actual Minimum
----------------- ---------------
(Dollars in millions) Ratio Amount Required/(1)/ Ratio Amount Required/(1)/
-----------------------------------------------------------------------
Tier 1 Capital
Bank of America Corporation 8.30% $ 41,972 $ 20,243 7.50% $ 40,667 $ 21,687
Bank of America, N. A. 9.25 42,161 18,225 7.72 39,178 20,308
Total Capital
Bank of America Corporation 12.67 64,118 40,487 11.04 59,826 43,374
Bank of America, N. A. 12.55 57,192 36,450 10.81 54,871 40,616
Leverage
Bank of America Corporation 6.56 41,972 25,604 6.12 40,667 26,587
Bank of America, N. A. 7.59 42,161 22,233 6.59 39,178 23,771
===========================================================================================================
/(1)/ Dollar amount required to meet the Agencies' guidelines for adequately
capitalized institutions.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
106
Note 15 Employee Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed qualified pension plans that
cover substantially all officers and employees. The plans provide defined
benefits based on an employee's compensation, age and years of service. It is
the policy of the Corporation to fund not less than the minimum funding amount
required by ERISA. Individually, BankAmerica, Barnett Banks and NationsBank each
sponsored defined benefit pension plans prior to each of the respective mergers
of these banks. The BankAmerica plan was a cash balance design plan, providing
participants with compensation credits, based on age and period of service,
applied at each pay period and a defined earnings rate on all participant
account balances in the plan. The NationsBank plan was amended to a cash balance
plan effective July 1, 1998 and provided a similar crediting basis for all
participants. The Barnett plan was amended to merge into the NationsBank plan
and, effective January 1, 1999, to provide the cash balance plan design feature
to those participants. The BankAmerica and NationsBank plans were merged
effective December 31, 1998; however, the participants in each plan retained the
cash balance plan design followed by their predecessor plans until the plan was
amended in 2000. The Corporation and the BankAmerica 401(k) retirement plans
were combined effective June 30, 2000. As part of the plan mergers, certain
participants were offered a one-time opportunity to transfer certain assets from
their savings or 401(k) plans to the cash balance plan. Assets with an
approximate fair value of $2.8 billion were transferred by plan participants.
The Bank of America Pension Plan (Pension Plan) allows participants to select
from various earnings measures, which are based on the returns of certain funds
managed by subsidiaries of the Corporation or common stock of the Corporation.
The actual returns on the funds underlying the earnings measures selected by
participants determine the earnings rate on the individual participant account
balances. Participants may elect to modify existing earnings measures
allocations on a daily basis. In 2001, the Corporation made a voluntary
contribution to the Pension Plan of $500 million.
The 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 and certain credits from future market downturns. The
Corporation is responsible for funding any shortfall on the guarantee feature.
At December 31, 2001, the market value of transferred assets exceeded the
guaranteed amount.
In 2000, a curtailment resulted from employee terminations in connection
with the Corporation's reduction in number of associates. See Note Two for
additional information.
The Corporation sponsors a number of noncontributory, nonqualified pension
plans. These plans, which are unfunded, provide defined pension benefits to
certain employees.
In addition to retirement pension benefits, full-time, salaried employees
and certain part-time employees may become eligible to continue participation as
retirees in health care and/or life insurance plans sponsored by the
Corporation. Based on the other provisions of the individual plans, certain
retirees may also have the cost of these benefits partially paid by the
Corporation.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
107
The following table summarizes the balances, changes in fair value of plan
assets and benefit obligations, and the weighted average assumptions as of and
for the years ended December 31, 2001 and 2000. Prepaid and accrued benefit
costs are reflected in other assets and other liabilities, respectively, in the
Consolidated Balance Sheet. For the Pension Plan, the asset valuation method
recognizes 60 percent of the market gains or losses in the first year, with the
remaining 40 percent spread equally over the next four years. For both the
Pension Plan and the Postretirement Health and Life Plans, the expected return
on plan assets will be decreased to 9.50% for 2002.
Qualified Nonqualified Postretirement
Pension Pension Health and Life
Plan Plans Plans
-------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
-------------------------------------------------------------------
Change in fair value of plan assets
(Primarily listed stocks, fixed income and real
estate)
Fair value at January 1 $ 8,652 $ 8,063 $ - $ - $ 208 $ 202
Actual return on plan assets (154) (135) - - (14) 6
Company contributions 500 - 98 49 69 63
Plan participant contributions - - - - 41 35
Acquisition/transfer 16 1,334 - - - -
Benefits paid (750) (610) (98) (49) (110) (98)
- ---------------------------------------------------------------------------------------------------------------------
Fair value at December 31 $ 8,264 $ 8,652 $ - $ - $ 194 $ 208
=====================================================================================================================
Change in benefit obligation
Benefit obligation at January 1 $ 8,011 $ 6,252 $ 534 $ 535 $ 840 $ 836
Service cost 202 153 22 10 11 11
Interest cost 560 519 40 39 64 58
Plan participant contributions - - - - 41 35
Plan amendments - 325 2 12 29 6
Actuarial loss (gain) (434) 16 9 (13) 69 (17)
Acquisition/transfer 17 1,392 20 - - -
Effect of curtailments - (36) - - - 9
Benefits paid (750) (610) (98) (49) (110) (98)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31 $ 7,606 $ 8,011 $ 529 $ 534 $ 944 $ 840
=====================================================================================================================
Funded status
Overfunded (unfunded) status at December 31 $ 658 $ 641 $ (529) $ (534) $ (750) $ (632)
Unrecognized net actuarial loss (gain) 954 358 86 69 45 (39)
Unrecognized transition obligation (asset) - (2) 1 2 355 387
Unrecognized prior service cost 468 521 61 70 44 19
- ---------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 2,080 $ 1,518 $ (381) $ (393) $ (306) $ (265)
=====================================================================================================================
Weighted average assumptions at December 31
Discount rate 7.25% 7.25% 7.25% 7.25% 7.25% 7.25%
Expected return on plan assets 10.00 10.00 n/a n/a 10.00 10.00
Rate of compensation increase 4.00 4.00 4.00 4.00 n/a n/a
=====================================================================================================================
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
108
Net periodic pension benefit cost (income) for the years ended December 31,
2001, 2000 and 1999, included the following components:
Qualified Pension Plan Nonqualified Pension Plan
---------------------------------------------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
---------------------------------------------------------
Components of net periodic pension benefit cost (income)
Service cost $ 202 $ 153 $ 115 $ 22 $ 10 $ 9
Interest cost 560 519 433 40 39 33
Expected return on plan assets (876) (813) (713) - - -
Amortization of transition obligation (asset) (2) (4) (4) - 1 1
Amortization of prior service cost 54 38 20 11 10 7
Recognized net actuarial loss - - - 7 9 8
Recognized gain due to settlements and curtailments - (11) - 6 - -
- --------------------------------------------------------------------------------------------------------------------------
Net periodic pension benefit cost (income) $ (62) $ (118) $ (149) $ 86 $ 69 $ 58
==========================================================================================================================
For the years ended December 31, 2001, 2000 and 1999, net periodic
postretirement benefit cost included the following components:
(Dollars in millions) 2001 2000 1999
--------------------------
Components of net periodic postretirement benefit cost (income)
Service cost $ 11 $ 11 $ 12
Interest cost 65 58 58
Expected return on plan assets (21) (20) (19)
Amortization of transition obligation 32 37 34
Amortization of prior service cost (credit) 4 (3) -
Recognized net actuarial loss (gain) 20 (45) (54)
Recognized loss due to settlements and curtailments - 20 -
- ---------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 111 $ 58 $ 31
=========================================================================================================
Net periodic postretirement health and life expense was determined using the
"projected unit credit" actuarial method. Gains and losses for all benefits
except postretirement health care are recognized in accordance with the minimum
amortization provisions of the applicable accounting standards. For the
postretirement health care plans, 50 percent of the unrecognized gain or loss at
the beginning of the fiscal year (or at subsequent remeasurement) is recognized
on a level basis during the year.
Assumed health care cost trend rates affect the postretirement benefit
obligation and benefit cost reported for the health care plan. The assumed
health care cost trend rates used to measure the expected cost of benefits
covered by the postretirement health care plans was 8.0 percent for 2002,
reducing in steps to 4.5 percent in 2006 and later years. A one percentage point
increase in assumed health care cost trend rates would have increased the
service and interest costs and the benefit obligation by $6 million and $52
million, respectively, in 2001, $9 million and $49 million, respectively, in
2000 and $7 million and $62 million, respectively, in 1999. A one percentage
point decrease in assumed health care cost trend rates would have lowered the
service and interest costs and the benefit obligation by $4 million and $45
million, respectively, in 2001, $7 million and $40 million, respectively, in
2000 and $6 million and $56 million, respectively, in 1999.
Defined Contribution Plans
The Corporation maintains a qualified defined contribution retirement plan and
certain nonqualified defined contribution retirement plans. There are two
components of the qualified defined contribution retirement plan: an ESOP and a
profit-sharing plan. Prior to 2001, the ESOP component of the qualified defined
contribution retirement plan featured leveraged ESOP provisions. The
profit-sharing component allows participants to modify existing investment
allocations on a daily basis. See Note Thirteen for additional information on
the ESOP provisions.
Effective June 30, 2000, the BankAmerica 401(k) Investment Plan was merged
with and into the Bank of America 401(k) Plan (401(k) Plan). During 2000, the
Corporation offered former BankAmerica plan participants a one-time opportunity
to transfer certain assets from the 401(k) Plan to the Pension Plan.
The Corporation contributed approximately $196 million, $163 million, and
$191 million for 2001, 2000, and 1999, respectively, in cash and stock which was
utilized primarily to purchase the Corporation's common stock under the terms of
these plans. At December 31, 2001 and 2000, an aggregate of 45,468,591 shares
and 46,010,493 shares, respectively, of the Corporation's common stock and
1,506,553 shares and 1,684,053 shares, respectively, of ESOP preferred stock
were held by the Corporation's various savings and profit sharing plans.
Under the terms of the ESOP Preferred Stock provision, payments to the plan
for dividends on the ESOP Preferred Stock were $5 million, $6 million, and $3
million, for 2001, 2000, and 1999, respectively. Payments to the plan for
dividends on the ESOP Common Stock were $27 million, $22 million, and $21
million during the same periods. Interest incurred to service the debt of the
ESOP Preferred Stock and ESOP Common Stock amounted to $0.3 million, $3 million
and $5 million for 2001, 2000 and 1999, respectively. As of December 31, 2001,
all principal and interest associated with the debt of the ESOP Preferred Stock
and ESOP Common Stock have been repaid.
In addition, certain non-U.S. employees within the Corporation are covered
under defined contribution pension plans that are separately administered in
accordance with local laws.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
109
Note 16 Stock Incentive Plans
At December 31, 2001, the Corporation had certain stock-based compensation plans
which are described below. The Corporation applies the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its stock option and award plans. In accordance with Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based
Compensation," the Corporation has also elected to provide disclosures as if the
Corporation had adopted the fair-value based method of measuring outstanding
employee stock options in 2001, 2000 and 1999 as indicated below:
As reported Pro forma
----------------------------------------------------------
(Dollars in millions, except per share data) 2001 2000 1999 2001 2000 1999
----------------------------------------------------------
Net income $ 6,792 $ 7,517 $ 7,882 $ 6,441 $ 7,215 $ 7,563
Net income available to common shareholders 6,787 7,511 7,876 6,436 7,209 7,557
Earnings per common share 4.26 4.56 4.56 4.04 4.38 4.38
Diluted earnings per common share 4.18 4.52 4.48 3.96 4.34 4.30
=============================================================================================================
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the fair
value of traded options, which have different characteristics than employee
stock options, and changes to the subjective assumptions used in the model can
result in materially different fair value estimates. The weighted average
grant-date fair values of the options granted during 2001, 2000 and 1999 were
based on the following assumptions:
Risk-free Interest rates Dividend Yield Expected Lives (Years) Volatility
-------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999 2001 2000 1999
-------------------------------------------------------------------------------------------------------
Key Employee Stock Plan 5.05% 6.74% 5.19% 4.50% 4.62% 2.91% 7 7 7 26.68% 25.59% 24.91%
Take Ownership! 4.89 6.57 4.73 5.13 4.62 3.06 4 4 4 31.62 30.27 27.67
=================================================================================================================================
Compensation expense under the fair-value based method is recognized over the
vesting period of the related stock options. Accordingly, the pro forma results
of applying SFAS 123 in 2001, 2000 and 1999 may not be indicative of future
amounts.
Key Employee Stock Plan
The Key Employee Stock Plan, as amended and restated, provides for different
types of awards including stock options, restricted stock and performance shares
(or restricted stock units). Under the plan, ten-year options to purchase
approximately 97.3 million shares of common stock have been granted through
December 31, 2001 to certain employees at the closing market price on the
respective grant dates. Options granted under the plan generally vest in three
or four equal annual installments. At December 31, 2001, approximately 76.2
million options were outstanding under this plan. Approximately 3.8 million
shares of restricted stock and restricted stock units were granted during 2001.
These shares of restricted stock generally vest in three equal annual
installments beginning one year from the grant date. The Corporation incurred
restricted stock expense of $182 million, $273 million and $324 million for the
years ended December 31, 2001, 2000 and 1999, respectively.
Take Ownership!
The Bank of America Global Associate Stock Option Program (Take Ownership!)
covers all employees below a specified executive grade level. Under the plan,
eligible employees received an award of a predetermined number of stock options
entitling them to purchase shares of the Corporation's common stock at the fair
market value on the grant date. Options granted on the first business day of
1999, 2000 and 2001 vest 25 percent on the first anniversary of the date of
grant, 25 percent on the second anniversary of the date of grant and 50 percent
on the third anniversary of the date of grant. These options have a term of five
years after the grant date. On January 2, 2001, options to purchase
approximately 22.8 million shares of common stock at $46.75 per share were
granted under the plan. At December 31, 2001, approximately 62.1 million options
were outstanding under this plan. No further awards may be granted under this
plan.
2002 Associates Stock Option Plan
On September 26, 2001, the Board approved the Bank of America Corporation 2002
Associates Stock Option Plan which covers all employees below a specified
executive grade level. Under the plan, eligible employees received a one-time
award of a predetermined number of options entitling them to purchase shares of
the Corporation's common stock. Approximately 54 million options were granted
subsequent to December 31, 2001 at the closing price of $61.36. The options vest
as follows: 50 percent of the options become exercisable after the Corporation's
common stock closes at or above $76.36 per share for ten consecutive trading
days; the remaining 50 percent of the options become exercisable after the
Corporation's common stock closes at or above $91.36 for ten consecutive trading
days. Regardless of the stock price, all options will be fully exercisable
February 1, 2006. No option can be exercised before June 1, 2002. The options
expire on the close of business January 31, 2007.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
110
Other Plans
Under the NationsBank 1996 ASOP, as amended, the Corporation granted in 1996 and
1997 to certain full- and part-time associates options to purchase an aggregate
of approximately 47 million shares of the Corporation's common stock. All
options granted under the ASOP expired on June 29, 2001. No further awards may
be granted under this plan.
Under the BankAmerica 1992 Management Stock Plan, ten-year options to
purchase shares of the Corporation's common stock were granted to certain key
employees in 1997 and 1998. Options awarded generally vest in three equal annual
installments beginning one year from the grant date. At December 31, 2001,
approximately 18.4 million options were outstanding under this plan.
Additionally, 2.9 million shares of restricted stock were granted to certain key
employees in 1997 and 1998. These shares generally vest in four equal annual
installments beginning the second year from the date of grant. No further awards
may be granted under this plan.
Under the BankAmerica Performance Equity Program, ten-year options to
purchase shares of the Corporation's common stock were granted to certain key
employees in 1997 and 1998 in the form of market price options and premium price
options. All options issued under this plan to persons who were employees as of
the Merger date vested. At December 31, 2001, approximately 11.8 million options
were outstanding under this plan. No further awards may be granted under this
plan.
On October 1, 1996, BankAmerica adopted the BankAmerica Global Stock Option
Program (BankAmerica Take Ownership!), which covered substantially all
associates. Options awarded under this plan vest in three equal installments
beginning one year from the grant date and have a term of five years after the
grant date. At December 31, 2001, approximately 14.1 million options were
outstanding under this plan. No further awards may be granted under this plan.
Additional stock options assumed in connection with various acquisitions
remain outstanding and are included in the tables below. No further awards may
be granted under these plans.
The following tables present the status of all plans at December 31, 2001,
2000 and 1999, and changes during the years then ended:
2001 2000 1999
----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Option) (Option) (Option)
Employee Stock Options Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at January 1 178,572,021 $ 54.45 156,205,635 $ 56.03 126,465,501 $ 51.01
Granted 53,067,079 50.45 49,318,536 48.44 68,341,012 61.30
Exercised (28,198,630) 40.86 (5,144,778) 30.68 (21,872,532) 38.45
Forfeited (18,890,454) 56.32 (21,807,372) 57.73 (16,728,346) 62.59
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 184,550,016 55.19 178,572,021 54.45 156,205,635 56.03
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31 94,753,943 57.94 98,092,637 53.56 85,753,568 49.97
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year $ 10.36 $ 11.00 $ 13.88
===========================================================================================================================
2001 2000 1999
----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Grant Grant Grant
Restricted Stock/Unit Awards Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding unvested grants at January 1 7,172,546 $ 63.37 13,027,337 $ 62.39 3,781,154 $ 61.85
Granted 3,844,384 51.21 652,724 48.50 11,413,497 61.99
Vested (4,223,770) 60.32 (6,111,163) 59.51 (1,732,513) 57.19
Canceled (201,414) 57.16 (396,352) 66.18 (434,801) 67.96
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding unvested grants at December 31 6,591,746 $ 58.42 7,172,546 $ 63.37 13,027,337 $ 62.39
===========================================================================================================================
The following table summarizes information about stock options outstanding at
December 31, 2001:
Outstanding Options Options Exercisable
---------------------------------------------------------------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Range of Exercise Prices December 31 Contractual Life Exercise Price December 31 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$10.00-$30.00 10,012,213 2.9 years $ 23.35 10,012,213 $ 23.35
$30.01-$46.50 6,892,929 4.4 years 36.14 6,747,766 35.95
$46.51-$65.50 144,609,175 5.2 years 54.47 56,227,059 58.40
$65.51-$99.00 23,035,699 4.8 years 79.23 21,766,905 79.47
- ---------------------------------------------------------------------------------------------------------------------------
Total 184,550,016 5.0 years $ 55.19 94,753,943 $ 57.94
===========================================================================================================================
B A N K O F A M ER I C A 2 0 0 1 A N N U A L R E P O R T
111
Note 17 Income Taxes
The components of income tax expense for the years ended December 31, 2001, 2000
and 1999 were as follows:
(Dollars in millions) 2001 2000 1999
------------------------------
Current expense:
Federal $ 3,183 $ 3,109 $ 1,470
State 364 161 63
Foreign 341 354 341
- ----------------------------------------------------------------------------------
Total current expense 3,888 3,624 1,874
- ----------------------------------------------------------------------------------
Deferred (benefit) expense:
Federal (554) 526 2,207
State (10) 120 254
Foreign 1 1 (2)
- ----------------------------------------------------------------------------------
Total deferred (benefit) expense (563) 647 2,459
- ----------------------------------------------------------------------------------
Total income tax expense $ 3,325 $ 4,271 $ 4,333
==================================================================================
The preceding table does not reflect the tax effects of unrealized gains and
losses on available-for-sale and marketable equity securities, foreign currency
translation adjustments and derivatives that are included in shareholders'
equity and certain tax benefits associated with the Corporation's employee stock
plans. As a result of these tax effects, shareholders' equity increased by $21
million in 2001, decreased by $684 million in 2000 and increased by $1.6 billion
in 1999. The Corporation's current income tax expense approximates the amounts
payable for those years. Deferred income tax expense represents the change in
the deferred tax asset or liability and is discussed further below.
A reconciliation of the expected federal income tax expense using the
federal statutory tax rate of 35 percent to the actual income tax expense for
the years ended December 31, 2001, 2000 and 1999 follows:
(Dollars in millions) 2001 2000 1999
-------------------------------
Expected federal income tax expense $ 3,541 $ 4,126 $ 4,275
Increase (decrease) in taxes resulting from:
Tax-exempt income (105) (116) (103)
State tax expense, net of federal benefit 230 183 206
Goodwill amortization/(1)/ 366 202 207
Basis difference in subsidiary stock (418) - -
Low income housing credits (129) (108) (79)
Foreign tax differential (83) (72) (58)
Other (77) 56 (115)
- ----------------------------------------------------------------------------------------------------
Total income tax expense $ 3,325 $ 4,271 $ 4,333
====================================================================================================
/(1)/ Goodwill amortization included in business exit costs was $164 million
in 2001.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
112
Significant components of the Corporation's deferred tax (liabilities) assets at
December 31, 2001 and 2000 were as follows:
(Dollars in millions) 2001 2000
--------------------------
Deferred tax liabilities:
Equipment lease financing $ (6,788) $ (6,268)
Intangibles (767) (733)
Employee retirement benefits (560) (403)
Investments (551) (494)
State taxes (431) (438)
Deferred gains and losses (285) (295)
Securities valuation (231) (400)
Depreciation (144) (145)
Other (323) (232)
- ----------------------------------------------------------------------------------------------------------
Gross deferred tax liabilities (10,080) (9,408)
- ----------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses 3,085 2,751
Employee benefits 497 344
Accrued expenses 430 341
Basis difference in subsidiary stock 418 -
Available-for-sale securities 311 330
Loan fees and expenses 282 116
Net operating loss carryforwards 149 130
Other 463 425
- ----------------------------------------------------------------------------------------------------------
Gross deferred tax assets 5,635 4,437
- ----------------------------------------------------------------------------------------------------------
Valuation allowance (136) (114)
- ----------------------------------------------------------------------------------------------------------
Gross deferred tax assets, net of valuation allowance 5,499 4,323
- ----------------------------------------------------------------------------------------------------------
Net deferred tax liabilities $ (4,581) $ (5,085)
==========================================================================================================
The Corporation's deferred tax assets at December 31, 2001 and 2000 included a
valuation allowance of $136 million and $114 million, respectively, primarily
representing net operating loss carryforwards for which it is more likely than
not that realization will not occur. The net change in the valuation allowance
for deferred tax assets resulted from net operating losses being generated by
foreign subsidiaries in 2001 where realization is not expected to occur.
At December 31, 2001 and 2000, federal income taxes had not been provided
on $859 million and $762 million, respectively, of undistributed earnings of
foreign subsidiaries, earned prior to 1987 and after 1997, that have been
reinvested for an indefinite period of time. If the earnings were distributed,
an additional $188 million and $163 million of tax expense, net of credits for
foreign taxes paid on such earnings and for the related foreign withholding
taxes, would result in 2001 and 2000, respectively.
Note 18 Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair value of financial instruments. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are utilized as estimates of the fair values
of financial instruments. Since no quoted market prices exist for a significant
part of the Corporation's financial instruments, the fair values of such
instruments have been derived based on management's assumptions, the estimated
amount and timing of future cash flows and estimated discount rates. The
estimation methods for individual classifications of financial instruments are
described more fully below. Different assumptions could significantly affect
these estimates. Accordingly, the net realizable values could be materially
different from the estimates presented below. In addition, the estimates are
only indicative of the value of individual financial instruments and should not
be considered an indication of the fair value of the combined Corporation.
The provisions of SFAS 107 do not require the disclosure of the fair value
of lease financing arrangements and nonfinancial instruments, including
intangible assets such as goodwill, franchise, and credit card and trust
relationships.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
113
Short-Term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash
equivalents, federal funds sold and purchased, resale and repurchase agreements,
commercial paper and other short-term borrowings, approximates the fair value of
these instruments. These financial instruments generally expose the Corporation
to limited credit risk and have no stated maturities or have an average maturity
of less than 30 days and carry interest rates which approximate market.
Financial Instruments Traded in the Secondary Market
Held-to-maturity securities, available-for-sale securities, trading account
instruments, long-term debt and trust preferred securities traded actively in
the secondary market have been valued using quoted market prices. The fair
values of securities and trading account instruments are reported in Notes Three
and Four.
Derivative Financial Instruments
All derivatives are recognized on the balance sheet at fair value, taking into
consideration the effects of legally enforceable master netting agreements which
allow the Corporation to settle positive and negative positions with the same
counterparty on a net basis. For exchange traded contracts, fair value is based
on quoted market prices. For non-exchange traded contracts, fair value is based
on dealer quotes, pricing models or quoted prices for instruments with similar
characteristics. The fair value of the Corporation's derivative assets and
liabilities is presented in Note Five.
Loans
Fair values were estimated for groups of similar loans based upon type of loan
and maturity. The fair value of loans was determined by discounting estimated
cash flows using interest rates approximating the Corporation's current
origination rates for similar loans and using credit factors. Where quoted
market prices were available, primarily for certain residential mortgage loans,
such market prices were utilized as estimates for fair values. Contractual cash
flows for residential mortgage loans were adjusted for estimated prepayments
using published industry data.
Substantially all of the foreign loans reprice within relatively short
timeframes. Accordingly, for foreign loans, the carrying values were assumed to
approximate their fair values.
Mortgage Banking Assets
The Certificates are carried at estimated fair value which is based on an
option-adjusted spread model which requires several key components including,
but not limited to, proprietary prepayment models and term structure modeling
via Monte Carlo simulation.
Deposits
The fair value for deposits with stated maturities was calculated by discounting
contractual cash flows using current market rates for instruments with similar
maturities. The carrying value of foreign time deposits approximates fair value.
For deposits with no stated maturities, the carrying amount was considered to
approximate fair value and does not take into account the significant value of
the cost advantage and stability of the Corporation's long-term relationships
with depositors.
The book and fair values of certain financial instruments at December 31,
2001 and 2000 were as follows:
2001 2000
----------------------------------------------------------
Book Fair Book Fair
(Dollars in millions) Value Value Value Value
----------- ------- ----------- -------
Financial assets
Loans $ 310,427 $ 314,804 $ 369,706 $ 374,313
Financial liabilities
Deposits 373,495 374,231 364,244 364,547
Long-term debt/(1)/ 62,466 64,531 67,516 68,595
Trust preferred securities 5,530 5,612 4,955 4,792
------------------------------ ----------- ------- ----------- -------
/(1)/ Excludes obligations under capital leases.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
114
Note 19 Business Segment Information
The Corporation reports the results of its operations through four business
segments: Consumer and Commercial Banking, Asset Management, Global Corporate
and Investment Banking and Equity Investments. Certain operating segments have
been aggregated into a single business segment. A customer-centered strategic
focus is changing the way the Corporation is managing its business. In addition
to existing financial reporting, the Corporation has begun preparing customer
segment-based financial operating information.
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 investment, fiduciary and comprehensive credit expertise;
asset management services to institutional clients, high-net-worth individuals
and retail customers; and investment, securities and financial planning services
to affluent and high-net-worth individuals. Global Corporate and Investment
Banking provides capital raising solutions, advisory services, derivatives
capabilities, equity and debt sales and trading, as well as traditional bank
deposit and loan products, cash management and payments services to large
corporations and institutional markets. Equity Investments includes Principal
Investing which makes both direct and indirect equity investments in a wide
variety of companies at all stages of the business cycle. Equity Investments
also includes the Corporation's strategic technology and alliances investment
portfolio. Corporate Other consists primarily of the functions associated with
managing the interest rate risk of the Corporation and Consumer Special Assets,
which includes certain consumer finance businesses being liquidated and certain
residential mortgages originated by the mortgage group (not from retail branch
originations).
In the first quarter of 2001, the thirty-year mortgage portfolio was moved
from Consumer and Commercial Banking to Corporate Other. In the third quarter of
2001, certain consumer finance businesses being liquidated were transferred from
Consumer and Commercial Banking to Corporate Other.
Effective January 2, 2001, the Corporation acquired the remaining 50
percent of Marsico Capital Management LLC (Marsico), which is part of the Asset
Management segment, 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.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
115
The following table includes total revenue and net income for the years ended
December 31, 2001, 2000 and 1999, and total assets at December 31, 2001 and 2000
for each business segment. Certain prior period amounts have been reclassified
between segments to conform to the current period presentation.
Business Segments
For the year ended December 31
Consumer and
Total Corporation Commercial Banking /(1)/
------------------------------------- -------------------------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
--------------------------------------------------------------------------------
Net interest income/(2)/ $ 20,633 $ 18,671 $ 18,342 $ 13,364 $ 12,620 $ 12,851
Noninterest income/(3)/ 14,348 14,582 14,179 8,008 7,356 7,160
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 34,981 33,253 32,521 21,372 19,976 20,011
Provision for credit losses 4,287 2,535 1,820 1,802 1,111 1,118
Gains (losses) on sales of
securities 475 25 240 3 - 48
Amortization of intangibles 878 864 888 637 649 673
Other noninterest expense 19,831 17,769 17,623 11,048 10,684 11,027
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,460 12,110 12,430 7,888 7,532 7,241
Income tax expense 3,668 4,593 4,548 3,046 2,981 2,723
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 6,792 $ 7,517 $ 7,882 $ 4,842 $ 4,551 $ 4,518
=====================================================================================================================
Period-end total assets $ 621,764 $ 642,191 $ 304,874 $ 287,013
=====================================================================================================================
For the year ended December 31
Global Corporate and
Asset Management/(1)/ Investment Banking/(1)/
------------------------------------- -------------------------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
--------------------------------------------------------------------------------
Net interest income/(2)/ $ 741 $ 666 $ 610 $ 4,592 $ 3,725 $ 3,407
Noninterest income/(3)/ 1,733 1,801 1,667 4,639 4,444 4,104
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 2,474 2,467 2,277 9,231 8,169 7,511
Provision for credit losses 121 47 99 1,275 751 213
Gains (losses) on sales of
securities - - - (45) (15) 9
Amortization of intangibles 57 30 31 143 138 137
Other noninterest expense 1,482 1,431 1,388 5,013 4,687 4,331
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 814 959 759 2,755 2,578 2,839
Income tax expense 293 370 280 876 819 916
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 521 $ 589 $ 479 $ 1,879 $ 1,759 $ 1,923
=====================================================================================================================
Period-end total assets $ 26,810 $ 27,140 $ 194,146 $ 206,820
=====================================================================================================================
For the year ended December 31
Equity Investments/(1)/ Corporate Other
--------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
--------------------------------------------------------------------------------
Net interest income/(2)/ $ (151) $ (139) $ (83) $ 2,087 $ 1,799 $ 1,557
Noninterest income/(3)/ 183 1,007 777 (215) (26) 471
- ---------------------------------------------------------------------------------------------------------------------
Total revenue 32 868 694 1,872 1,773 2,028
Provision for credit losses/(4)/ 8 4 25 1,081 622 365
Gains (losses) on sales of
securities - - - 517 40 183
Amortization of intangibles 10 11 11 31 36 36
Other noninterest expense/(4)/ 174 101 124 2,114 866 753
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes (160) 752 534 (837) 289 1,057
Income tax expense (66) 291 203 (481) 132 426
- ---------------------------------------------------------------------------------------------------------------------
Net income $ (94) $ 461 $ 331 $ (356) $ 157 $ 631
=====================================================================================================================
Period-end total assets $ 6,230 $ 6,691 $ 89,704 $ 114,527
=====================================================================================================================
/(1)/ There were no material intersegment revenues among the segments.
/(2)/ Net interest income is presented on a taxable-equivalent basis and
includes taxable-equivalent basis adjustments of $343 million, $322
million, and $215 million in 2001, 2000 and 1999, respectively.
/(3)/ Noninterest income included the $83 million SFAS 133 transition
adjustment net loss which was recorded in trading account profits in
2001. The components of the transition adjustment by segment were a gain
of $4 million for Consumer and Commercial Banking, a gain of $19 million
for Global Corporate and Investment Banking and a loss of $106 million
for Corporate Other.
/(4)/ Corporate Other includes exit charges consisting of provision for credit
losses of $395 million and noninterest expense of $1,305 million related
to the exit of certain consumer finance businesses in 2001 and merger
and restructuring charges in noninterest expense of $550 million and
$525 million in 2000 and 1999,respectively.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
116
Following is a reconciliation of the four business segments' revenue and net
income for the years ended December 31, 2001, 2000 and 1999 and total assets at
December 31, 2001 and 2000 to the consolidated totals:
(Dollars in millions) 2001 2000 1999
-----------------------------
Segments' revenue $ 33,109 $ 31,480 $ 30,493
Adjustments:
Earnings associated with unassigned capital 346 368 357
Consumer Special Assets activity 1,751 1,236 1,792
SFAS 133 transition adjustment net loss (106) - -
Gain on sale of a business - 187 -
Other (119) (18) (121)
- ---------------------------------------------------------------------------------------------------------
Consolidated revenue $ 34,981 $ 33,253 $ 32,521
=========================================================================================================
Segments' net income $ 7,148 $ 7,360 $ 7,251
Adjustments, net of taxes:
Earnings associated with unassigned capital 222 235 231
Consumer Special Assets activity 586 318 610
SFAS 133 transition adjustment net loss (68) - -
Gain on sale of a business - 117 -
Provision for credit losses in excess of net charge-offs (182) (86) -
Gains on sales of securities 333 25 118
Severance charge (96) - -
Litigation expense (214) - -
Exit charges (1,250) - -
Merger and restructuring charges - (346) (358)
Tax benefit associated with basis difference in subsidiary stock 267 - -
Other 46 (106) 30
- ---------------------------------------------------------------------------------------------------------
Consolidated net income $ 6,792 $ 7,517 $ 7,882
=========================================================================================================
Segments' total assets $ 532,060 $ 527,664
Adjustments:
Available-for-sale securities 70,540 47,256
Elimination of excess earning asset allocations (65,908) (52,826)
Consumer Special Assets 56,628 96,419
Other, net 28,444 23,678
- ---------------------------------------------------------------------------------------------------------
Consolidated total assets $ 621,764 $ 642,191
=========================================================================================================
The adjustments presented in the table above represent consolidated income,
expense and asset balances not specifically allocated to individual business
segments. In addition, reconciling items also include the effect of earnings
allocations not assigned to specific business segments, as well as the related
earning asset balances.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
117
Note 20 Bank of America Corporation (Parent Company Only)
The following tables present the Parent Company Only financial information:
Year Ended December 31
--------------------------------
(Dollars in millions) 2001 2000 1999
--------------------------------
Condensed Statement of Income
Income
Dividends from subsidiaries:
Bank subsidiaries $ 5,000 $ 6,902 $ 7,700
Other subsidiaries 32 18 171
Interest from subsidiaries 1,746 2,756 2,197
Other income 1,772 1,053 987
- ---------------------------------------------------------------------------------------------------------------
8,550 10,729 11,055
- ---------------------------------------------------------------------------------------------------------------
Expense
Interest on borrowed funds 2,564 3,359 2,626
Noninterest expense 2,082 1,238 1,155
- ---------------------------------------------------------------------------------------------------------------
4,646 4,597 3,781
- ---------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in undistributed
earnings of subsidiaries 3,903 6,132 7,274
Income tax benefit 385 456 494
- ---------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings 4,288 6,588 7,768
of subsidiaries
Equity in undistributed earnings of
subsidiaries:
Bank subsidiaries 2,653 583 10
Other subsidiaries (149) 346 104
- ---------------------------------------------------------------------------------------------------------------
2,504 929 114
- ---------------------------------------------------------------------------------------------------------------
Net income $ 6,792 $ 7,517 $7,882
===============================================================================================================
Net income available to common shareholders $ 6,787 $ 7,511 $7,876
===============================================================================================================
December 31
---------------------
(Dollars in millions) 2001 2000
---------------------
Condensed Balance Sheet
Assets
Cash held at bank subsidiaries $ 15,973 $ 20,233
Temporary investments 663 677
Receivables from subsidiaries:
Bank subsidiaries 9,813 13,336
Other subsidiaries 13,076 7,331
Investments in subsidiaries:
Bank subsidiaries 58,968 52,711
Other subsidiaries 794 2,248
Other assets 3,675 4,157
- ---------------------------------------------------------------------------------------------------
Total assets $102,962 $ 100,693
- ---------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Commercial paper and other notes payable $ 1,593 $ 6,747
Accrued expenses and other liabilities 3,328 2,767
Payables to subsidiaries:
Bank subsidiaries 297 83
Other subsidiaries 4,948 4,422
Long-term debt 44,276 39,046
Shareholders' equity 48,520 47,628
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $102,962 $ 100,693
===================================================================================================
Year Ended December 31
--------------------------------
(Dollars in millions) 2001 2000 1999
--------------------------------
Condensed Statement of Cash Flows
Operating Activities
Net income $ 6,792 $ 7,517 $7,882
Reconciliation of net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (2,504) (929) (114)
Other operating activities 1,768 798 (191)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,056 7,386 7,577
- ---------------------------------------------------------------------------------------------------------------
Investing Activities
Net (increase) decrease in temporary investments (24) 87 (274)
Net payments from (to) subsidiaries (3,330) 237 9,192
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (3,354) 324 8,918
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase (decrease) in commercial paper and
other notes payable (5,154) (399) 1,600
Proceeds from issuance of long-term debt 10,762 6,335 5,912
Retirement of long-term debt (6,106) (2,993) (3,760)
Proceeds from issuance of common stock 1,121 294 1,158
Common stock repurchased (4,716) (3,256) (4,858)
Cash dividends paid (3,632) (3,388) (3,199)
Other financing activities 763 (2) (485)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,962) (3,409) (3,632)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash held at bank subsidiaries (4,260) 4,301 12,863
Cash held at bank subsidiaries at January 1 20,233 15,932 3,069
- ---------------------------------------------------------------------------------------------------------------
Cash held at bank subsidiaries at December 31 $15,973 $ 20,233 $15,932
===============================================================================================================
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
118
Note 21 Performance by Geographic Area
Since the Corporation's operations are highly integrated, certain asset,
liability, income and expense amounts must be allocated to arrive at total
assets, total revenue, income (loss) before income taxes and net income (loss)
by geographic area. The Corporation identifies its geographic performance based
upon the business unit structure used to manage the capital or expense deployed
in the region as applicable. This requires certain judgements related to the
allocation of revenue so that revenue can be appropriately matched with the
related expense or capital deployed in the region. Translation gains, for those
units in hyperinflationary economies, net of hedging, totaled $2 million in 2001
compared to translation losses of $1 million in 2000 and translation gains of $4
million in 1999. These amounts, which are reported in other noninterest income,
are included in the table below:
Total revenue/(2)/
Total assets/(1)/ for the year ended Income (loss)
(Dollars in millions) Year at December 31 December 31 before income taxes Net income (loss)
------------------------------------------------------------------------------------------
Domestic/(3)/ 2001 $ 570,184 $ 32,187 $ 9,428 $ 6,315
2000 587,287 30,633 10,584 6,693
1999 30,038 11,164 7,159
- --------------------------------------------------------------------------------------------------------------------------
Asia 2001 17,231 921 411 276
2000 22,093 954 508 355
1999 1,104 535 367
- --------------------------------------------------------------------------------------------------------------------------
Europe, Middle East and Africa 2001 27,674 1,227 435 295
2000 25,799 995 533 363
1999 693 247 177
- --------------------------------------------------------------------------------------------------------------------------
Latin America and the Caribbean 2001 6,675 303 (157) (94)
2000 7,012 349 163 106
1999 471 269 179
- --------------------------------------------------------------------------------------------------------------------------
Total Foreign 2001 51,580 2,451 689 477
2000 54,904 2,298 1,204 824
1999 2,268 1,051 723
- --------------------------------------------------------------------------------------------------------------------------
Total Consolidated 2001 $ 621,764 $ 34,638 $ 10,117 $ 6,792
2000 642,191 32,931 11,788 7,517
1999 32,306 12,215 7,882
==========================================================================================================================
/(1)/ Total assets includes long-lived assets, which are primarily located in
the U.S.
/(2)/ There were no material intercompany revenues between geographic regions
for any of the periods presented.
/(3)/ Includes the Corporation's Canadian operations, which had total assets
of $2,849 and $3,938; total revenues of $121, $118 and $100; income
before income taxes of $4, $34 and $55; and net income of $0.3, $22 and
$30 at and for the years ended December 31, 2001, 2000 and 1999,
respectively.
B A N K O F A M E R I C A 2 0 0 1 A N N U A L R E P O R T
119