Portions of Annual Report

Management’s Discussion and Analysis of
Results of Operations and Financial Condition
Bank of America Corporation and Subsidiaries

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

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

The Corporation is headquartered in Charlotte, North Carolina, operates in 21 states and the District of Columbia, and has offices located in 30 countries. The Corporation provides a diversified range of banking and certain non-banking 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 .The following Management’s Discussion and Analysis of Results of Operations and Financial Condition should be read in conjunction with the Statistical Information beginning on page 56. When a note to the consolidated financial statements is referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition such as by the word “see,” then such note is incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Performance Overview

Net income totaled $9.2 billion, or $5.91 per diluted common share in 2002, compared to $6.8 billion, or $4.18 per diluted common share in 2001. The return on average common shareholders’ equity was 19.44 percent in 2002 compared to 13.96 percent in 2001. Goodwill was not expensed in 2002 as a result of a new rule issued by the Financial Accounting Standards Board (FASB). During 2001, we expensed $662 million or $0.38 per diluted common share associated with goodwill. Prior year results also included $1.25 billion, or $0.77 per diluted common share, of after-tax business exit charges in the third quarter of 2001.

In 2002, we saw continued strong financial performance in our Consumer and Commercial Banking business segment; however, a challenging economic environment for our market-sensitive businesses and credit quality issues in the Global Corporate and Investment Banking and Asset Management segments negatively impacted financial results.

In the fourth quarter of 2002, we increased our quarterly dividend to $0.64 per share bringing the 2002 total dividend to $2.44 per share. Our average total shareholder return (stock price appreciation and dividends paid) over the past three years was 15.9 percent, ranking us first in our peer group. Our one-year total shareholder return was 14.1 percent, second in our peer group. In addition, we repurchased 109 million shares and issued 50 million shares under employee plans in 2002, resulting in a net return of capital to our shareholders of $4.8 billion.

During 2002, we also experienced strong core business fundamentals in the areas of customer satisfaction and product/market performance that have created momentum for 2003.

Customer satisfaction continued to increase during the year, resulting in better retention and increased opportunities to deepen relationships with our customers. Delighted or highly satisfied customers, those who rate us a 9 or 10 on a 10-point scale, increased 10.4 percent from a year ago. An important factor driving the increase was a 24 percent reduction in errors reported by our customers.

On a net basis, we increased consumer checking accounts by approximately 528,000 in 2002 compared to a net increase of approximately 193,000 in 2001, driven by greater customer satisfaction, focused marketing and new products such as MyAccess Checking.™

Online banking is an important component in giving customers the flexibility to do banking in a fast and easy way, whenever it’s most convenient. Our success continued in 2002 as our active online banking customers reached more than 4.7 million by the end of the year, a 63 percent increase. Active bill pay customers more than doubled during the year to nearly 1.8 million. Monthly, our customers pay 9.9 million bills online totaling $2.7 billion.

First mortgage originations reached $88.1 billion, as low mortgage interest rates drove refinance volume, coupled with expanded market coverage from our deployment of LoanSolutions.^®Total consumer real estate originations, which include first and second mortgages and home equity lines, surpassed $100 billion in 2002. The introduction of LoanSolutions^®into our banking centers has expedited the mortgage application process, enabling 7,300 personal bankers to, in minutes, match customers with the right products to meet their needs.

Despite a challenging market, we made significant market share gains in convertible and common stock offerings, mergers and acquisitions advisory services, and asset-backed securities in Global Corporate and Investment Banking.

In December 2002, we agreed to purchase a 24.9 percent stake in Grupo Financiero Santander Serfin (GFSS), the subsidiary of Santander Central Hispano in Mexico, for $1.6 billion. GFSS is the third-largest and most profitable banking organization in Mexico. The transaction is expected to close in the first quarter of 2003.

Financial Highlights

For the Corporation in total, the increase in net interest income was more than offset by the decline in noninterest income. The impact of higher levels of securities and residential mortgage loans, higher levels of core deposit funding, the margin impact of higher trading-related assets, consumer loan growth and the absence of 2001 losses associated with auto lease financing had a positive effect on net interest income. The securitization of subprime real estate loans and reduced commercial loan levels negatively impacted net interest income relative to 2001. The net interest yield improved seven basis points from a year ago, primarily due to a favorable shift in loan mix, higher levels of core deposit funding, the absence of 2001 losses associated with auto lease financing and higher levels of securities and residential mortgage loans, partially offset by the securitization of subprime real estate loans and higher-trading related assets.

Noninterest income declined $777 million as market conditions in 2002 negatively impacted our market-sensitive revenue. This decline was partially offset by strong performance in consumer-based fee income and gains recognized in our whole mortgage loan portfolio created by the interest rate fluctuations that occurred in 2002. Other noninterest income included gains from whole mortgage loan sales of $500 million in 2002 compared to $20 million in 2001. Gains on sales of securities were $630 million, an increase of $155 million from 2001.

The provision for credit losses decreased $590 million, due in part to $395 million in 2001 associated with exiting the subprime real estate lending business. Net charge-offs were down $547 million to $3.7 billion, or 1.10 percent of average loans and leases, a decrease of six basis points. Decreases in commercial – domestic and consumer finance net charge-offs and $635 million of charge-offs in 2001 related to exiting the subprime real estate lending business were partially offset by increases in credit card and commercial – foreign net charge-offs.

Nonperforming assets were $5.3 billion, or 1.53 percent of loans, leases and foreclosed properties at December 31, 2002, a $354 million increase from December 31, 2001. Nonperforming assets in the large corporate portfolio within Global Corporate and Investment Banking drove the increase, partially offset by credit quality improvement in the commercial portfolio within Consumer and Commercial Banking.

Noninterest expense declined $2.3 billion, as reductions in personnel expense and professional fees were partially offset by increased data processing and marketing expenses. Noninterest expense in 2001 included $1.3 billion of business exit costs, $662 million in goodwill amortization expense and $334 million of litigation expenses in fourth quarter 2001. Excluding these items in 2001, noninterest expense was relatively unchanged compared to the prior year.

Salaries expense declines were partially offset by increased employee benefit costs, which largely resulted from higher healthcare costs and the $69 million impact of a change in the expected long-term rate of return on plan assets to 8.5 percent for the Bank of America Pension Plan. Incentive compensation, primarily in the Global Corporate and Investment Banking business, declined consistent with reductions in market-sensitive revenues. In the fourth quarter of 2002, we also recorded a $128 million severance charge related to outsourcing and strategic alliances.

Reduced consulting and other professional fees reflected the increased use of in-house personnel for consulting and productivity-related activities. Data processing expense increases reflected the $45 million in costs associated with terminated contracts on discontinued software licenses in the third quarter of 2002 as well as higher volumes of online bill pay activity, check imaging and higher item processing and check clearing expenses. Marketing expense increased in 2002 as we expanded our advertising campaign. Advertising efforts primarily focused on card, mortgage, online banking and bill pay.

Income tax expense was $3.7 billion resulting in an effective tax rate of 28.8 percent. During 2002, we reached a settlement with the IRS generally covering tax years ranging from 1984 to 1999 but including returns as far back as 1971. As a result of this settlement, the Corporation recorded a $488 million reduction in income tax expense.

TABLE 1 Five-Year Summary of Selected Financial Data⁽¹⁾

(Dollars in millions, except per share information)	2002			2001			2000			1999			1998

Income statement
Net interest income	$	20,923		$	20,290		$	18,349		$	18,127		$	18,298
Noninterest income	13,571			14,348			14,582			14,179			12,189
Total revenue	34,494			34,638			32,931			32,306			30,487
Provision for credit losses	3,697			4,287			2,535			1,820			2,920
Gains on sales of securities	630			475			25			240			1,017
Noninterest expense	18,436			20,709			18,633			18,511			20,536
Income before income taxes	12,991			10,117			11,788			12,215			8,048
Income tax expense	3,742			3,325			4,271			4,333			2,883
Net income	9,249			6,792			7,517			7,882			5,165
Average common shares issued and outstanding (in thousands)	1,520,042			1,594,957			1,646,398			1,726,006			1,732,057
Average diluted common shares issued and outstanding (in thousands)	1,565,467			1,625,654			1,664,929			1,760,058			1,775,760

Performance ratios
Return on average assets	1.40		%	1.05		%	1.12		%	1.28		%	0.88		%
Return on average common shareholders’ equity	19.44			13.96			15.96			16.93			11.56
Total equity to total assets (at year end)	7.62			7.80			7.42			7.02			7.44
Total average equity to total average assets	7.19			7.49			7.02			7.55			7.67
Dividend payout ratio	40.07			53.44			45.02			40.54			50.18

Per common share data
Earnings	$	6.08		$	4.26		$	4.56		$	4.56		$	2.97
Diluted earnings	5.91			4.18			4.52			4.48			2.90
Cash dividends paid	2.44			2.28			2.06			1.85			1.59
Book value	33.49			31.07			29.47			26.44			26.60

Average balance sheet
Total loans and leases	$	336,819		$	365,447		$	392,622		$	362,783		$	347,840
Total assets	662,401			649,547			671,573			616,838			584,487
Total deposits	371,479			362,653			353,294			341,748			345,485
Long-term debt	60,207			64,638			65,338			52,619			45,098
Trust preferred securities	5,838			4,984			4,955			4,955			4,871
Common shareholders’equity	47,552			48,609			47,057			46,527			44,467
Total shareholders’equity	47,613			48,678			47,132			46,601			44,829

Risk-based capital ratios (at year end)
Tier 1 capital	8.22		%	8.30		%	7.50		%	7.35		%	7.06		%
Total capital	12.43			12.67			11.04			10.88			10.94
Leverage ratio	6.29			6.56			6.12			6.26			6.22

Market price per share of common stock
Closing	$	69.57		$	62.95		$	45.88		$	50.19		$	60.13
High	77.08			65.54			61.00			76.38			88.44
Low	53.98			45.00			36.31			47.63			44.00

⁽¹⁾ As a result of the adoption of SFAS 142 on January 1, 2002, the Corporation no longer amortizes goodwill. Goodwill amortization expense was $662, $635, $635 and $633 in 2001, 2000, 1999 and 1998, respectively.

Supplemental Financial Data

In managing our business, we use certain non-GAAP (generally accepted accounting principles) performance measures and ratios, including financial information on an operating basis, shareholder value added, taxable-equivalent net interest income and core net interest income. We also calculate certain measures, such as the net interest yield and the efficiency ratio, on a taxable-equivalent basis. Other companies may define or calculate supplemental financial data differently. See Table 2 for supplemental financial data and corresponding reconciliations to GAAP financial measures for the five most recent years.

Supplemental financial data presented on an operating basis is a non-GAAP basis of presentation that excludes exit, merger and restructuring charges. Table 2 includes earnings, earnings per share, shareholder value added, return on assets, return on equity, efficiency ratio and dividend payout ratio presented on an operating basis. Management believes that the exclusion of the exit, merger and restructuring charges provides a meaningful period-to-period comparison and is more reflective of normalized operations.

Shareholder value added (SVA) is a key non-GAAP measure of performance used in managing our growth strategy orientation and that strengthens our focus on generating long-term growth and shareholder value. SVA is used in measuring performance of our different business units and is an integral component for allocating resources. Each business segment has a goal for growth in SVA reflecting the individual segment’s business and customer strategy. Investment resources and initiatives are aligned with these SVA growth goals during the planning and forecasting process. Investment, relationship and profitability models all have SVA as a key measure to support the implementation of SVA growth goals. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. Cash basis earnings is net income adjusted to exclude amortization of intangibles. The charge for the use of capital is calculated by multiplying 12 percent (management’s estimate of the shareholders’ minimum required rate of return on capital invested) by average total common shareholders’ equity at the corporate level and by average allocated equity at the business segment level. Equity is allocated to the business segments using a risk-adjusted methodology for each segment’s credit, market, country and operational risk. In 2002, we did not make any significant changes to the methodology used to allocate the cost of capital. Effective January 2003, the Corporation will charge 11 percent for the use of capital. Management believes that this decrease better reflects the changes in investors’ expected returns in a lower growth rate environment. SVA increased 22 percent to $3.8 billion in 2002 compared to the prior year, due to both the $547 million increase in operating cash basis earnings and the $1.1 billion reduction in average common shareholders’ equity. For additional discussion of SVA, see Business Segment Operations beginning on page 30.

Management reviews net interest income on a taxable-equivalent basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a taxable-equivalent basis is also used in the calculation of the efficiency ratio and the net interest yield. The efficiency ratio, which is calculated by dividing noninterest expense by total revenue, measures how much it costs to produce one dollar of revenue. Net interest income on a taxable-equivalent basis is also used in our business segment reporting.

Additionally, management reviews “core net interest income,” which adjusts reported net interest income on a taxable-equivalent basis for the impact of trading-related activities and loans originated by the Corporation and sold into revolving credit card and commercial securitizations. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as the Corporation takes on the role of servicer and records servicing income and gains or losses on securitizations, where appropriate. For purposes of internal analysis, management combines trading-related net interest income with trading account profits, as discussed in the Global Corporate and Investment Banking business segment discussion beginning on page 34, as trading strategies are evaluated based on total revenue.

Core net interest income increased $344 million in 2002. This increase was driven by the impact of higher levels of securities and residential mortgage loans, higher levels of core deposit funding, consumer loan growth and the absence of 2001 losses associated with auto lease financing. The securitization of the subprime real estate loans and reduced commercial loan levels negatively impacted core net interest income relative to 2001.

Core average earning assets decreased $13.1 billion in 2002, primarily due to exiting unprofitable commercial loan relationships, the decline in subprime real estate loans (net of the remaining securitization) and auto lease financing, partially offset by higher levels of securities and residential mortgage loans.

The core net interest yield increased 20 basis points in 2002, mainly due to a favorable shift in loan mix, higher levels of core deposit funding, the absence of 2001 losses associated with auto lease financing and higher levels of securities and residential mortgage loans, partially offset by the impact of the securitization of subprime real estate loans.

TABLE 2 Supplemental Financial Data and Reconciliations to GAAP Financial Measures

(Dollars in millions, except per share information)	2002			2001			2000			1999			1998

Operating basis^(1,2)
Operating earnings	$	9,249		$	8,042		$	7,863		$	8,240		$	6,490
Operating earnings per share	6.08			5.04			4.77			4.77			3.73
Diluted operating earnings per share	5.91			4.95			4.72			4.68			3.64
Shareholder value added	3,760			3,087			3,081			3,544			2,056
Return on average assets	1.40		%	1.24		%	1.17		%	1.34		%	1.11		%
Return on average common shareholders’equity	19.44			16.53			16.70			17.70			14.54
Efficiency ratio (taxable-equivalent basis)	52.55			55.47			54.38			55.30			61.15
Dividend payout ratio	40.07			45.13			43.04			38.77			39.90

Net interest income
Taxable-equivalent basis data
Net interest income	$	21,511		$	20,633		$	18,671		$	18,342		$	18,461
Total revenue	35,082			34,981			33,253			32,521			30,650
Net interest yield	3.75		%	3.68		%	3.20		%	3.45		%	3.69		%
Efficiency ratio (taxable-equivalent basis)	52.55			59.20			56.03			56.92			67.00
Core basis data⁽³⁾
Core net interest income	$	20,063		$	19,719		$	18,546		$	18,583		n/a
Average core earnings assets	455,200			468,317			506,898			472,329			n/a
Core net interest yield	4.41		%	4.21		%	3.66		%	3.93		%	n/a

Reconciliation of net income to operating earnings
Net income	$	9,249		$	6,792		$	7,517		$	7,882		$	5,165
Exit charges	—			1,700			—			—			—
Merger and restructuring charges	—			—			550			525			1,795
Related income tax benefit	—			(450		)	(204		)	(167		)	(470		)
Operating earnings	9,249			8,042			7,863			8,240			6,490

Reconciliation of EPS to operating EPS
Earnings per share	$	6.08		$	4.26		$	4.56		$	4.56		$	2.97
Exit charges, net of tax benefit	—			0.78			—			—			—
Merger and restructuring charges, net of tax benefit	—			—			0.21			0.21			0.76
Operating earnings per share		6.08		5.04			4.77			4.77			3.73

Reconciliation of diluted EPS to diluted operating EPS
Diluted earnings per share	$	5.91		$	4.18		$	4.52		$	4.48		$	2.90
Exit charges, net of tax benefit	—			0.77			—			—			—
Merger and restructuring charges, net of tax benefit	—			—			0.20			0.20			0.74
Diluted operating earnings per share	5.91			4.95			4.72			4.68			3.64

Reconciliation of net income to shareholder value added
Net income	$	9,249		$	6,792		$	7,517		$	7,882		$	5,165
Amortization expense	218			878			864			888			902
Exit charges, net of tax benefit	—			1,250			—			—			—
Merger and restructuring charges, net of tax benefit	—			—			346			358			1,325
Capital charge	(5,707		)	(5,833		)	(5,646		)	(5,584		)	(5,336		)
Shareholder value added	3,760			3,087			3,081			3,544			2,056

⁽¹⁾ Operating basis excludes exit, merger and restructuring charges. Exit charges in 2001 represented provision for credit losses of $395 and noninterest expense of $1,305, both of which were related to the exit of certain consumer finance businesses. Merger and restructuring charges were $550, $525 and $1,795 in 2000, 1999 and 1998, respectively.

⁽²⁾ As a result of the adoption of SFAS 142 on January 1, 2002, the Corporation no longer amortizes goodwill. Goodwill amortization expense was $662, $635, $635 and $633 in 2001, 2000, 1999 and 1998, respectively.

⁽³⁾ Information not available for 1998.

Complex Accounting Estimates and Principles

The Corporation’s significant accounting principles are described in Note 1 of the consolidated financial statements and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Some of the Corporation’s accounting principles require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to individual transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements.

The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. Management has used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income.

Allowance for Credit Losses

The allowance for credit losses is management’s best estimate of the probable incurred credit losses in the lending portfolio and is discussed in further detail in the Credit Risk Management section beginning on page 41. The Corporation performs periodic and systematic detailed reviews of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These reviews include loss forecast modeling based on historical experiences and current events and conditions as well as individual loan valuations. In each analysis, numerous portfolio and economic assumptions are made.

Principal Investing

Principal Investing within the Equity Investments segment, discussed in more detail in Business Segment Operations, is comprised of a diversified portfolio of investments in privately held and publicly traded companies at all stages, from start-up to buyout. Some of these companies may need access to additional cash to support their long-term business models. Market conditions as well as company performance may impact whether such funding is sourced from private investors or via capital markets. As of December 31, 2002, we had non-public investments of $5.4 billion.

Trading Assets and Liabilities

The Corporation engages in a variety of trading-related activities that are either for clients or our own accounts. The management process related to the trading positions is discussed in detail in the Market Risk Management section beginning on page 49. Positions recorded on the balance sheet are valued at fair value and the majority of the positions are based on or derived from actively quoted markets prices or rates. Valuations for trading account assets and liabilities are obtained from actively traded markets where valuations can be obtained from quoted market prices or observed transactions. The most significant factor affecting the valuation of trading assets or liabilities is the lack of liquidity, where trading in a position or a market sector has slowed significantly or ceased and quotes may not be available. Liquidity situations generally are triggered by the market’s perception of credit regarding a single company or a specific market sector, for example airlines or sub-prime. In these instances, valuations are derived from the limited market information available and other factors, principally from reviewing the issuer’s financial statements and changes in credit ratings made by one or more of the rating agencies. Valuations for derivative assets and liabilities not traded on an exchange, or over the counter, are obtained using mathematical models that require inputs of external rates and prices to generate continuous yield or pricing curves used to value the position. This “pricing risk” is greater for positions with either option-based or longer dated attributes where inputs are not readily available and model-based extrapolations of rate and price scenarios are used to generate valuations. In these situations, this risk is mitigated through the use of valuation adjustments.

Accrued Taxes

Management estimates tax expense based on the amount it expects to owe various tax authorities. Taxes are discussed in more detail in Note 18 of the consolidated financial statements. Accrued taxes represent the net estimated amount due or to be received from taxing authorities. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position.

Goodwill

The nature and accounting for goodwill is discussed in detail in Notes 1 and 9 of the consolidated financial statements. Assigned goodwill is subject to a market value recoverability test that records a loss if the value of goodwill is less than the amount recorded in the financial statements. Estimating the value of goodwill requires assumptions regarding future cash flows and comparable business valuations.

Accounting Standards

Our accounting for hedging activities, securitizations and off-balance sheet special purpose entities requires significant judgment in interpreting and applying the accounting principles related to these matters. 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 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 – a replacement of FASB Statement No. 125” (SFAS 140) and the determination of when certain special purpose entities should be consolidated in the Corporation’s balance sheet and statement of income. For a more complete discussion of these principles, see Notes 1, 5 and 8 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 72 through 111. See Note 1 for Recently Issued Accounting Pronouncements.

Business Segment Operations

We provide to our clients both traditional banking and nonbanking financial products and services through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments.

In managing our four business segments, we evaluate results using both financial and non-financial measures. Financial measures consist primarily of revenue, net income and shareholder value added. Non-financial measures include, but are not limited to, market share and customer satisfaction. Total revenue includes net interest income on a taxable-equivalent basis and noninterest income. The net interest income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net interest income also reflects an allocation of net interest income generated by certain assets and liabilities used in our asset and liability management (ALM) activities.

From time to time we refine the business segment strategy and reporting. As we continued to refine our business segment strategy in 2001, we moved a portion of our thirty-year mortgage portfolio from the Consumer and Commercial Banking segment to Corporate Other. The mortgages designated solely for ALM activities were moved to Corporate Other to reflect the fact that management decisions regarding this portion of the mortgage portfolio are driven by corporate ALM considerations and not by the business segments’ management. In the first quarter of 2002, certain commercial lending businesses in

the process of liquidation were transferred from Consumer and Commercial Banking to Corporate Other, and in the third quarter of 2001, certain consumer finance businesses in the process of liquidation (subprime real estate, auto leasing and manufactured housing) were transferred from Consumer and Commercial Banking to Corporate Other.

See Note 20 of the consolidated financial statements for additional business segment information, reconciliations to consolidated amounts and information on Corporate Other. Certain prior period amounts have been reclassified between segments and their components to conform to the current period presentation.

Table 3 presents selected financial information for the business segments for 2002 and 2001.

TABLE 3 Business Segment Summary

	Total Corporation						Consumer and Commercial Banking⁽¹⁾						Asset Management⁽¹⁾

(Dollars in millions)	2002			2001			2002			2001			2002			2001

Net interest income⁽²⁾	$	21,511		$	20,633		$	14,538		$	13,243		$	774		$	742
Noninterest income⁽³⁾	13,571			14,348			8,451			7,815			1,625			1,733

Total revenue	35,082			34,981			22,989			21,058			2,399			2,475
Provision for credit losses	3,697			4,287			1,805			1,582			318			121
Noninterest expense⁽⁴⁾	18,436			20,709			11,558			11,410			1,473			1,537
Net income	9,249			6,792			6,088			4,953			404			522
Shareholder value added	3,760			3,087			4,054			3,286			113			312
Return on average equity	19.4		%	14.0		%	33.1		%	25.9		%	16.3		%	23.5		%
Efficiency ratio (taxable-equivalent basis)	52.6			59.2			50.3			54.2			61.4			62.1
Net interest yield (taxable-equivalent basis)	3.75			3.68			5.05			5.01			3.24			2.91
Average:
Total loans and leases	$	336,819		$	365,447		$	183,341		$	178,116		$	23,251		$	24,381
Total assets	662,401			649,547			312,011			290,038			25,409			26,764
Total deposits	371,479			362,653			283,261			266,035			12,030			11,897
Common equity/Allocated equity	47,552			48,609			18,406			19,159			2,474			2,223
Year end:
Total loans and leases	342,755			329,153			187,068			182,158			22,263			24,692
Total assets	660,458			621,764			339,959			304,558			24,891			26,811
Total deposits		386,458			373,495			297,653			280,962			13,305			12,208

	Global Corporate and Investment Banking⁽¹⁾						Equity Investments⁽¹⁾						Corporate Other

(Dollars in millions)	2002			2001			2002			2001			2002			2001

Net interest income⁽²⁾	$	4,992		$	4,727		$	(152	)	$	(150	)	$	1,359		$	2,071
Noninterest income⁽³⁾	3,841			4,859			(281		)	179			(65		)	(238		)

Total revenue	8,833			9,586			(433		)	29			1,294			1,833
Provision for credit losses⁽⁵⁾	1,209			1,292			7			8			358			1,284
Noninterest expense^(4,5)	4,977			5,369			94			214			334			2,179
Net income (loss)	1,723			1,956			(329		)	(115		)	1,363			(524		)
Shareholder value added	421			519			(582		)	(388		)	(246		)	(642		)
Return on average equity	15.5		%	14.9		%	(15.5		)%	(4.9		)%	n/m			n/m
Efficiency ratio (taxable-equivalent basis)	56.4			56.0			n/m			n/m			n/m			n/m
Net interest yield (taxable-equivalent basis)	2.48			2.45			n/m			n/m			n/m			n/m
Average:
Total loans and leases	$	62,934		$	82,321		$	440		$	477		$	66,853		$	80,152
Total assets	241,325			232,366			6,179			6,583			77,477			93,796
Total deposits	64,769			66,983			—			13			11,419			17,725
Common equity/Allocated equity⁽⁶⁾	11,121			13,164			2,123			2,365			13,428			11,698
Year end:
Total loans and leases	57,569			68,215			437			433			75,418			53,655
Total assets	219,938			195,817			6,064			6,315			69,606			88,263
Total deposits		67,216			66,532			—			—			8,284			13,793

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 in 2001 included the $83 SFAS 133 transition adjustment net loss which was included in trading account profits. The components of the transition adjustment by segment were a gain of $4 for Consumer and Commercial Banking, a gain of $19 for Global Corporate and Investment Banking and a loss of $106 for Corporate Other.

⁽⁴⁾ The Corporation adopted SFAS 142 on January 1, 2002. Accordingly, no goodwill amortization was recorded in 2002.

⁽⁵⁾ Corporate Other includes exit charges consisting of provision for credit losses of $395 and noninterest expense of $1,305 related to the exit of certain consumer finance businesses in the third quarter of 2001.

⁽⁶⁾ Corporate Other also included unallocated capital of $12.5 billion and $9.4 billion in 2002 and 2001, respectively.

Consumer and Commercial Banking

Consumer and Commercial Banking provides a wide range of products and services to individuals, small businesses and middle market companies through multiple delivery channels.

The major components of Consumer and Commercial Banking are Banking Regions, Consumer Products and Commercial Banking.

Banking Regions serves consumer households and small businesses in 21 states and the District of Columbia through its network of 4,208 banking centers, 13,013 ATMs, telephone, and Internet channels on www.bankofamerica.com. Banking Regions provides a wide range 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. It also provides 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 also includes Premier Banking, which provides high-touch banking and investment solutions to affluent clients with balances up to $3 million.

Consumer Products provides specialized services such as the origination, fulfillment and servicing of residential mortgage loans, issuance and servicing of credit cards, direct banking via telephone and Internet, student lending and certain insurance services. Consumer Products also provides retail finance and floorplan programs to marine, RV and auto dealerships.

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

Consumer and Commercial Banking drove our financial results in 2002 as total revenue increased $1.9 billion, or nine percent. Net income rose $1.1 billion, or 23 percent. The increase in net income and lower economic capital, as a result of reductions in commercial loan levels in specific industries, drove the 23 percent increase in shareholder value added.

Throughout the year our Consumer and Commercial Banking strategy has been to attract, retain and deepen customer relationships. A critical component of that strategy includes improvement of customer satisfaction. Customers reporting that they were delighted with their service increased 10.4 percent during the year. As a result of this improvement, we added 528,000 net new checking accounts for the year, which exceeded our goal, compared to 193,000 for 2001. Access to our services through on-line banking which saw a 63 percent increase in customers, our network of domestic banking centers, ATMs, telephone and internet channels, and our product innovations such as an expedited mortgage application process through LoanSolutions^®were factors contributing to revenue growth and success with our customers.

A favorable shift in loan mix from commercial to credit card and residential mortgage, overall loan and deposit growth and the results of ALM activities contributed to the $1.3 billion, or ten percent, increase in net interest income. These increases were partially offset by the compression of deposit interest margins.

Net interest income was positively impacted by the $5.2 billion, or three percent, increase in average loans and leases compared to 2001. Average on-balance sheet credit card outstandings increased 29 percent, primarily due to balance transfers, the reduction in voluntary attrition and an increase in new advances on previously securitized balances that are recorded on the Corporation’s balance sheet after the revolving period of the securitization. Average residential mortgage loans increased 38 percent primarily driven by the refinancing environment that began in the fourth quarter of 2001. Offsetting these increases was a decline in average commercial loans of 12 percent driven by liquidations, lower hold levels, reduced utilization of existing facilities and soft loan demand.

Deposit growth also positively impacted net interest income. Higher consumer deposit balances due to significant growth in net checking accounts, increased money market accounts due to an emphasis on total relationship balances and customer preference for stable investments in these uncertain economic times drove the $17.2 billion, or seven percent, increase in average deposits to $283.3 billion in 2002.

Significant Noninterest Income Components

(Dollars in millions)	2002		2001

Service charges	$	4,070	$	3,779
Card income	2,620		2,422
Mortgage banking income		751		593

Increases in service charges, card income and mortgage banking income drove the $636 million, or eight percent, increase in noninterest income. These increases were partially offset by a decrease in trading account profits within Consumer Products. In 2002, a trading loss of $24 million was recorded compared to a trading gain of $165 million in the prior year. The amount recorded in trading account profits represents the net mark-to-market adjustments on certain mortgage banking assets and the related derivative instruments. See Note 1 of the consolidated financial statements for additional information on mortgage banking assets.

Both corporate and consumer service charges attributed to the $291 million, or eight percent, increase in service charges. Corporate service charges increased $163 million, or 17 percent, as customers opted to pay service charges rather than maintain additional deposit balances in the lower rate environment. Increased customer account

charges, partially offset by the impact of new and existing customers choosing accounts with lower or no service charges drove the $128 million, or five percent, increase in consumer service charges.

Increases in both debit and credit card income drove the eight percent increase in card income. The increase in debit card income within Banking Regions of $143 million, or 22 percent, was driven by increases in purchase volumes. Higher annual, late, cash advance and overlimit fees partially offset by the impact of reduced securitized balances attributed to the $55 million, or three percent, increase in credit card income within Consumer Products. Card income included activity from the securitized portfolio of $168 million and $193 million in 2002 and 2001, respectively. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. New advances under these previously securitized balances will be recorded on our balance sheet after the revolving period of the secu-ritization, which has the effect of increasing loans on our balance sheet and increasing net interest income and charge-offs, with a corresponding reduction in noninterest income.

An increase in net mortgage production income driven by higher mortgage sales, partially offset by declines in servicing volume due to portfolio run-off were the main contributors to the $158 million, or 27 percent, increase in mortgage banking income within Consumer Products. An increase in total production of first mortgage loans originated of $11.5 billion to $88.1 billion in 2002, is primarily attributed to the current refinancing boom and the successful deployment of LoanSolutions.^®These factors more than offset our decision in the second quarter of 2001 to exit the correspondent loan origination channel in an effort to focus on the retail channel. We believe the retail channel allows us to be more customer focused and deepen our relationships with our customers as well as being more profitable. First mortgage loan origination volume was composed of approximately $60.0 billion of retail loans and $28.1 billion of wholesale loans in 2002. Retail first mortgage origination volume was 68 percent of total volume in 2002 compared to 61 percent in 2001. An increase in mortgage prepayments resulting from the significant decrease in mortgage interest rates during 2002 drove the $28.4 billion decline in the average portfolio of first mortgage loans serviced to $283.0 billion in 2002. Total consumer real estate originations surpassed $100 billion in 2002. Mortgage banking assets declined $1.8 billion or 46 percent from a year ago also due to higher prepayments in the lower interest rate environment.

Higher provision in the credit card loan portfolio, partially offset by a decline in provision within Commercial Banking resulted in a $223 million, or 14 percent, increase in the provision for credit losses. The increase in credit card provision was primarily attributable to the increase in average on-balance sheet outstandings, portfolio seasoning of outstandings from new account growth in 2000 and 2001 and a weaker economic environment. Seasoning refers to the length of time passed since an account was opened. The reduction in the Commercial Banking provision was driven by the reduction in average commercial loans and leases and improved credit quality during 2002.

Noninterest expense increased slightly, primarily attributable to increases in processing/support costs (which included increases related to e-commerce and debit card processing), marketing and promotional fees, data processing expense and personnel expense as well as the change in assumptions for the Bank of America Pension Plan. The increase in marketing and promotional fees for the segment was primarily due to increased advertising and marketing investments in mortgage, online banking and bill pay and card products. The increase in data processing expense was primarily due to costs associated with terminated contracts on discontinued software licenses and due to an increase in online bill payers. An increase in employee benefits expense for the segment and an increase in incentive compensation due to higher mortgage production drove the increase in personnel expense. See Note 16 of the consolidated financial statements for additional discussion of the change in assumption for the Bank of America Pension Plan. These increases were partially offset by the elimination of goodwill amortization. Goodwill amortization expense in 2001 was $452 million.

Asset Management

Asset Management includes the Private Bank, Banc of America Investments and Banc of America Capital Management. The Private Bank’s goal is to assist individuals and families in building and preserving their wealth by providing investment, fiduciary, comprehensive credit and banking expertise to high-net-worth clients. Banc of America Investments provides investment, securities and financial planning services and includes both the full-service network of investment advisors and an extensive on-line investor service. Banc of America Capital Management is an 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, provides investment solutions, offers institutional separate accounts and wrap programs and provides advice to clients through asset allocation expertise and software.

Despite the 23 percent drop in the S&P 500 Index from a year ago, total revenue only declined $76 million, or three percent, in 2002. Net income decreased $118 million, or 23 percent. The decrease in net income drove the 64 percent decline in shareholder value added.

During 2002, Asset Management grew its distribution capabilities to better serve the financial needs of its clients across the franchise, surpassing its goal of increasing the number of advisors by more than 20 percent. In addition, we continue to enhance the financial planning tools used to assist clients with their financial goals, and these financial planning tools have received industry recognition in the market place.

Client Assets

	December 31

(Dollars in billions)	2002		2001

Assets under management	$	310.3	$	314.2
Client brokerage assets	90.9		99.4
Assets in custody	46.6		46.9

Total client assets	$	447.8	$	460.5

Assets under management, which consist largely of mutual funds, equities and bonds, generate fees based on a percentage of their market value. Compared to the prior year, assets under management remained relatively flat, as the decline in equity funds due to the weakened economic environment was partially offset by an increase in money market and other short-term fixed income funds. Client brokerage assets, a source of commission revenue, decreased $8.5 billion, or nine percent, compared to the prior year. Client brokerage assets consist largely of investments in bonds, mutual funds, annuities and equities. Assets in custody represent trust assets managed for customers. Trust assets encompass a broad range of asset types including real estate, private company ownership interest, personal property and investments.

Net interest income increased $32 million, or four percent, primarily due to results of ALM activities, partially offset by the impact of declines in loan balances and loan yields. Average loans and leases declined $1.1 billion, or five percent.

Significant Noninterest Income Components

(Dollars in millions)	2002		2001

Asset management fees⁽¹⁾	$	1,087	$	1,129
Brokerage income	435		450

Total investment and brokerage services	$	1,522	$	1,579

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

The increase in net interest income was offset by a $108 million, or six percent, decline in noninterest income. This decline was primarily due to a decrease in investment and brokerage services activities, which reflected the current market environment. Declines in personal asset management fees and brokerage income more than offset an increase in mutual fund fees.

Provision expense increased $197 million, driven principally by the charge-off of one large credit in the Private Bank.

The elimination of goodwill amortization of $51 million and lower revenue-related incentive compensation of $44 million were the primary drivers of the $64 million, or four percent, decrease in noninterest expense. These decreases were partially offset by increased expenses related to the growth of the segment’s distribution capabilities.

Global Corporate and Investment Banking

Global Corporate and Investment Banking provides a broad range 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 30 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, structured finance and trade services.

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 includes the Corporation’s investment banking activities and risk management products. 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 as well as 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 Global Investment Banking.

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 and is a primary dealer in the U.S. as well as in several international locations.

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

Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and our corporate clients manage their operations and cash flows on a local, regional, national and global level.

Total revenue within Global Corporate and Investment Banking declined $753 million, or eight percent, primarily driven by a decline in trading–related revenue. Net income decreased $233 million, or 12 percent. The decline in cash basis earnings, partially offset by lower economic capital due to reductions in loan levels, drove the 19 percent decline in shareholder value added.

Net interest income increased by $265 million, or six percent, as a result of higher net interest income from trading related activities and the results of ALM activities. Partially offsetting this increase were lower levels of commercial loans. Average loans and leases declined $19.4 billion, or 24 percent to $62.9 billion.

Significant Noninterest Income Components

(Dollars in millions)	2002		2001

Service charges	$	1,170	$	1,130
Investment and brokerage services	636		473
Investment banking income	1,481		1,526
Trading account profits		830		1,818

Noninterest income declined $1.0 billion, or 21 percent, due to a sharp decline in trading account profits and a decline in investment banking income, partially offset by increases in investment and brokerage services and service charges. Service charges increased four percent to $1.2 billion as many corporate customers chose to pay higher fees rather than increase deposit balances in the lower rate environment. Investment and brokerage services increased 35 percent to $636 million primarily driven by a shift to commissions based on a fixed rate rather than a variable spread. Commissions based on a fixed rate are recorded in investment and brokerage services while those based on variable spread are recorded in trading account profits.

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

Trading-related Revenue in Global Corporate and Investment Banking

(Dollars in millions)	2002		2001

Net interest income	$	1,970	$	1,609
Trading account profits	830		1,818

Total trading-related revenue	$	2,800	$	3,427

Revenue by product
Foreign exchange	$	530	$	541
Interest rate	886		923
Credit⁽¹⁾	914		887
Equities	384		906
Commodities	86		170

Total trading-related revenue	$	2,800	$	3,427

⁽¹⁾ Credit includes credit fixed income, credit derivatives and hedges of credit exposure.

Trading-related revenue decreased $627 million in 2002, as the $988 million decrease in trading account profits was partially offset by a $361 million increase in the net interest income. The overall decrease was primarily due to a decline in revenue from equity products of $522 million, which was attributable to a slowdown in market activities and a shift to commissions based on a fixed rate rather than a variable spread. Revenue from commodities contracts also contributed to the decline with a decrease of $84 million, attributable to prior year gains that resulted from the prior year’s volatile markets.

Investment Banking Income in Global Corporate and Investment Banking

(Dollars in millions)	2002		2001

Investment banking income
Securities underwriting	$	721	$	796
Syndications	427		395
Advisory services	288		251
Other	45		84

Total	$	1,481	$	1,526

Overall, investment banking fees were strong relative to another year of declining market conditions. Market share gains were achieved in nearly all debt and equity capital raising services with our most significant market share gains in high grade originations and convertible bond offerings. These market share gains served to minimize the decline of $45 million, or three percent, in investment banking income. The market for securities underwriting continued to decline, resulting in a $75 million decrease in securities underwriting fees, which was partially offset by increases in market share gains. Despite a smaller market for syndication fees, we continued to increase market share, which drove an increase in syndication fees of $32 million. Advisory services income increased $37 million, primarily due to increases in fees from restructuring Clients’ balance sheets.

The adverse economic environment in 2001 continued throughout 2002. While provision expense declined in 2002, we continued to be impacted by elevated loss levels, including sporadic, large borrower defaults. Declining loan levels and higher than normal recoveries softened the negative impact of the weakened economic environment. In addition to credit losses reflected in provision expense, included in other income in 2002 were losses from writedowns of approximately $82 million related to partnership interests in leveraged leases to the airline industry.

Noninterest expense declined by $392 million, or seven percent, driven by lower market-based compensation and the elimination of goodwill amortization. Goodwill amortization expense in 2001 was $117 million.

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

Equity Investments

Equity Investments includes Principal Investing, which is comprised of a diversified portfolio of investments in privately held and publicly traded companies at all stages, from start-up to buyout. Investments are made on both a direct and indirect basis in the U.S. and overseas. Direct investing activity focuses on advising portfolio companies on strategic directions and providing access to the Corporation’s global resources. Indirect investments represent passive limited partnership commitments to funds managed by experienced third party private equity investors who act as general partners. Equity Investments also includes the Corporation’s strategic alliances and investment portfolio.

For 2002, both revenue and net income in Principal Investing decreased substantially, primarily due to higher Principal Investing impairment charges. The equity investment portfolio in Principal Investing remained relatively flat at $5.7 billion in 2002.

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

Equity Investment Gains in Principal Investing

(Dollars in millions)	2002			2001

Cash gains	$	432		$	425
Impairments	(708		)	(335		)
Fair value adjustments	(10		)	(40		)

Total	$	(286	)	$	50

Noninterest income primarily consists of equity investment gains (losses). Weakness in equity markets in 2002 and a $140 million gain in the strategic investments portfolio in the first quarter of 2001 related to the sale of an interest in the Star Systems ATM network were the primary drivers for the decline in equity investment gains (losses). Impairments recorded in both 2002 and 2001 were driven by continuing depressed levels of economic activity across many sectors and a lack of liquidity in the private or public equity markets which were compounded in 2001 by the terrorist attack on September 11. The Corporation recognized a reduction in values of certain equity positions primarily within the technology, media and telecom portfolios as well as value adjustments across many other industries both domestically and internationally.

Risk Management

Overview

Our corporate governance structure enables us to manage all major aspects of our business through an integrated planning and review process that includes strategic, financial, associate and risk planning. We derive our revenue from assuming and managing customer risk for profit. Through a robust governance structure, risk and return is evaluated to produce sustainable revenue, to reduce earnings volatility and increase shareholder value. Our business exposes us to four major risks: liquidity, credit, market and operational.

Liquidity risk is the inability to accommodate liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations at reasonable market rates. Credit risk is the inability of a customer to meet its repayment or delivery obligations. Market risk is the fluctuation in asset values caused by changes in market prices and yields. Operational risk is the potential for loss resulting from events involving people, processes, technology, legal issues, external events, execution, regulatory or reputation.

Board Committees

Our governance structure begins with our Board of Directors. The Board of Directors evaluates risk through the Chief Executive Officer (CEO) and three Board committees:

• Finance Committee reviews market, credit, liquidity and operational risk

• Asset Quality Committee reviews credit risk

• Audit Committee reviews scope and coverage of external and corporate audit activities

Three Lines of Defense

Management has established control processes and procedures to align risk-taking and risk management throughout our organization. These control processes and procedures are designed around “three lines of defense”: lines of business; Risk Management joined by other units such as Finance and Legal; and Corporate Audit.

The lines of business are responsible for identifying, quantifying, mitigating and managing all risks. Except for trading-related business activities within Global Corporate Investment Banking, interest rate risk associated with our business activities is managed centrally in the Corporate Treasury function. Line of business management makes and executes the business plan, which puts it closest to the changing nature of risks and therefore best able to take actions to manage and mitigate those risks. Our management processes, structures and policies help us comply with laws and regulations and provide clear lines of sight for decision-making and accountability. Wherever practical, we attempt to house decision-making authority as close to the customer as possible.

The Risk Management organization translates approved business plans into approved limits, approves requests for changes to those limits, approves transactions as appropriate and works closely with business units to establish and monitor risk parameters. Each of the four business segments has a Risk Executive assigned to it who is responsible for oversight for all risks of the line of business.

Corporate Audit provides an independent assessment of our management systems and internal control systems. Corporate Audit activities are designed to provide reasonable assurance that resources are adequately protected; significant financial, managerial and operating information is complete, accurate, and reliable; and employees’ actions are in compliance with Corporate policies, standards, procedures, and applicable laws and regulations.

Senior Management Committees

To ensure our risk management goals and objectives are accomplished, oversight of our risk-taking and risk management activities is conducted through three senior management committees.

The Risk and Capital Committee (RCC) establishes long-term strategy and short-term operating plans. RCC also establishes the risk appetite through corporate performance measures, capital allocations, aggregate risk levels, and overall capital planning. RCC reviews actual performance to plan and actual risk incurred to forecasted risk levels, including information regarding credit, market and operational risk.

The Asset and Liability Committee (ALCO), a subcommittee of the Finance Committee, reviews portfolio hedging used for managing liquidity, market and credit portfolio risks as well as interest rate risk inherent in our balance sheet and trading risk inherent in our customer and proprietary trading portfolio. ALCO approves Value at Risk (VAR) limits for various trading activities in the Corporation.

The Credit Risk Committee (CRC) establishes corporate credit practices and limits, including industry and country concentration limits, approval requirements and exceptions. CRC also reviews business asset quality results versus plan, portfolio management, hedging results and the adequacy of the allowance for credit losses.

Risk Management Controls

We use various controls to manage risks at the line of business level and corporate-wide. For example, our planning and forecasting process facilitates analysis of results versus plan and provides early indication of unplanned risk levels. Various line of business risk committees and forums are comprised of line personnel, Risk Management and other groups responsible for the internal control infrastructure (i.e. Finance, Legal, Compliance, Tax and/or Corporate Audit). Limits, the amount of exposure that may be taken in a product, relationship, region or industry, are set based on metrics thereby aligning our risk goals with those of each line of business. Models are used to estimate market and net interest income sensitivity. Modeling is used to estimate both expected and unexpected credit losses for each product and line of business. We employ hedging strategies to reduce concentrations and improve portfolio granularity and to manage interest rate risk in the portfolio. We have continued to strengthen the linkage between the associate performance management process and individual compensation to help associates work toward corporate wide goals. Finally, compliance plays a significant role in aiding our business units in risk management.

Formal processes used in managing risk only represent one side of the equation. Corporate culture and the actions of our associates are critical to effective risk management. Through our recently updated Code of Ethics, we set a high standard for our associates. The Code of Ethics provides a framework for all of our associates to conduct themselves with the highest integrity in the delivery of their product or service to our customers.

The following sections, Liquidity Risk Management, Credit Risk Management beginning on page 41, Market Risk Management beginning on page 49 and Operational Risk Management beginning on page 53, address in more detail the specific procedures, measures and analyses of the four categories of risk that we manage.

Liquidity Risk Management

Liquidity Risk

Liquidity is the ongoing ability to accommodate liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations through generally unconstrained access to funding at reasonable market rates. Liquidity management involves maintaining ample and diverse funding capacity, liquid assets and other sources of cash to accommodate fluctuations in asset and liability levels due to business shocks or unanticipated events.

We manage liquidity at two primary levels. The first level is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second level is the liquidity of the banking subsidiaries. The management of liquidity at both levels is essential because the parent company and banking subsidiaries each have different funding needs and sources and each are subject to certain regulatory guidelines and requirements. The Finance Committee is responsible for establishing our liquidity policy as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis, both of which may be delegated to ALCO. Corporate Treasury is responsible for planning and executing our funding activities and strategy.

A primary objective of liquidity risk management is to provide a planning mechanism for unanticipated changes in the demand or need of liquidity created by customer behavior or capital market conditions. In order to achieve this objective, liquidity management and business unit activities are managed consistent with a strategy of funding stability, flexibility and diversity. We emphasize maximizing and preserving customer deposits and other customer-based funding sources. Deposit rates and levels are monitored, and trends and significant changes are reported to ALCO and the Finance Committee. Deposit marketing strategies are reviewed for consistency with our liquidity policy objectives. Asset securitization also enhances funding diversity and stability and is considered a critical source of contingency funding.

We develop and maintain contingency funding plans that separately address the parent company and banking subsidiaries liquidity. These plans evaluate market-based funding capacity under various levels of market conditions and specify actions and procedures to be implemented under liquidity stress. Further, these plans address alternative sources of liquidity, measure the overall ability to fund our operations and define roles and responsibilities for effectively managing liquidity through a problem period.

Our borrowing costs and ability to raise funds are directly impacted by our credit ratings and changes thereto. The credit ratings of the Corporation and Bank of America, N.A. are reflected in the table below.

TABLE 4 Credit Ratings

	Bank of America Corporation			Bank of America, N.A.

	Commercial Paper	Senior Debt	Subordinated Debt	Short-Term	Long-Term

Moody’s	P-1	Aa2	Aa3	P-1	Aa1
S & P	A-1	A+	A	A-1+	AA-
Fitch, Inc.	F1+	AA-	A+	F1+	AA

Primary sources of funding for the parent company include dividends received from its banking subsidiaries and proceeds from the issuance of senior and subordinated debt, commercial paper and equity. Primary uses of funds for the parent company include repayment of maturing debt and commercial paper, share repurchases, dividends paid to shareholders and subsidiary funding.

Parent company liquidity is maintained at levels sufficient to fund holding company and non-bank affiliate operations during various stress scenarios in which access to normal funding sources is disrupted. The primary measure used in assessing the parent company’s liquidity is “Time to Required Funding” in a stress environment. This measure assumes that the parent company is unable to generate funds from debt or equity issuance, receives no dividend income from subsidiaries, and no longer pays dividends to shareholders. Projected liquidity demands are met with available liquidity until the liquidity is exhausted. Under this scenario, the amount of time which elapses before the current liquid assets are exhausted is considered the Time to Required Funding. ALCO approves the target range set for this metric and monitors adherence to the target. In order to remain in the target range, management uses the Time to Required Funding measurement to determine the timing and extent of future debt issuances and other actions.

Primary sources of funding for the banking subsidiaries include customer deposits, wholesale funding and asset securitizations and sales. Primary uses of funds for the banking subsidiaries include repayment of maturing obligations and growth in the core and discretionary asset portfolios, including loan demand. Our discretionary portfolio consists of securities, certain residential mortgages held for asset and liability management purposes, and our swap portfolio.

ALCO regularly reviews the funding plan for the banking subsidiaries and focuses on maintaining prudent levels of wholesale borrowing. Also for the banking subsidiaries, expected wholesale borrowing capacity over a 12-month horizon compared to current outstandings is evaluated using a variety of business environments. These environments have differing earnings performance, customer relationship and ratings scenarios. Funding exposure related to our role as liquidity provider to certain off-balance sheet financing entities is also measured under a stress scenario. In this measurement, ratings are downgraded such that the off-balance sheet financing entities are not able to issue commercial paper and backup facilities that we provide are drawn upon. In addition, potential draws on credit facilities to issuers with ratings below a certain level are analyzed to assess potential funding exposure.

Our primary business activities allow us to obtain funds from our customers in many ways and require us to provide funds to our customers in many different forms. A key element of our success is the ability to balance the cash provided from our deposit base and the capital markets against cash used in our activities.

Our customers’ demand for loans and deposits can be seen by assessing our average balance sheet. One ratio used to monitor trends is the “loan to domestic deposit” (LTD) ratio. Our LTD ratio trend is positive evidence of our improving liquidity position. The ratio was 97 percent at December 31, 2002. Just two years ago, our LTD ratio was 126 percent. The following provides information regarding our deposit and funding activities and needs, followed by a discussion of our customer lending activity and needs.

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

TABLE 5 Average Balance Sheet

(Dollars in millions)	2002		2001


Assets
Time deposits and other short-term investments	$	10,038	$	6,723
Fed funds sold and reverse repos	45,640		35,202
Trading account assets	79,562		66,418
Securities	75,298		60,372
Loans and leases	336,819		365,447
Other assets	115,044		115,385

Total assets	$	662,401	$	649,547


Liabilities and equity
Domestic interest-bearing deposits	$	225,464	$	215,171
Foreign interest-bearing deposits	36,549		49,952
Short-term borrowings	104,153		92,476
Trading account liabilities	31,600		29,995
Debt and trust preferred securities	66,045		69,622
Noninterest-bearing deposits	109,466		97,529
Other liabilities	41,511		46,124
Shareholders’equity	47,613		48,678

Total liabilities and equity	$	662,401	$	649,547

Deposits and Other Funding Sources

Deposits, a key source of funding, increased in 2002. We typically categorize our deposits into either core or market-based deposits. Core deposits, which are generally customer-based, are an important stable, low-cost funding source and typically react more slowly to interest rate changes than market-based deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest-bearing deposits. Our core deposits were up seven percent from a year ago. The increase was due to significant growth in net checking accounts, increased money market accounts due to an emphasis on total relationship balances and customer preference for stable investments in these uncertain economic times. The decline in consumer CDs and IRAs was primarily driven by a change in product mix to money market and other deposit accounts. Market-based deposit funding was down from a year ago as we were able to utilize more core deposits to fund loans and other assets. Deposits on average represented 56 percent of total sources of funds during both 2002 and 2001.

TABLE 6 Average Deposits

(Dollars in millions)	2002		2001

Deposits by type
Domestic interest-bearing:
Savings	$	21,691	$	20,208
NOW and money market accounts	131,841		114,657
Consumer CDs & IRAs	67,695		74,458
Negotiable CDs & other time deposits	4,237		5,848

Total domestic interest-bearing	225,464		215,171

Foreign interest-bearing:
Banks located in foreign countries	15,464		23,397
Governments & official institutions	2,316		3,615
Time, savings & other	18,769		22,940

Total foreign interest-bearing	36,549		49,952

Total interest-bearing	262,013		265,123

Noninterest-bearing	109,466		97,529

Total deposits	$	371,479	$	362,652

Core and market-based deposits
Core deposits	$	330,693	$	306,852
Market-based deposits	40,786		55,800

Total deposits	$	371,479	$	362,652

Additional sources of funds include short-term borrowings, long-term debt and shareholders’ equity. Short-term borrowings, a relatively low-cost source of funds, were up as proceeds from repurchase agreements were used to fund asset growth. Long-term debt of $9.4 billion was issued during the year. Repayments of long-term debt were $14.5 billion in 2002.

Obligations and Commitments

The Corporation has contractual obligations to make future payments on debt and lease agreements. These types of obligations are more fully discussed in Notes 11, 12 and 13 of the consolidated financial statements.

Table 7 presents total debt and lease obligations at December 31, 2002.

TABLE 7 Debt and Lease Obligations

	December 31, 2002

(Dollars in millions)	Due in 1 Year or Less		Thereafter		Total

Debt and capital leases⁽¹⁾	$	8,219	$	52,926	$	61,145
Trust preferred securities⁽¹⁾	—		6,031		6,031
Operating lease obligations	1,166		6,212		7,378

Total	$	9,385	$	65,169	$	74,554

⁽¹⁾ Includes principal payments only.

Many of our lending relationships contain both funded and unfunded elements. The funded portion is represented by the average balance sheet levels. The unfunded component of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Loan commitments declined as a reduction in commercial commitments of $13.2 billion was partially offset by a $4.4 billion increase in consumer commitments.

These commitments, as well as guarantees, are more fully discussed in Note 13 of the consolidated financial statements.

The following table summarizes the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date.

TABLE 8 Credit Extension Commitments

	December 31, 2002

(Dollars in millions)	Expires in 1 Year or Less		Thereafter		Total

Loan commitments⁽¹⁾	$	98,101	$	114,603	$	212,704
Standby letters of credit and financial guarantees	20,002		10,835		30,837
Commercial letters of credit	2,674		435		3,109

Legally binding commitments	120,777		125,873		246,650
Credit card lines	73,779		—		73,779

Total	$	194,556	$	125,873	$	320,429

⁽¹⁾ Equity commitments of $2.2 billion and $2.5 billion primarily related to obligations to fund existing venture capital equity investments were included in loan commitments at December 31, 2002 and 2001, respectively.

Off-Balance Sheet Financing Entities

In addition to traditional lending, we also support our customers’ financing needs by facilitating their access to the commercial paper markets. These markets provide an attractive, lower-cost financing alternative for our customers. Our customers sell assets, such as high-grade trade or other receivables or leases, to a commercial paper financing entity, which in turn issues high-grade short-term commercial paper that is collateralized by the assets sold. Additionally, some customers receive the benefit of commercial paper financing rates related to certain lease arrangements. We facilitate these transactions and collect fees from the financing entity for the services it provides (including administration, trust services and marketing the commercial paper).

We receive fees for providing combinations of liquidity, standby letters of credit (SBLCs) or similar loss protection commitments, and derivatives to the commercial paper financing entities. These forms of asset support are senior to the first layer of asset support provided by customers through over-collateralization. The rating agencies require that a certain percentage of the commercial paper entity’s assets be supported by both the seller’s over-collateralization and our SBLC in order to receive their respective investment rating. The SBLC would be drawn on only when the over-collateralization provided by the seller is not sufficient to cover losses of the related asset. Liquidity commitments made to the commercial paper entity are designed to fund scheduled redemptions of commercial paper if there is a market disruption or the new commercial paper cannot be issued to fund the redemption of the maturing commercial paper. The liquidity facility has the same legal priority as the commercial paper. We do not enter into any other form of guarantee with these entities.

We manage our credit risk on these commitments by subjecting them to our normal underwriting and risk management processes. At December 31, 2002 and 2001, the Corporation had off-balance sheet liquidity commitments and SBLCs to these financing entities of $34.2 billion and $36.1 billion, respectively. Substantially all of these liquidity commitments and SBLCs mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these financing entities were approximately $484 million and $256 million for 2002 and 2001, respectively.

We generally do not purchase any commercial paper issued by these financing entities other than during the underwriting process when we act as issuing agent nor do we purchase any of the commercial paper for our own account. We do not consolidate these types of entities based on the accounting guidance contained in ARB No. 51, “Consolidated Financial Statements”, SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries”, EITF Issue No. D-14, “Transactions Involving Special Purpose Entities”, and EITF Issue No. 90-15, “Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions”. Derivative instruments related to these entities are marked to market through the statement of income. SBLCs and liquidity commitments are accounted for pursuant to SFAS No. 5, “Accounting for Contingencies”(SFAS 5), and are discussed further in Note 13 to the consolidated financial statements.

In January 2003, the FASB issued a new rule that addresses off-balance sheet financing entities. As a result, we expect that we will have to consolidate our multi-seller asset backed conduits beginning in the third quarter of 2003, as required by the rule. As of December 31, 2002, the assets of these entities were approximately $25.0 billion. The actual amount that will be consolidated is dependent on actions taken by the Corporation and our customers between December 31, 2002 and the third quarter of 2003. Management is assessing alternatives with regards to these entities including restructuring the entities and/or alternative sources of cost-efficient funding for our customers and expects that the amount of assets consolidated will be less than the $25.0 billion due to these actions and those of our customers. Revenues from administration, liquidity, letters of credit and other services provided to these entities were approximately $121 million in 2002 and $125 million in 2001. The new rule requires that for entities to be consolidated that those assets be initially recorded at their carrying amounts at the date the requirements of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value the first date the new rule applies. Any difference between the net amount added to the Corporation’s balance sheet and the amount of any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change. Had we adopted the rule in 2002, there would have been no material impact to net income. See Note 1 of the consolidated financial statements for a discussion regarding the new rule in 2003.

In addition, to control our capital position, diversify funding sources and provide customers with commercial paper investments, from time to time we will sell assets to off-balance sheet commercial paper entities. The commercial paper entities are special purpose entities that have been isolated beyond our reach or that of our creditors, even in the event of bankruptcy or other receivership. Assets sold to the entities consist primarily of high-grade corporate or municipal bonds, collateralized debt obligations and asset-backed securities. These entities issue collateralized commercial paper to third party market participants and passive derivative instruments to us. Assets sold to the entities typically have an investment rating ranging from Aaa/AAA to Aa/AA. We may provide liquidity, SBLCs or similar loss protection commitments to the entity, or we may enter into a derivative with the entity in which we assume certain risks. The liquidity facility and derivative have the same legal standing with the commercial paper.

The derivative provides interest rate, currency and a pre-specified amount of credit protection to the entity in exchange for the commercial paper rate. This derivative is provided for in the legal documents and helps to alleviate any cash flow mismatches. In some cases, if an asset’s rating declines below a certain investment quality as evidenced by its investment rating or defaults, we are no longer exposed to the risk of loss. At that time, the commercial paper holders assume the risk of loss. In other cases, we agree to assume all of the credit exposure related to the referenced asset. Legal documents for each entity specify asset quality levels that require the entity to automatically dispose of the asset once the asset falls below the specified quality rating. At the time the asset is disposed, we are required to reimburse the entity for any credit-related losses depending on the pre-specified level of protection provided.

We also receive fees for the services we provide to the entities, and we manage any credit or market risk on commitments or derivatives through normal underwriting and risk management processes. Derivative activity related to these entities is included in Note 5 of the consolidated financial statements. At December 31, 2002 and 2001, the Corporation had off-balance sheet liquidity commitments, SBLCs and other financial guarantees to the financing entities of $4.5 billion and $4.3 billion, respectively. Substantially all of these liquidity commitments, SBLCs and other financial guarantees mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these entities were $37 million and $49 million in 2002 and 2001, respectively.

We generally do not purchase any of the commercial paper issued by these types of financing entities other than during the underwriting process when we act as issuing agent nor do we purchase any of the commercial paper for our own account. We do not consolidate these types of entities because they are considered Qualified Special Purpose Entities as defined in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Derivative instruments related to these entities are marked to market through the statement of income. SBLCs and liquidity commitments are accounted for pursuant to SFAS 5 and are discussed further in Note 13 to the consolidated financial statements.

Because we provide liquidity and credit support to these financing entities, our credit ratings and changes thereto will affect the borrowing cost and liquidity of these entities. In addition, significant changes in counterparty asset valuation and credit standing may also affect the liquidity of the commercial paper issuance. Disruption in the commercial paper markets may result in our having to fund under these commitments and SBLCs discussed above. We manage these risks, along with all other credit and liquidity risks, within our policies and practices. See Notes 1 and 8 of the consolidated financial statements for additional discussion of off-balance sheet financing entities.

Capital Management

The final component of liquidity risk is capital management, which focuses on the level of shareholders’ equity. Period-end shareholders’ equity increased from a year ago, driven by net income, shares issued under employee plans and unrealized gains on securities. These increases were offset by share repurchases and dividends paid. The net impact of share repurchases and issuances under employee plans to earnings per share was $0.11 per share in 2002. We anticipate that future share repurchases will at least equal shares issued under our various stock option plans. See Note 14 of the consolidated financial statements for additional disclosures related to repurchase programs.

As a regulated financial services company, we are governed by certain regulatory capital requirements. The regulatory Tier 1 Capital Ratio was 8.22 percent at December 31, 2002, a decrease of eight basis points from a year ago. The minimum Tier 1 Ratio required is four percent. At December 31, 2002, the Corporation was classified as well-capitalized for regulatory purposes, the highest classification.

Our current estimate of the possible impact on our capital ratios of the FASB’s new rule on accounting for off-balance sheet financing entities, as previously discussed, is 25-30 basis points. For additional information on the regulatory capital ratios along with a description of the components of risk-based capital, capital adequacy requirements and prompt corrective action provisions, see Note 15 of the consolidated financial statements.

On October 23, 2002, the Board approved a $0.04 per share, or seven percent, increase in the quarterly common dividend. This increase brings the common dividend to $0.64 per share for the fourth quarter of 2002 and $2.44 for the year ended December 31, 2002.

The Corporation from time to time sells put options on its common stock to independent third parties. The put option program was undertaken with the goal of partially offsetting the cost of share repurchases. At December 31, 2002, there were 6.5 million put options outstanding with exercise prices ranging from $61.86 per share to $70.72 per share, which expire from February 2003 to July 2003. Should the outstanding options at December 31, 2002 be exercised in the future, the per-share cost to the Corporation, net of the premium already received, will range from $54.87 to $64.07, or a weighted average of $58.68. The closing market price of the Corporation’s common stock on December 31, 2002 was $69.57 per share.

Economic capital is allocated to business units based on an assessment of risk. The allocated amount of capital varies according to the characteristics of the individual product offerings within the business units. Capital is allocated separately based on the following types of risk: credit, market and operational. Average total economic capital allocated to business units was $35.1 billion in 2002 and $39.2 billion in 2001. Average unallocated economic capital (not allocated to business units) was $12.5 billion in 2002 and $9.4 billion in 2001.

Credit Risk Management

Credit risk arises from the inability of a customer to meet its repayment obligation. Credit risk exists in our outstanding loans and leases, derivative assets, letters of credit and financial guarantees, acceptances and unfunded loan commitments. For additional information on derivatives and credit extension commitments, see Notes 5 and 13 of the consolidated financial statements. Credit exposure (defined to include loans and leases, letters of credit, derivatives, acceptances, assets held for sale and binding unfunded commitments) associated with a client represents the maximum loss potential arising from all these product classifications. Our commercial and consumer credit extension and review procedures take into account credit exposures that are both funded and unfunded.

We manage credit risk associated with our business activities based on the risk profile of the borrower, repayment source and the nature of underlying collateral given current events and conditions. At a macro level we segregate our loans in two major groups – commercial and consumer.

Commercial Portfolio Credit Risk Management

Commercial credit risk management begins with an assessment of the credit risk profile of an individual borrower (or counterparty) based on an analysis of the borrower’s financial position in conjunction with current industry and economic or geopolitical trends. As part of the overall credit risk assessment of a borrower, each commercial credit exposure is assigned a risk rating and is subject to approval based on existing credit approval standards. Risk ratings are a factor in determining the level of assigned economic capital and the allowance for credit losses. Credit decisions are determined by the lines of business with approvals from Risk Management. In making decisions regarding credit we consider risk rating, collateral, and industry and single name concentration limits while also balancing the total client relationship and SVA.

Credit exposures are continuously monitored by both lines of business and Risk Management personnel for possible adjustment if there has been a change in a borrower/counterparty’s ability to perform under its obligations. Additionally, we manage the size of our credit exposure through syndications, loan sales, credit derivatives and securitizations. These activities play an important role in reducing credit exposures where it has been determined that credit risk concentrations are unacceptable or for other risk mitigation purposes.

Banc of America Strategic Solutions, Inc. (SSI) is a wholly-owned subsidiary of the Corporation which manages problem asset resolution and the coordination of exit strategies, if applicable, including bulk sales, collateralized debt obligations and other resolutions of domestic and international commercial distressed assets. For additional discussion, see “Problem Loan Management” on page 48.

Consumer Portfolio Credit Risk Management

Credit risk management for consumer credit occurs throughout a borrower’s credit cycle. Statistical techniques are used to establish product pricing, risk appetite, operating processes and metrics to balance risks and rewards appropriately. Consumer exposure is grouped by product and other attributes for purposes of evaluating credit risk. Statistical models are built using detailed behavioral and demographic information from external sources such as credit bureaus as well as extensive internal historical experience. These models form the foundation of our consumer credit risk management process and are used extensively to determine approve/decline credit decisions, collections management, portfolio management, adequacy of the allowance for credit losses and economic capital allocation for credit risk.

Table 9 presents outstanding loans and leases.

TABLE 9 Outstanding Loans and Leases⁽¹⁾

	December 31

(Dollars in millions)	2002					2001

Commercial – domestic	$	105,053	30.6		%	$	118,205	35.9		%
Commercial – foreign	19,912		5.8			23,039		7.0
Commercial real estate – domestic	19,910		5.8			22,271		6.8
Commercial real estate – foreign	295		0.1			383		0.1

Total commercial	145,170		42.3			163,898		49.8

Residential mortgage	108,197		31.6			78,203		23.8
Home equity lines	23,236		6.8			22,107		6.7
Direct/Indirect consumer	31,068		9.1			30,317		9.2
Consumer finance	8,384		2.4			12,652		3.9
Credit card	24,729		7.2			19,884		6.0
Foreign consumer	1,971		0.6			2,092		0.6

Total consumer	197,585		57.7			165,255		50.2

Total	$	342,755		100.0	%	$	329,153		100.0	%

⁽¹⁾ The Corporation used credit derivatives to provide credit protection (single name credit default swaps, basket credit default swaps and CLOs) for loan counterparties in the amounts of $16.7 billion and $14.5 billion at December 31, 2002 and 2001, respectively.

Concentrations of Credit Risk

Portfolio credit risk is evaluated toward a goal that concentrations of credit exposure do not result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various ways including industry, product, geography and customer relationship. Risk due to borrower concentrations is more prevalent in the commercial portfolio and is categorized into various perspectives within the domestic and foreign commercial portfolio. We review non-real estate commercial loans by industry and real estate loans by geographic location and by property type. Additionally, within our international portfolio, we also evaluate borrowings by region and by country. Tables 10, 11 and 12 summarize these concentrations.

While we have experienced improvement in certain portfolios during these uncertain times, most notably in the Commercial Banking loan portfolio, we also have witnessed how the negative economic environment has impacted certain industries, particularly in our large corporate loan portfolio. Such industries have and are continuing to experience heightened distress, particularly the telecommunications, media, merchant power and merchant energy sectors (included in the utilities and energy industries) and domestic scheduled airline sector (included in the transportation industry). Further, the poor global economic environment has negatively impacted various regions and certain countries continue to experience significant distress, specifically Brazil and Argentina.

Table 10 reflects significant industry non-real estate outstanding commercial loans and leases by Standard and Poor’s industry classifications.

TABLE 10 Significant Industry Non-Real Estate Outstanding Commercial Loans and Leases

	December 31

(Dollars in millions)	2002		2001

Retailing	$	10,165	$	10,651
Diversified financials	8,344		7,916
Leisure and sports, hotels and restaurants	8,139		9,193
Transportation	8,030		9,508
Materials	7,972		10,399
Food, beverage and tobacco	7,335		8,543
Capital goods	7,088		9,691
Commercial services and supplies	6,449		7,637
Media	5,911		5,244
Utilities	5,590		4,860
Education and government	5,206		4,936
Health care equipment and services	3,912		4,809
Telecommunications services	3,105		4,560
Energy	3,076		3,800
Consumer durables and apparel	2,591		3,725
Religious and social organizations	2,426		2,213
Banks	1,881		2,999
Insurance	1,616		2,113
Technology hardware and equipment	1,368		2,527
Food and drug retailing	1,344		1,603
Other⁽¹⁾	23,417		24,317

Total	$	124,965	$	141,244

⁽¹⁾ Other includes $5,134 and $6,032 of loans outstanding to individuals and Trusts representing 1.5 percent and 1.8 percent of total loans outstanding at December 31, 2002 and 2001 respectively.

A measure of the risk diversification is the distribution of loans by loan size. Over 99 percent of the non-real estate outstanding commercial loans and leases are less than $50 million, representing 86 percent of total non-real estate outstanding commercial loans and leases.

Table 11 presents outstanding commercial real estate loans by geographic region and by property type. The amounts presented do not include outstanding loans and leases 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 outstandings presented do not include commercial loans secured by owner-occupied real estate. As depicted in the table, we believe the commercial real estate portfolio is well-diversified in terms of both geographic region and property type.

Over 99 percent of the commercial real estate loans outstanding are less than $50 million, representing 95 percent of total commercial real estate loan outstandings.

TABLE 11 Outstanding Commercial Real Estate Loans

	December 31

(Dollars in millions)	2002		2001

By Geographic Region⁽¹⁾

California	$	4,769	$	5,225
Southwest	2,945		3,239
Florida	2,424		2,399
Northwest	2,067		2,363
Midwest	1,696		1,688
Mid-Atlantic	1,332		1,430
Carolinas	1,324		1,472
Midsouth	1,166		1,276
Geographically diversified	1,075		1,950
Northeast	667		750
Other states	445		478
Non-US	295		384

Total	$	20,205	$	22,654


By Property Type
Office buildings	$	3,953	$	4,567
Apartments	3,556		3,797
Residential	3,153		3,157
Shopping centers/retail	2,400		2,754
Industrial/warehouse	1,884		2,011
Land and land development	1,307		1,501
Hotels/motels	853		1,186
Multiple use	718		694
Miscellaneous commercial	378		289
Unsecured	356		433
Other	1,352		1,881
Non-US	295		384

Total	$	20,205	$	22,654

⁽¹⁾ Distributions based on geographic location of collateral.

Foreign Portfolio

Table 12 sets forth total foreign exposure by region at December 31, 2002 and 2001. Total regional foreign exposure is defined to include credit exposure plus securities and other investments. Reported exposure includes both gross local country exposure and cross-border exposure. Gross local country exposure includes amounts payable to the Corporation by residents of the country 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 country exposures as allowed by the FFIEC. Cross-border exposure includes amounts payable to the Corporation by residents of countries outside of the country where the credit is booked, regardless of the currency in which the claim is denominated.

TABLE 12 Regional Foreign Exposure and Selected Emerging Markets Exposure⁽¹⁾

	Total Regional Foreign Exposure at December 31

(Dollars in millions)	2002		2001

Regional Foreign Exposure
Asia	$	13,912	$	14,546
Europe	43,034		40,087
Africa	80		128
Middle East	435		571
Latin America	3,915		6,371
Other⁽²⁾	8,709		9,447

Total	$	70,085	$	71,150

Selected Emerging Markets
Asia	$	10,296	$	11,301
Central and Eastern Europe	364		393
Latin America	3,915		6,371

Total	$	14,575	$	18,065

⁽¹⁾ Exposures for Asia and Latin America have been reduced by $12 and $763, respec- tively, at December 31, 2002, and $10 and $573, respectively, at December 31, 2001. Such amounts represent the fair value of U.S. Treasury securities held as collateral outside the country of exposure.

⁽²⁾ Other includes Canada, Australia, New Zealand, Bermuda, Cayman Islands and supranational entities.

Our total foreign exposure was $70.1 billion at December 31, 2002, a decrease of $1.1 billion from December 31, 2001. Our foreign exposure was concentrated in Western Europe, which accounted for $42.7 billion, or 61 percent of total foreign exposure. Growth in exposure in Western Europe in 2002 was across a broad base of diverse products and industries.

Foreign exposure to entities in countries defined as emerging markets was $14.6 billion, or 21 percent of total foreign exposure, with the bulk of the emerging markets exposure in Asia ($10.3 billion). The decrease in foreign exposure in Asia is primarily due to Hong Kong with a decrease of $451 million and India with a decrease of $407 million. The decrease in foreign exposure in Latin America is primarily due to Brazil with a decrease of $1.3 billion and Mexico with a decrease of $638 million.

The Corporation has been devoting particular attention to Argentina and Brazil, which have been significantly impacted by negative global economic pressure.

Throughout 2001, Argentina’s economy and political environmental deteriorated sharply, finally ending in December 2001 with the collapse of the Argentine peso. As a result of these events, at the end of 2001, the Argentine government defaulted on its obligations and during all of 2002, local companies faced serious difficulties servicing their debt. In response to the economic climate in Argentina, the Corporation reduced its credit exposure in the country in 2002 by $280 million to $465 million. Of that $465 million, $339 million represented traditional credit exposure (loans, letters of credit, etc.) predominantly to Argentine subsidiaries of foreign multinational corporations. Additional credit exposure was attributable to $62 million in Argentina government bonds. Net charge-offs in 2002 totaled $113 million. The allowance for credit losses associated with outstanding loans and leases related to Argentina was $154 million at December 31, 2002.

In response to uncertain economic conditions in Brazil, the Corporation has reduced its credit exposure by 53 percent to $1.2 billion at December 31, 2002. The decline was due to loan maturities and lower level of local issuer risk. Of this amount, $562 million represented traditional credit exposure (loans, letters of credit, etc.) and $290 million was Brazilian government securities. Derivatives exposure totaled $55 million. The allowance for credit losses related to Brazil consisted of $60 million related to traditional credit exposure. An additional $6 million is reserved for derivatives exposure.

Nonperforming Assets and Net Charge-offs

We routinely review the loan and lease portfolio to determine if any credit exposure should be placed on nonperforming status. An asset is placed on nonperforming status when it is determined that principal and interest are not expected to be fully collected in accordance with its contractual terms. Nonperforming asset levels, presented in Table 13, continue to be adversely affected by the weakened economic environment. Sales of nonperforming assets during 2002 totaled $543 million, comprised of $296 million of nonperforming commercial loans, $105 million of nonperforming residential mortgage loans and $142 million of foreclosed properties.

In 2001 and continuing in 2002 sporadic large single company events and issues in certain industries have impacted nonperform-ing assets and consequently our provision for credit losses. These losses resulted from a multitude of factors including business failures as a result of financial reporting fraud, the prolonged weak economic environment and industry specific issues. It is difficult to predict the timing of such event risk and as a consequence the timing and amount of loss potential is more difficult to estimate.

Nonperforming commercial – domestic loans decreased $342 million to 2.65 percent of commercial – domestic loans at December 31, 2002 from 2.64 percent at December 31, 2001. Nonperforming commercial – foreign loans increased $898 million to 6.83 percent of commercial – foreign loans at December 31, 2002 from 2.00 percent at December 31, 2001. The increase was primarily attributable to media and telecommunications services firms located in Western Europe and in Latin America.

Credit exposure to companies in the telecommunications service industry that were in bankruptcy at December 31, 2002 totaled $190 million, with associated reserves of $44 million. Net charge-offs associated with credit exposure to these telecommunications services companies were $105 million for 2002.

At December 31, 2002 and 2001, Argentine nonperforming loans were $278 million and $40 million, respectively. Nonperforming loans in Brazil were $90 million at December 31, 2002 compared to $2 million at December 31, 2001.

Within the consumer portfolio, nonperforming loans increased $54 million to $733 million, or 0.37 percent of consumer loans, at December 31, 2002 from $679 million or 0.41 percent at December 31, 2001, primarily due to higher levels of residential mortgage loans being held in the portfolio, partially offset by the sale of nonperforming residential mortgage loans during the first quarter of 2002.

The Corporation also had approximately $4 million and $48 million of troubled debt restructured loans at December 31, 2002 and 2001, respectively, that were accruing interest and were not included in nonperforming assets.

TABLE 13 Nonperforming Assets⁽¹⁾

	December 31

(Dollars in millions)	2002		2001

Commercial – domestic	$	2,781	$	3,123
Commercial – foreign	1,359		461
Commercial real estate – domestic	161		240
Commercial real estate – foreign	3		3

Total commercial	4,304		3,827

Residential mortgage	612		556
Home equity lines	66		80
Direct/Indirect consumer	30		27
Consumer finance	19		9
Foreign consumer	6		7

Total consumer	733		679

Total nonperforming loans	5,037		4,506

Foreclosed properties	225		402

Total nonperforming assets	$	5,262	$	4,908

⁽¹⁾ In 2002, $668 in interest income was contractually due on nonperforming loans and troubled debt restructured loans. Of this amount, $193 was actually recorded as interest income in 2002.

Table 14 presents the additions to and reductions in nonperforming assets in the commercial and consumer portfolios during 2002 and 2001.

TABLE 14 Nonperforming Assets Activity

(Dollars in millions)	2002			2001

Balance, January 1	$	4,908		$	5,457

Commercial
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties	4,963			4,797
Advances on loans	244			197

Total commercial additions	5,207			4,994

Reductions in nonperforming assets:
Paydowns, payoffs and sales	(2,171		)	(2,065		)
Returns to performing status	(149		)	(313		)
Charge-offs⁽¹⁾	(2,354		)	(2,289		)

Total commercial reductions	(4,674		)	(4,667		)

Total commercial net additions to nonperforming assets	533			327

Consumer
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties	1,694			2,723

Total consumer additions	1,694			2,723

Reductions in nonperforming assets:
Paydowns, payoffs and sales	(957		)	(881		)
Returns to performing status	(886		)	(1,360		)
Charge-offs⁽¹⁾	(107		)	(261		)
Transfers (to) from assets held for sale^(2,3)	77			(1,097		)

Total consumer reductions	(1,873		)	(3,599		)

Total consumer net reductions in nonperforming assets	(179		)	(876		)

Total net additions to (reductions in) nonperforming assets	354			(549		)

Balance, December 31	$	5,262		$	4,908

⁽¹⁾ Certain loan products, including commercial credit card, consumer credit card and consumer non-real estate loans, are not classified as nonperforming; therefore, the charge-offs on these loans are not included above.

⁽²⁾ Includes assets held for sale that were foreclosed and transferred to foreclosed properties.

⁽³⁾ Transfers in 2001 were primarily related to the exit of the subprime real estate lending business.

Commercial – domestic loans past due 90 days or more and still accruing interest were $223 million and $215 million at December 31, 2002 and 2001, respectively. Consumer loans past due 90 days or more and still accruing interest were $541 million and $459 million at December 31, 2002 and 2001, respectively.

As a matter of corporate practice, we do not discuss specific client relationships; however, due to the publicity and interest surrounding Enron Corporation and its related entities (Enron), we made an exception. In the fourth quarter of 2001, our total exposure to Enron was $503 million before a charge-off of $210 million, as well as a $21 million write-off of Enron securities related to a collateralized loan obligation. During 2002, the Corporation had an additional $48 million of charge-offs related to Enron. The Corporation’s exposure (after charge-offs) related to Enron was $185 million and $272 million at December 31, 2002 and 2001, respectively, of which $136 million and $184 million was secured. Nonperforming loans related to Enron were $159 million and $226 million at December 31, 2002 and 2001, respectively.

The Corporation also has other assets that represent possible credit risk. Included in Other Assets are loans held for sale and leveraged lease partnership interests of $13.8 billion and $387 million, respectively, at December 31, 2002 and $8.4 billion and $485 million, respectively, at December 31, 2001. Included in these balances are nonperforming loans held for sale and leveraged lease partnership interests of $118 million and $2 million, respectively, at December 31, 2002 and $1.0 billion and $0, respectively, at December 31, 2001.

The Corporation utilizes actual loan net charge-offs in its analysis of the adequacy of the allowance for credit losses. Net charge-offs are presented in Table 15.

Commercial – domestic loan net charge-offs decreased $478 million in 2002 compared to 2001, primarily due to lower domestic gross charge-offs in Global Corporate and Investment Banking and Commercial Banking and higher recoveries, partially offset by charge-offs related to one large credit in the Private Bank.

Commercial – foreign loan net charge-offs increased $313 million in 2002 compared to 2001, primarily due to charge-offs in emerging markets including Argentina, as well as in telecommunications services, media, and utilities industries in Western Europe.

Net charge-offs on consumer finance loans decreased $771 million in 2002 compared to 2001, primarily due to $635 million in exit-related charge-offs in the third quarter of 2001 as well as continued runoff in the portfolio.

Credit card net charge-offs increased $422 million to $1.1 billion in 2002 compared to 2001. The increase in net charge-offs was primarily a result of portfolio seasoning of outstandings from new account growth in 2000 and 2001, new advances on previously securitized balances, and a weaker economic environment. New advances under these previously securitized balances are recorded on our balance sheet after the revolving period of the securitization, which has the effect of increasing loans on our balance sheet, increasing net interest income and increasing charge-offs, with a corresponding reduction in noninterest income.

Allowance for Credit Losses

To help us identify credit risks and assess the overall collectibility of our lending portfolios, we conduct periodic and systematic detailed reviews. The allowance for credit losses represents management’s estimate of probable losses in the portfolio.

Within the allowance, reserves are allocated to each product type based on specific and formula components, as well as a general reserve. See Note 1 of the consolidated financial statements for additional discussion on the Corporation’s allowance for credit losses.

The specific component of the allowance for credit losses covers those commercial loans that are our nonperforming or impaired. An allowance is established when the discounted cash flows (or collateral value or observable market price) is lower than the carrying value of that loan. For purposes of computing the specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical loss experience for the respective product type and risk rating of the loan. In Table 17, this component of the allowance is characterized as commercial impaired.

The formula component of the allocated allowance covers performing commercial loans and leases, letters of credit and consumer loans. The allowance for commercial loans and letters of credit is established by credit type by analyzing historical loss experience, by internal risk rating, current economic conditions and performance trends within each portfolio segment. The formula component allowance for consumer loans is based on aggregated portfolio segment evaluations generally by credit product type. Loss forecast models are utilized for consumer products which consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies and credit scores. These components of the allowance are characterized as commercial non-impaired and total consumer, respectively, in Table 17.

A general portion of allowance for credit losses is maintained to cover uncertainties that affect our estimate of probable losses. These uncertainties include the imprecision inherent in the forecasting methodologies, certain industry and geographic concentrations (including global economic uncertainty) and exposures related to legally binding commitments that have not yet been drawn. Management assesses each of these components to determine the overall level of the general portion. The relationship of the general 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 specific, formula and general components.

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

Additions to the allowance for credit losses are made by charges to the provision for credit losses. Credit exposures (excluding derivatives) deemed to be uncollectible are charged against the allowance for credit losses. Table 15 presents a rollforward of the allowance for credit losses. Recoveries of previously charged off amounts are credited to the allowance for credit losses. The provision for credit losses was $3.7 billion and $4.3 billion for 2002 and 2001, respectively. The allowance for credit losses was $6.9 billion at December 31, 2002 and 2001. The allowance for credit losses as a percentage of total outstanding loans and leases was 2.00 percent at December 31, 2002 compared to 2.09 percent at December 31, 2001.

Table 15 presents the activity in the allowance for credit losses for 2002 and 2001.

TABLE 15 Allowance for Credit Losses

(Dollars in millions)	2002			2001

Balance, January 1	$	6,875		$	6,838
Loans and leases charged off

Commercial – domestic	(1,793		)	(2,120		)
Commercial – foreign	(566		)	(249		)
Commercial real estate – domestic	(45		)	(46		)

Total commercial	(2,404		)	(2,415		)

Residential mortgage	(56		)	(39		)
Home equity lines	(40		)	(32		)
Direct/Indirect consumer	(355		)	(389		)
Consumer finance⁽¹⁾	(333		)	(1,137		)
Credit card	(1,210		)	(753		)
Other consumer domestic	(57		)	(73		)
Foreign consumer	(5		)	(6		)

Total consumer	(2,056		)	(2,429		)

Total loans and leases charged off	(4,460		)	(4,844		)

Recoveries of loans and leases previously charged off
Commercial – domestic	322			171
Commercial – foreign	45			41
Commercial real estate – domestic	8			7

Total commercial	375			219

Residential mortgage	14			13
Home equity lines	14			13
Direct/Indirect consumer	145			139
Consumer finance	78			111
Credit card	116			81
Other consumer domestic	21			23
Foreign consumer	—			1

Total consumer	388			381

Total recoveries of loans and leases previously charged off	763			600

Net charge-offs	(3,697		)	(4,244		)

Provision for credit losses⁽²⁾	3,697			4,287
Other, net	(24		)	(6		)

Balance, December 31	$	6,851		$	6,875

Loans and leases outstanding at December 31	$	342,755		$	329,153
Allowance for credit losses as a percentage of loans and leases outstanding at December 31	2.00		%	2.09		%
Average loans and leases outstanding during the year	$	336,819		$	365,447
Net charge-offs as a percentage of average outstanding loans and leases during the year	1.10		%	1.16		%
Allowance for credit losses as a percentage of nonperforming loans at December 31	136.01			152.58
Ratio of the allowance for credit losses at December 31 to net charge-offs	1.85			1.62

⁽¹⁾ Includes $635 related to the exit of the subprime real estate lending business in 2001.

⁽²⁾ Includes $395 related to the exit of the subprime real estate lending business in 2001.

For reporting purposes, the Corporation allocates its allowance across products; however, the allowance is available to absorb all credit losses without restriction. Table 16 represents our current allocation by product type and Table 17 presents an allocation by component.

During the fourth quarter of 2002, the Corporation updated historic loss rate factors used in estimating the allowance for loan losses to incorporate more current information. The most significant result was a decrease in the allowance for commercial – domestic real estate and an increase in the allowance for commercial – domestic loans.

TABLE 16 Allocation of the Allowance for Credit Losses

	December 31

(Dollars in millions)	2002		2001

Commercial – domestic	$	2,392	$	1,974
Commercial – foreign	886		766
Commercial real estate – domestic	439		924
Commercial real estate – foreign	9		8

Total commercial	3,726		3,672

Residential mortgage	108		145
Home equity lines	49		83
Direct/Indirect consumer	361		367
Consumer finance	323		433
Credit card	1,031		821
Foreign consumer	9		10

Total consumer	1,881		1,859

General	1,244		1,344

Total	$	6,851	$	6,875

TABLE 17 Allocation of the Allowance for Credit Losses

	December 31

	2002					2001

(Dollars in millions)	Amount		Percent			Amount		Percent

Commercial non-impaired	$	2,807	41.0		%	$	2,909	42.3		%
Commercial impaired	919		13.4			763		11.1

Total commercial	3,726		54.4			3,672		53.4
Total consumer	1,881		27.5			1,859		27.0
General	1,244		18.2			1,344		19.5

Total	$	6,851		100	%	$	6,875		100	%

While the allowance for commercial credit losses remained relatively flat at $3.7 billion, individual product reserves changed as a result of updated reserve rates based on a review of performance trends and portfolio deterioration. Commercial–domestic reserves increased $418 million year-to-year to end at $2.4 billion on December 31, 2002. This reflects an increased reserve rate partially offset by a $13.2 billion decrease in loans between December 31, 2002 and December 31, 2001. Similarly, commercial-foreign reserves increased $120 million reflecting increased reserve rates due to portfolio deterioration and partially offset by a $3.1 billion decrease in the portfolio. Reserves for commercial real estate-domestic loans decreased $485 million from December 31, 2001 due to updated reserve rates based on portfolio performance and a loan portfolio reduction of $2.4 billion since December 31, 2001. Specific reserves on impaired loans increased $156 million in 2002 reflecting an increase in our investment in specific loans considered impaired which was $4.1 billion at December 31, 2002 compared to $3.9 billion at December 31, 2001. Commercial –domestic impaired loans declined $585 million to $2.6 billion at December 31, 2002 compared to December 31, 2001. Commercial – foreign impaired loans increased $854 million to $1.4 billion. Commercial real estate impaired loans decreased $81 million to $159 million.

The allowance for credit losses in the consumer portfolio was $1.9 billion at December 31, 2002, consistent with December 31, 2001. Growth in the credit card and residential mortgage portfolios was offset by the application of updated performance trends that decreased consumer real estate reserve rates. Management expects continued growth in the credit card portfolio.

General reserves at December 31, 2002 were $1.2 billion, down $100 million from December 31, 2001, representing approximately 18 percent of the total allowance for credit losses. Management reviewed and adjusted the margin of imprecision and the binding unfunded loan commitment components of the general reserve due to updated information and factors. Partially offsetting these adjustments were increases to industry concentration components.

Problem Loan Management

In 2001, the Corporation realigned certain problem loan management activities into a wholly-owned subsidiary, Banc of America Strategic Solutions, Inc. (SSI). SSI was established to better align the management of commercial loan credit workout operations. The Corporation believes that economic returns will improve with more effective and efficient management processes afforded a closely aligned end-to-end function. The Corporation believes that economic returns will be maximized by assisting borrowing companies in refinancing with other lenders or through the capital markets, facilitating the sale of entire borrowing companies or certain assets/subsidiaries, negotiating traditional restructurings using borrowing company cash flows to repay debts, selling individual assets in the secondary market when the market prices are attractive relative to assessed collateral values and by executing collateralized debt obligations or otherwise disposing of assets in bulk. From time to time, the Corporation may contribute or sell certain loans to SSI.

In September 2001, Bank of America, N.A. (BANA), a wholly-owned subsidiary of the Corporation, contributed to SSI, a consolidated subsidiary of BANA, commercial loans with a gross book balance of $3.2 billion in exchange for a class of preferred and for a class of common stock of SSI. For financial reporting under GAAP, the loan contribution was accounted for at carryover book basis as appropriate for entities under common control, and there was no change in the designation or measurement of the loans because the individual loan resolution strategies were not affected by the realignment or contribution. From time to time, management may identify certain loans to be considered for accelerated disposition. At that time, such loans or pools of loans would be redesignated as held for sale and remeasured at lower of cost or market.

The loan contribution was effected as an exchange for tax purposes. As is common in workout situations, the loans had a tax basis higher than their fair market value. Under the Internal Revenue Code (the Code), SSI received a carryover tax basis in the contributed loans. In addition, under the Code, the aggregate tax basis of the class of preferred and the class of common stock received in the exchange was equal to the basis of the loans contributed. Under the Code, the preferred stock’s allocated tax basis was equal to its fair market value and the common stock was allocated the remaining tax basis, resulting in a tax basis in excess of its fair market value and book basis. We took into account the tax loss which results from the difference in tax basis and fair market value, recognized on the sale of this class of common stock to an unrelated third party, as well as the carryover tax basis in the contributed loans. The Corporation believes that recognition of the tax loss continues to be appropriate.

During September 2002, commercial loans with a gross book balance of $2.7 billion were sold to SSI. For tax purposes, under the Code, the sale was treated as a taxable exchange. The tax and accounting treatment of this sale had no financial statement impact on the Corporation because the sale was a transfer among entities under common control, and there was no change in the individual loan resolution strategies.

Market Risk Management

Market risk is the potential loss due to adverse changes in market prices and yields. Market risk is inherent in most of the Corporation’s operating positions and/or activities including customers’ loans, deposits, securities and long-term debt (interest rate risk), trading assets and liability positions and derivatives. Our market-sensitive assets and liabilities are generated through our customer and proprietary trading operations, asset/liability management activities and to a lesser degree from our mortgage banking activities. Loans and deposits generated through our traditional banking business generate interest income and expense, respectively, and the value of the cash flows change based on general economic levels, most importantly, the level of interest rates.

We manage trading risk within our proscribed risk appetite using hedging techniques. Trading positions are subject to all primary risk drivers, including interest rate, foreign exchange, equity and commodity. Trading positions are reported at market value with changes reflected in income, which is the estimated current cash exchange value. Our traditional banking loan and deposit products are non-trading positions and are reported at amortized cost for assets or the amount owed for liabilities and not market value. While existing accounting rules require a historical cost view of traditional banking assets and liabilities, these positions are still subject to changes in economic value based on varying market conditions. The effect of changes in the economic value of our loans and deposits is reflected in the levels of future income and expense produced by these positions versus levels that would be generated by current levels of interest rates. To hedge this risk, we use various financial instruments, both on- and off-balance sheet, to manage the risk, commonly referred to as ALM.

Trading Risk Management

Trading revenues (including trading account profits and related net interest income) represent the amount earned from our trading positions, which include trading account assets and liabilities, derivative positions and mortgage banking assets. Trading positions are taken in a diverse range of financial instruments and markets and are marked to market. Most are recorded based on actively quoted market prices or values. The remaining positions are recorded based on management’s assessment of market value using market indicators and mathematical models. Trading profit can be volatile and is largely driven by general market conditions and customer demand. Profit is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment.

A histogram of daily revenue or loss is a simple graphic depicting trading volatility and tracking success of trading-related revenue. Trading-related revenue encompasses both proprietary trading and customer-related activities. In 2002, positive trading-related revenue was recorded for 215 of 251 trading days. Furthermore, of the 36 days that showed negative revenue, only 12 were greater than $10 million, and the largest loss was $32 million.

Histogram of Daily Trading-Related Revenue
Twelve Months Ended December 31, 2002

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

A VAR model estimates a range of hypothetical scenarios within which the next day’s profit or loss is expected. These estimates are impacted by the nature of the positions in the portfolio and the correlation within the portfolio. Within any VAR model, there are significant and numerous assumptions that will differ from company to company. Our VAR model assumes a 99 percent confidence level. Statistically this means that over a three to five year period, one out of 100 trading days, or on average, two to three times a year, losses will exceed the model-calculated range. Actual losses did not exceed VAR in 2002 or 2000 but exceeded it once in 2001.

There are numerous assumptions and estimates associated with modeling, and actual results could differ. In addition to the review of our assumptions with senior management, we mitigate these uncertainties through close monitoring and by examining and updating assumptions on an ongoing basis. If the results of our analysis indicate higher than expected levels of risk, proactive measures are taken to adjust risk levels.

Table 18 presents actual daily VAR for both 2002 and 2001.

TABLE 18 Trading Activities Market Risk

	2002						2001

(Dollars in millions)	Average VAR ⁽¹⁾		High VAR ⁽²⁾		Low VAR ⁽²⁾		Average VAR ⁽¹⁾		High VAR ⁽²⁾		Low VAR ⁽²⁾

Foreign exchange	$	3.2	$	7.1	$	0.5	$	7.2	$	12.8	$	1.9
Interest rate	28.8		40.3		17.3		34.3		47.0		23.0
Credit⁽³⁾	14.8		21.6		6.5		10.9		17.3		3.0
Real estate/mortgage⁽⁴⁾	19.2		61.6		2.5		33.2		55.5		8.8
Equities	8.8		18.2		4.3		15.4		25.1		8.9
Commodities	9.2		15.4		3.4		4.3		10.9		0.9
Total trading portfolio		40.1		69.8		19.2		52.7		69.9		35.8

⁽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⁾ Credit includes credit fixed income, credit derivatives, hedges of credit exposure and mortgage banking assets.

⁽⁴⁾ Real estate/mortgage, which is included in the credit category in the Trading related revenue table in Note 4 of the consolidated financial statements, includes capital market real estate and mortgage banking certificates.

During the fourth quarter of 2002, we completed an enhancement of our methodology used in the VAR risk aggregation calculation. This approach utilizes historical market conditions over the last three years to derive estimates of trading risk and provides for the natural aggregation of trading risk across different groups. Historically, we used a mathematical method to allocate risk across different trading groups that did not assume the benefit of correlation across markets. This change resulted in a lower VAR calculation in 2002. Prior year VAR amounts have not been restated to reflect this change.

Stress Testing

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

In addition, for interest rate sensitive products and portfolios, we gauge the interest rate sensitivity through the use of a DV01 (Dollar Value of One Basis Point) method, which computes the impact of a one basis point (or 1/100 or 0.01 percent) movement in interest rates. The calculations are done on individual portfolios and at the aggregate level. This method is a useful tool for risk management, particularly at the individual trader level, but must be complemented with other tools.

Interest Rate Risk Management

Our ALM process, managed through ALCO, is used to manage interest rate risk associated with non-trading financial instruments. Interest rate risk represents the most significant market risk exposure to our non-trading financial instruments.

Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the potential volatility to our net interest income caused by changes in market interest rates. In managing interest rate risk of our non-trading financial instruments we look at two broad portfolios – non-discretionary and discretionary. The non-discretionary portfolio consists of our customer-driven loan and deposit positions and securities required to support legal and regulatory requirements. To manage the resulting interest rate sensitivity of the non-discretionary portfolio, we utilize a discretionary portfolio of securities, residential mortgage loans and derivatives. Strategically positioning our discretionary portfolio allows us to manage the interest rate sensitivity in our non-discretionary portfolio.

Complex sensitivity simulations are used to estimate the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations estimate levels of short-term financial instruments, securities, loans, deposits, borrowings and ALM derivative instruments. In addition, 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. In addition to net interest income sensitivity simulations, market value sensitivity measures are also utilized.

The Balance Sheet Management division maintains a net interest income forecast utilizing different rate scenarios, including a most likely scenario. The most likely scenario is designed around an economic forecast that is meant to estimate our expectation of the most likely path of rates for the upcoming horizon. The Balance Sheet Management division constantly updates the net interest income forecast for changing assumptions and differing outlooks based on actual results.

Net interest income risk is measured based on rate shocks over different time horizons versus a current stable interest rate environment. Assumptions used in these calculations are similar to those used in our corporate planning and forecasting process. The overall interest rate risk position and strategies are reviewed on an ongoing basis with ALCO and other committees as appropriate. Table 19 provides our estimated net interest income at risk over the subsequent year from December 31, 2002 and 2001 resulting from a 100 basis point gradual (over 12 months) increase or decrease in interest rates.

TABLE 19 Estimated Net Interest Income at Risk

	-100 bp		+100 bp

December 31, 2002	(2.4	)%	1.5	%
December 31, 2001	(0.8	)	0.4

Securities

The securities portfolio is integral to our ALM 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 and regulatory requirements and on- and off- balance sheet positions. The securities portfolio at December 31, 2002 ended down from a year ago. In 2002, we purchased securities of $146 billion, sold $137 billion and received paydowns of $25 billion. During the year, we continuously monitored the interest rate risk position of the portfolio and repositioned the securities portfolio in order to manage convexity risk and to take advantage of interest rate fluctuations. Through sales of the securities portfolio, we realized $630 million in gains on sales of securities during the year.

Residential Mortgage Portfolio

We repositioned the discretionary mortgage loan portfolio to manage prepayment risk resulting from the unusually low rate environment. The residential mortgages designated solely for ALM activities grew primarily through whole loan purchase activity. In 2002, we purchased $55.0 billion of residential mortgages in the wholesale market for our discretionary portfolio and interest rate risk management. During the same period, we sold $22.7 billion of whole mortgage loans and recognized $500 million in gains on the sales.

Interest Rate and Foreign Exchange Derivative Contracts

Interest rate derivative contracts and foreign exchange derivative contracts are utilized in our ALM process. We use derivatives as an efficient, low-cost tool to manage our interest rate risk. We use derivatives to hedge or offset the changes in cash flows or market values of our balance sheet. See Note 5 of the consolidated financial statements for additional information on the Corporation’s hedging activities.

Our interest rate contracts are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards. In addition, we use foreign currency contracts to manage the foreign exchange risk associated with foreign-denominated assets and liabilities, as well as our equity investments in foreign subsidiaries. Table 20 reflects the notional amounts, fair value, weighted average receive fixed and pay fixed rates, expected maturity and estimated duration of our ALM derivatives at December 31, 2002 and 2001. Management believes the fair value of the ALM interest rate and foreign exchange portfolios should be viewed in the context of the combined discretionary and non-discretionary portfolios.

TABLE 20 Asset and Liability Management Interest Rate and Foreign Exchange Contracts

	December 31, 2002

				Expected Maturity

(Dollars in millions, average estimated duration in years)	Fair Value			Total			2003			2004			2005			2006			2007			Thereafter			Average Estimated Duration

Open interest rate contracts
Total receive fixed swaps	$	4,449																								4.89
Notional amount				$	116,520		$	3,132		$	3,157		$	5,719		$	14,078		$	16,213		$	74,221
Weighted average receive rate					4.29	%		1.76	%		3.17	%		4.66	%		4.50	%		3.90	%		4.46	%
Total pay fixed swaps		(1,825	)																							4.07
Notional amount				$	61,680		$	10,083		$	5,694		$	7,993		$	15,068		$	6,735		$	16,107
Weighted average pay rate					3.60	%		1.64	%		2.46	%		3.90	%		3.17	%		3.62	%		5.48	%
Basis swaps		(3	)
Notional amount				$	15,700		$	—		$	9,000		$	500		$	4,400		$	—		$	1,800

Total swaps		2,621

Option products		650
Net notional amount⁽¹⁾				$	48,374		$	1,000		$	6,767		$	40,000		$	—		$	—		$	607
Futures and forward rate contracts		(88	)
Net notional amount⁽¹⁾				$	8,850		$	(6,150	)	$	15,000

Total open interest rate contracts		3,183

Closed interest rate contracts^{(2, 3)}		955

Net interest rate contract position		4,138

Open foreign exchange contracts		313
Notional amount				$	4,672		$	78		$	648		$	102		$	1,581		$	96		$	2,167

Total ALM contracts	$	4,451

	December 31, 2001

				Expected Maturity

(Dollars in millions, average estimated duration in years)	Fair Value			Total			2002			2003			2004			2005			2006			Thereafter			Average Estimated Duration

Open interest rate contracts
Total receive fixed swaps	$	784																								4.68
Notional amount				$	64,472		$	1,510		$	266		$	10,746		$	8,341		$	9,608		$	34,001
Weighted average receive rate				5.74		%	7.04		%	8.27		%	5.31		%	5.79		%	5.37		%	5.89		%
Total pay fixed swaps	(322		)																						2.26
Notional amount				$	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 amount				$	15,700		$	—		$	—		$	9,000		$	500		$	4,400		$	1,800

Total swaps	462

Option products	907
Net notional amount⁽¹⁾				$	7,000		$	—		$	7,000

Total open interest rate contracts	1,369

Closed interest rate contracts^{(2, 3)}	1,071

Net interest rate contract position	2,440

Open foreign exchange contracts	(285		)
Notional amount				$	6,968		$	465		$	283		$	576		$	1,180		$	2,335		$	2,129

Total ALM contracts	$	2,155

⁽¹⁾ Reflects the net of long and short positions.

⁽²⁾ Represents the unamortized net realized deferred gains associated with closed contracts. As a result, no notional amount is reflected for expected maturity.

⁽³⁾ The amount of unamortized net realized deferred gains associated with closed ALM swaps was $923 and $966 at December 31, 2002 and 2001, respectively. The amount of unamortized net realized deferred gains associated with closed ALM options was $21 and $114 at December 31, 2002 and 2001, respectively. The amount of unamortized net realized deferred gains (losses) associated with closed ALM futures and forward contracts was $11 and $(9) at December 31, 2002 and 2001, respectively. There were no unamortized net realized deferred gains or losses associated with closed foreign exchange contracts at December 31, 2002 and 2001. Of these unamortized net realized deferred gains, $234 was included in accumulated other comprehensive income and the remainder is primarily included as a basis adjustment of long-term senior debt at December 31, 2002.

Consistent with our strategy of managing interest rate sensitivity, the net receive fixed interest rate swap position increased by $11.8 billion to $54.8 billion at December 31, 2002. This increase primarily occurred in the last half of 2002. Option products in our ALM process may include 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 Corporation adopted SFAS 133 on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. We have not significantly altered our overall interest rate risk management objective and strategy as a result of adopting SFAS 133. For further information on SFAS 133, see Note 1 of the consolidated financial statements.

Mortgage Banking Risk

Mortgage production activities create unique interest rate and prepayment risk between the loan commitment date (pipeline) and the date the loan is sold to the secondary market. To manage interest rate risk, we enter into various financial instruments including interest rate swaps, forward delivery contracts, Euro dollar futures and option contracts. The notional amount of such contracts was $25.3 billion at December 31, 2002 with associated net unrealized losses of $224 million. At December 31, 2001, the notional amount of such contracts was $27.8 billion with associated net unrealized gains of $69 million. These contracts have an average expected maturity of less than 90 days.

Prepayment risk represents the loss in value associated with a high rate loan paying off in a low rate environment and the loss of servicing value when loans prepay. We manage prepayment risk using various financial instruments including purchased options and swaps. The notional amounts of such contracts at December 31, 2002 and 2001 were $53.1 billion and $65.1 billion, respectively. The related unrealized gain was $955 million and $301 million at December 31, 2002 and 2001, respectively. These amounts are included in the Derivatives table in Note 5 of the consolidated financial statements. See Note 1 for additional discussion of these financial instruments in the mortgage banking assets section.

Operational Risk Management

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

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

The Corporate Operational Risk Executive, reporting to the Chief Risk Officer, provides oversight to accelerate and facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the company. The Operational Risk Executive also works with the business segment executives and their risk counterparts to implement appropriate policies, processes and assessments at the segment level. In addition, the Corporate Audit group places special emphasis on operational risk management processes, at both the corporate and segment levels, in its assessments and testing.

Operational risks fall into two major categories, business specific and corporate-wide affecting all business lines. Operational Risk Management plays a different role in each category. For business specific risks, Operational Risk Management works with the segments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, Operational Risk Management assesses the risks, develops a consolidated corporate view and communicates that view to the business level.

At the business segment level, there are four business segment risk executives that are responsible for oversight of all operational risks in the business segments they support. In their management of these specific risks, they utilize corporate-wide operational risk policies, processes, and assessments. A specific example is our management of outsourced activities. To ensure that we meet our business segment objectives and manage the risks associated with these activities, vendor contracts contain specific corporate standards that allow for the tracking of service performance levels. In addition, we also have our Corporate Audit group perform independent assessments of vendor management processes and key vendor processes, the latter including on-site work at our more significant vendors.

To manage corporate-wide risks, we maintain specialized support groups, such as Legal, Information Security, Business Recovery, Supply Chain Management, Finance, Compliance and Technology and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the individual businesses. An example of such an effort is our company-wide implementation of the anti-money laundering aspects of the USA Patriot Act.

Operational Risk Management working in conjunction with senior business segment executives, has developed two key tools to help manage, monitor, and summarize operational risk. The first tool the businesses and executive management utilize is a company-wide quarterly self-assessment process, which identifies and evaluates the status of risk issues, including mitigation plans if appropriate. The goal of this process, which originates at the segment level, is to ensure that the overall operating environment for segments is being continuously assessed and appropriately enhanced for changing conditions. This self-assessment is also used for identifying emerging operational risk issues and determining how they should be managed – at the business segment or corporate level. The risks identified in this process are also integrated into our quarterly financial forecasting process. The second process is a metrics review of key risk indicators. Each business has identified metrics for each category of operational risk noted above. The resulting review is used to identify trends and issues on both a corporate and a segment level.

The approach described above allows the Corporation to have a discipline that anticipates and mitigates the losses from operational risks.

2001 Compared to 2000

The following discussion and analysis provides a comparison of the Corporation’s results of operations for 2001 and 2000. This discussion should be read in conjunction with the consolidated financial statements and related notes on pages 72 through 111. In addition, Tables 1 and 2 contain financial data to supplement this discussion.

Overview

Net income totaled $6.8 billion, or $4.18 per common share (diluted), in 2001 compared to $7.5 billion, or $4.52 per common share (diluted), in 2000. The return on average common shareholders’ equity was 13.96 percent in 2001 compared to 15.96 percent in 2000.

Earnings excluding charges related to the Corporation’s strategic decision to exit certain consumer finance businesses in 2001 and restructuring in 2000 were $8.0 billion, or $4.95 per common share (diluted), in 2001 compared to $7.9 billion, or $4.72 per common share (diluted), in 2000. Excluding these charges, the return on average common shareholders’ equity was 16.53 percent in 2001 compared to 16.70 percent in 2000. Shareholder value added (SVA), which excludes exit and restructuring charges, remained essentially unchanged at $3.1 billion. For additional information on the use of non-GAAP financial measures and reconciliations to corresponding GAAP measures, see the Supplemental Financial Data section beginning on page 27.

Total revenue was $34.6 billion, an increase of $1.7 billion from 2000. Net interest income increased $1.9 billion to $20.3 billion. The increase was primarily due to 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.

Noninterest income was $14.3 billion, a $234 million decrease. Service charges increased $401 million, or nine percent, driven by higher business volumes and corporate customers opting to pay higher fees rather than maintain additional deposit balances in the lower rate environment. Income from investment and brokerage services increased $183 million, or ten percent, largely due to higher corporate investment and brokerage services, 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. Mortgage banking income increased $81 million, or 16 percent, primarily reflecting higher origination activity and increased gains from higher loan sales to the secondary market, partially offset by increased prepayments on mortgage loans as a result of the declining interest rate environment. Investment banking income increased $67 million, or four percent, as strong growth in fixed income origination was offset by weaker demand for syndications, equity underwriting and advisory services. Equity investment gains decreased $763 million, or 72 percent, driven by the weaker equity markets. Card income increased $192 million, or nine percent, primarily due to new account growth in both credit and debit card and increased purchase volume on existing accounts. Trading account profits decreased $81 million, or four percent, as the SFAS 133 transition adjustment net loss and declines in trading results in Corporate Treasury were offset by improved trading results in Global Corporate and Investment Banking and favorable net mark-to-market adjustments on mortgage banking certificates and the related derivative instruments.

The provision for credit losses increased $1.8 billion in 2001 and included $395 million associated with exiting the subprime real estate lending business. Net charge-offs increased $1.8 billion to $4.2 billion or 1.16 percent of average loans and leases, primarily due to credit quality deterioration in the commercial – domestic portfolio and an increase in credit card charge-offs as well as $635 million in charge- offs associated with exiting the subprime real estate lending business.

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.

Noninterest expense increased $2.1 billion, primarily driven by business exit costs of $1.30 billion in 2001, higher personnel, litigation, professional fees, data processing and marketing expenses, partially offset by the restructuring charge in 2000. 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. 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. 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 planning process.

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 (SSI), resulted in a 17 percent effective tax rate for the fourth quarter of 2001. The effective tax rates for 2001 and 2000 were 32.9 percent and 36.2 percent, respectively. For additional information on SSI, see “Problem Loan Management” beginning on page 48.

Business Segment Operations

Consumer and Commercial Banking

Total revenue increased $1.6 billion, or eight percent, in 2001 compared to 2000. Net interest income increased $856 million, or seven percent, due to a favorable shift in loan mix, overall loan and deposit growth and the Corporation’s treasury asset and liability activities. 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. Noninterest income increased $736 million, or 10 percent, driven by a nine percent increase in service charges, a nine percent increase in card income and strong mortgage banking revenue. Net income in 2001 rose $478 million, or 11 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 four percent increase in noninterest expense. The provision for credit losses increased $551 million, or 53 percent, reflecting higher charge-offs in the commercial and credit card loan portfolios.

Asset Management

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. Net interest income increased $78 million, or 12 percent, due to the Corporation’s treasury asset and liability activities and growth in the commercial and residential mortgage loan portfolios. 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. Net income decreased $66 million, or 11 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. Noninterest expense increased $75 million, or five percent, reflecting investments in new private banking offices, the acquisition of Marsico and personnel supporting the revenue growth initiatives, partially offset by one-time business divestiture expenditures in 2000. Assets under management increased $36.1 billion, or 13 percent, primarily driven by the growth in money market funds and the addition of the remaining Marsico Funds.

Global Corporate and Investment Banking

In 2001, total revenue increased $1.1 billion, or 14 percent, primarily due to $663 million, or 24 percent, growth in trading-related revenue. Net interest income increased $912 million, or 24 percent, as a result of higher trading-related activities and the Corporation’s treasury asset and liability activities, partially offset by lower commercial loan levels. Noninterest income increased $230 million, or five 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. Net income increased $133 million, or seven percent, in 2001 as revenue growth was partially offset by higher credit-related costs and noninterest expense. The provision for credit losses increased $540 million to $1.3 billion due to credit quality deterioration in the commercial – domestic loan portfolio of Global Credit Products. A $373 million, or seven percent, increase in noninterest expense was primarily due to higher market-related incentives and other expenses in line with revenue growth.

Equity Investments

In 2001, both revenue and net income decreased substantially primarily due to lower equity investment gains. Equity investment gains decreased $753 million to $240 million. Principal Investing recorded cash gains of $425 million, offset by impairment charges of $335 million 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.