UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2003

 

or

 

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

EXCHANGE ACT OF 1934

 

Commission file number:

1-6523

 

Exact name of registrant as specified in its charter:

Bank of America Corporation

 

State of incorporation:

Delaware

 

IRS Employer Identification Number:

56-0906609

 

Address of principal executive offices:

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

 

Registrant’s telephone number, including area code:

(704) 386-8486

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  þ     No  ¨

 

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

 

Yes  þ     No  ¨

 

On July 31, 2003, there were 1,494,629,792 shares of Bank of America Corporation Common Stock outstanding.

 



Bank of America Corporation

 

June 30, 2003 Form 10-Q

 


 

INDEX

 

               Page

Part I

   Item 1.    Financial Statements:     

Financial

Information

       

Consolidated Statement of Income for the Three Months and Six Months Ended June 30, 2003 and 2002

   2
         

Consolidated Balance Sheet at June 30, 2003 and December 31, 2002

   3
         

Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2003 and 2002

   4
         

Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2003 and 2002

   5
         

Notes to Consolidated Financial Statements

   6
     Item 2.   

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

   19
     Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   54
     Item 4.   

Controls and Procedures

   54

 


Part II

              

Other

Information

   Item 1.   

Legal Proceedings

   54
     Item 2.   

Changes in Securities and Use of Proceeds

   55
     Item 4.   

Submission of Matters to a Vote of Security Holders

   55
     Item 6.   

Exhibits and Reports on Form 8-K

   56
     Signature    57
     Index to Exhibits    58

 

 


Part I. Financial Information

Item 1. Financial Statements


Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

 


    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

(Dollars in millions, except per share information)


   2003

   2002

    2003

    2002

 

Interest income

                               

Interest and fees on loans and leases

   $ 5,412    $ 5,530     $ 10,760     $ 10,975  

Interest and dividends on securities

     1,011      924       1,789       1,870  

Federal funds sold and securities purchased under agreements to resell

     193      270       387       485  

Trading account assets

     1,007      948       2,049       1,826  

Other interest income

     372      312       735       699  
    

  


 


 


Total interest income

     7,995      7,984       15,720       15,855  
    

  


 


 


Interest expense

                               

Deposits

     1,269      1,384       2,452       2,728  

Short-term borrowings

     514      529       967       1,006  

Trading account liabilities

     316      344       624       629  

Long-term debt

     531      633       1,103       1,245  
    

  


 


 


Total interest expense

     2,630      2,890       5,146       5,608  
    

  


 


 


Net interest income

     5,365      5,094       10,574       10,247  

Noninterest income

                               

Consumer service charges

     793      732       1,570       1,423  

Corporate service charges

     577      566       1,154       1,133  
    

  


 


 


Total service charges

     1,370      1,298       2,724       2,556  
    

  


 


 


Consumer investment and brokerage services

     401      420       779       801  

Corporate investment and brokerage services

     204      178       369       348  
    

  


 


 


Total investment and brokerage services

     605      598       1,148       1,149  
    

  


 


 


Mortgage banking income

     559      136       964       331  

Investment banking income

     488      464       866       805  

Equity investment gains (losses)

     43      (36 )     (25 )     (10 )

Card income

     762      621       1,443       1,198  

Trading account profits

     93      263       207       608  

Other income

     335      137       613       284  
    

  


 


 


Total noninterest income

     4,255      3,481       7,940       6,921  
    

  


 


 


Total revenue

     9,620      8,575       18,514       17,168  

Provision for credit losses

     772      888       1,605       1,728  

Gains on sales of securities

     296      93       569       137  

Noninterest expense

                               

Personnel

     2,695      2,386       5,154       4,832  

Occupancy

     498      441       970       873  

Equipment

     253      279       537       541  

Marketing

     238      170       468       340  

Professional fees

     281      122       406       213  

Amortization of intangibles

     54      55       108       110  

Data processing

     262      226       528       431  

Telecommunications

     137      123       261       242  

Other general operating

     640      688       1,343       1,402  
    

  


 


 


Total noninterest expense

     5,058      4,490       9,775       8,984  
    

  


 


 


Income before income taxes

     4,086      3,290       7,703       6,593  

Income tax expense

     1,348      1,069       2,541       2,193  
    

  


 


 


Net income

   $ 2,738    $ 2,221     $ 5,162     $ 4,400  
    

  


 


 


Net income available to common shareholders

   $ 2,737    $ 2,220     $ 5,160     $ 4,398  
    

  


 


 


Per common share information

                               

Earnings

   $ 1.83    $ 1.45     $ 3.45     $ 2.86  
    

  


 


 


Diluted earnings

   $ 1.80    $ 1.40     $ 3.39     $ 2.77  
    

  


 


 


Dividends paid

   $ 0.64    $ 0.60     $ 1.28     $ 1.20  
    

  


 


 


Average common shares issued and outstanding (in thousands)

     1,494,094      1,533,783       1,496,827       1,538,600  
    

  


 


 


 

See accompanying notes to consolidated financial statements.

 

2



Bank of America Corporation and Subsidiaries

Consolidated Balance Sheet


    

June 30

2003


   

December 31

2002


 

(Dollars in millions)


    

Assets

                

Cash and cash equivalents

   $ 25,220     $ 24,973  

Time deposits placed and other short-term investments

     6,790       6,813  

Federal funds sold and securities purchased under agreements to resell (includes $61,976 and $44,779 pledged as collateral)

     64,314       44,878  
                  

Trading account assets (includes $47,644 and $35,515 pledged as collateral)

     66,947       63,996  

Derivative assets

     38,587       34,310  

Securities:

                

Available-for-sale (includes $61,159 and $32,919 pledged as collateral)

     114,250       68,122  

Held-to-maturity, at cost (market value—$290 and $1,001)

     279       1,026  
    


 


Total securities

     114,529       69,148  
    


 


Loans and leases

     360,305       342,755  

Allowance for credit losses

     (6,841 )     (6,851 )
    


 


Loans and leases, net of allowance for credit losses

     353,464       335,904  
    


 


Premises and equipment, net

     5,899       6,717  

Mortgage banking assets

     1,748       2,110  

Goodwill

     11,426       11,389  

Core deposit intangibles and other intangibles

     1,010       1,095  

Other assets(1)

     79,245       59,125  
    


 


Total assets

   $ 769,179     $ 660,458  
    


 


Liabilities

                

Deposits in domestic offices:

                

Noninterest-bearing

   $ 132,851     $ 122,686  

Interest-bearing

     256,602       232,320  

Deposits in foreign offices:

                

Noninterest-bearing

     2,206       1,673  

Interest-bearing

     30,276       29,779  
    


 


Total deposits

     421,935       386,458  
    


 


Federal funds purchased and securities sold under agreements to repurchase

     104,821       65,079  

Trading account liabilities

     27,708       25,574  

Derivative liabilities

     23,435       23,566  

Commercial paper and other short-term borrowings

     43,584       25,234  

Accrued expenses and other liabilities

     28,943       17,052  

Long-term debt

     61,681       61,145  

Trust preferred securities

     6,056       6,031  
    


 


Total liabilities

     718,163       610,139  
    


 


Commitments and contingencies (Note 5)

                

Shareholders’ equity

                

Preferred stock, $0.01 par value; authorized—100,000,000 shares; issued and outstanding—1,306,463 and 1,356,749 shares

     56       58  

Common stock, $0.01 par value; authorized—5,000,000,000 shares; issued and outstanding—1,496,314,280 and 1,500,691,103 shares

     15       496  

Retained earnings

     51,374       48,517  

Accumulated other comprehensive income

     (251 )     1,232  

Other

     (178 )     16  
    


 


Total shareholders’ equity

     51,016       50,319  
    


 


Total liabilities and shareholders’ equity

   $ 769,179     $ 660,458  
    


 



(1)   Other assets includes loans held for sale totaling $17,261 and $13,833 at June 30, 2003 and December 31, 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

3



Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity


   

Preferred
Stock


    Common Stock

   

Retained
Earnings


   

Accumulated

Other
Comprehensive
Income (Loss) (1)


   

Other


   

Total

Share-
holders’

Equity


   

Comprehensive
Income


 

(Dollars in millions, shares in thousands)


    Shares

    Amount

           

Balance, December 31, 2001

 

$

65

 

  1,559,297     $ 5,076     $ 42,980     $ 437     $ (38 )   $ 48,520          

Net income

                          4,400                       4,400     $ 4,400  

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

                                  620               620       620  

Net unrealized losses on derivatives

                                  (397 )             (397 )     (397 )

Cash dividends paid:

                                                             

Common

                          (1,844 )                     (1,844 )        

Preferred

                          (2 )                     (2 )        

Common stock issued under employee plans and related tax benefits

          38,612       1,979                       9       1,988          

Common stock repurchased

          (82,422 )     (5,679 )                             (5,679 )        

Conversion of preferred stock

    (5 )   173       5                                          

Other

          7       118       12               28       158          
   


 

 


 


 


 


 


 


Balance, June 30, 2002

  $ 60     1,515,667     $ 1,499     $ 45,546     $ 660     $ (1 )   $ 47,764     $ 4,623  
   


 

 


 


 


 


 


 


Balance, December 31, 2002

  $ 58     1,500,691     $ 496     $ 48,517     $ 1,232     $ 16     $ 50,319          

Net income

                          5,162                       5,162     $ 5,162  

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

                                  307               307       307  

Net unrealized gains on foreign currency translation adjustments

                                  59               59       59  

Net unrealized losses on derivatives

                                  (1,849 )             (1,849 )     (1,849 )

Cash dividends paid:

                                                             

Common

                          (1,920 )                     (1,920 )        

Preferred

                          (2 )                     (2 )        

Common stock issued under employee plans and related tax benefits

          44,239       2,591                       (155 )     2,436          

Common stock repurchased

          (48,700 )     (3,157 )     (382 )                     (3,539 )        

Conversion of preferred stock

    (2 )   84       2                               —            

Other

          —         83       (1 )             (39 )     43          
   


 

 


 


 


 


 


 


Balance, June 30, 2003

  $ 56     1,496,314     $ 15     $ 51,374     $ (251 )   $ (178 )   $ 51,016     $ 3,679  
   


 

 


 


 


 


 


 


 

(1)   At June 30, 2003 and December 31, 2002, Accumulated Other Comprehensive Income (Loss) included net unrealized gains on available-for-sale and marketable equity securities of $801 and $494, respectively; foreign currency translation adjustments of $(109) and $(168), respectively; and net unrealized gains (losses) on derivatives of $(854) and $995, respectively.

 

See accompanying notes to consolidated financial statements.

 

4



Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows


    

Six Months Ended

June 30


 

(Dollars in millions)


   2003

    2002

 

Operating activities

                

Net income

   $ 5,162     $ 4,400  

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

                

Provision for credit losses

     1,605       1,728  

Gains on sales of securities

     (569 )     (137 )

Depreciation and premises improvements amortization

     447       440  

Amortization of intangibles

     108       110  

Deferred income tax benefit

     (227 )     (35 )

Net increase in trading and hedging instruments

     (8,592 )     (6,209 )

Net (increase) decrease in other assets

     (23,505 )     10,087  

Net increase in accrued expenses and other liabilities

     12,975       7,292  

Other operating activities, net

     1,698       2,078  
    


 


Net cash provided by (used in) operating activities

     (10,898 )     19,754  
    


 


Investing activities

                

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

     23       (375 )

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

     (19,436 )     (7,341 )

Proceeds from sales of available-for-sale securities

     70,968       77,809  

Proceeds from maturities of available-for-sale securities

     17,569       12,200  

Purchases of available-for-sale securities

     (133,947 )     (86,661 )

Proceeds from maturities of held-to-maturity securities

     747       29  

Proceeds from sales of loans and leases

     20,699       11,603  

Other changes in loans and leases, net

     (34,648 )     (21,719 )

Purchases and originations of mortgage banking assets

     (735 )     (385 )

Net purchases of premises and equipment

     371       (531 )

Proceeds from sales of foreclosed properties

     30       100  

Investment in unconsolidated subsidiary

     (1,600 )     —    

Acquisition of business activities, net

     (100 )     (110 )

Other investing activities, net

     1,200       867  
    


 


Net cash used in investing activities

     (78,859 )     (14,514 )
    


 


Financing activities

                

Net increase (decrease) in deposits

     35,477       (12,726 )

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

     39,742       8,951  

Net increase in commercial paper and other short-term borrowings

     18,350       4,156  

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

     5,917       6,615  

Retirement of long-term debt and trust preferred securities

     (6,474 )     (12,193 )

Proceeds from issuance of common stock

     2,451       1,979  

Common stock repurchased

     (3,539 )     (5,679 )

Cash dividends paid

     (1,922 )     (1,846 )

Other financing activities, net

     (59 )     (11 )
    


 


Net cash provided by (used in) financing activities

     89,943       (10,754 )
    


 


Effect of exchange rate changes on cash and cash equivalents

     61       (14 )
    


 


Net increase (decrease) in cash and cash equivalents

     247       (5,528 )

Cash and cash equivalents at January 1

     24,973       26,837  
    


 


Cash and cash equivalents at June 30

   $ 25,220     $ 21,309  
    


 



Net transfers of loans and leases from loans held for sale (included in other assets) to the loan portfolio amounted to $5,341 and $3,003 for the six months ended June 30, 2003 and 2002, respectively.

 

Loans transferred to foreclosed properties amounted to $135 and $150 for the six months ended June 30, 2003 and 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

5


Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 


 

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the United States and in selected international markets. At June 30, 2003, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA).

 

Note 1—Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

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

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

6


In accordance with SFAS 148, the Corporation provides disclosures as if the Corporation had adopted the fair value based method of measuring all outstanding employee stock options in 2003 and 2002 as indicated in the following table. The disclosure requirement of SFAS 148 recognizes the impact of all outstanding employee stock options while the prospective method that the Corporation is following recognizes the impact of only newly issued employee stock options. The following table presents the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards for the three months and six months ended June 30, 2003 and 2002.

 

    

Three Months Ended

June 30


             

Six Months Ended

June 30


 

(Dollars in millions, except per share data)


   2003

    2002

              2003

              2002

 

Net income

   $ 2,738     $ 2,221               $ 5,162               $ 4,400  

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

     21       —                   38                 —    

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

     (64 )     (109 )               (140 )               (191 )
    


 


           


           


Pro forma net income

   $ 2,695     $ 2,112               $ 5,060               $ 4,209  
    


 


           


           


As reported

                                                    

Earnings per common share

   $ 1.83     $ 1.45               $ 3.45               $ 2.86  

Diluted earnings per common share

     1.80       1.40                 3.39                 2.77  

Pro forma

                                                    

Earnings per common share

     1.80       1.38                 3.38                 2.74  

Diluted earnings per common share

     1.77       1.33                 3.32                 2.66  
    


 


           


           



(1)      Includes all awards granted, modified or settled for which the fair value was required to be measured under SFAS 123, except restricted stock. Restricted stock expense, included in net income, for the three months ended June 30, 2003 and 2002 was $82 and $73, respectively, and for the six months ended June 30, 2003 and 2002 was $168 and $108, respectively.

 

On May 15, 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and is effective May 31, 2003 for all new and modified financial instruments and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities (or assets in some circumstances). The adoption of this rule did not have a material impact on the Corporation’s results of operations or financial condition.

 

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the consolidated financial statements of the Corporation’s 2002 Annual Report and Note 1 of the consolidated financial statements of the Corporation’s Form 10-Q for the three months ended March 31, 2003.

 

7


Note 2—Trading Activities

 

Trading-Related Revenue

 

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

 

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

 

    

Three Months Ended

June 30


  

Six Months Ended

June 30


(Dollars in millions)


   2003

    2002

   2003

    2002

Trading account profits—as reported

       $   93         $ 263    $    207     $    608

Trading-related net interest income(1)

     552       469      1,160       902
    


 

  


 

Total trading-related revenue

   $ 645     $ 732    $ 1,367     $ 1,510
    


 

  


 

Trading-related revenue by product

                             

Interest rate(1)

   $ 270     $ 225    $ 423     $    481

Credit(2)

     228       228      489       464

Foreign exchange

     123       139      259       268

Equities

     105       110      224       242

Commodities

     (81 )     30      (28 )     55
    


 

  


 

Total trading-related revenue

   $ 645     $ 732    $ 1,367     $ 1,510
    


 

  


 


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

 

Trading Account Assets and Liabilities

 

The fair values of the components of trading account assets and liabilities at June 30, 2003 and December 31, 2002 were:

 

(Dollars in millions)


   June 30
2003


   December 31
2002


Trading account assets

             

U.S. government and agency securities

   $ 18,074    $ 19,875

Foreign sovereign debt

     9,185      8,752

Corporate securities, trading loans, and other

     24,336      21,286

Equity securities

     7,166      5,380

Mortgage trading loans and asset-backed securities

     8,186      8,703
    

  

Total

   $ 66,947    $ 63,996
    

  

Trading account liabilities

             

U.S. government and agency securities

   $ 10,250    $ 8,531

Foreign sovereign debt

     2,633      3,465

Corporate securities, trading loans, and other

     5,890      7,320

Equity securities

     8,808      4,825

Mortgage trading loans and asset-backed securities

     127      1,433
    

  

Total

   $ 27,708    $ 25,574
    

  

 

 

8


Note 3—Derivatives

 

Credit risk associated with derivatives is measured as the net replacement cost should the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts assuming no recoveries of underlying collateral. A detailed discussion of derivative trading and asset and liability management (ALM) activities is presented in Note 5 of the consolidated financial statements of the Corporation’s 2002 Annual Report.

 

The following table presents the contract/notional and credit risk amounts at June 30, 2003 and December 31, 2002 of the Corporation’s derivative positions held for trading and hedging purposes. These derivative positions are primarily executed in the over-the-counter market. The credit risk amounts presented in the following table do not consider the value of any collateral held but take into consideration the effects of legally enforceable master netting agreements. The Corporation held $21.6 billion and $16.7 billion of collateral on derivative positions, of which $14.7 billion and $11.4 billion could be applied against credit risk at June 30, 2003 and December 31, 2002, respectively.

 

Derivatives(1)

         

     June 30, 2003

   December 31, 2002

(Dollars in millions)


   Contract/ Notional

   Credit Risk

   Contract/
Notional


   Credit Risk

Interest rate contracts

                           

Swaps

   $ 7,508,849    $ 21,519    $ 6,781,629    $ 18,981

Futures and forwards

     2,917,976      82      2,510,259      283

Written options

     1,041,777      —        973,113      —  

Purchased options

     1,018,197      3,900      907,999      3,318

Foreign exchange contracts

                           

Swaps

     215,916      2,961      175,680      2,460

Spot, futures and forwards

     904,241      2,505      724,039      2,535

Written options

     181,030      —        81,263      —  

Purchased options

     176,478      481      80,395      452

Equity contracts

                           

Swaps

     22,800      487      16,830      679

Futures and forwards

     1,273      —        48,470      —  

Written options

     23,818      —        19,794      —  

Purchased options

     20,392      3,716      23,756      2,885

Commodity contracts

                           

Swaps

     33,166      1,719      11,776      1,117

Futures and forwards

     5,878      —        3,478      —  

Written options

     13,353      —        12,158      —  

Purchased options

     8,536      330      19,115      347

Credit derivatives

     123,203      887      92,098      1,253
    

  

  

  

Total derivative assets

          $ 38,587           $ 34,310
           

         


(1)    Includes both long and short derivative positions.

                           

 

The average fair value of derivative assets for the six months ended June 30, 2003 and 2002 was $36.4 billion and $21.4 billion, respectively. The average fair value of derivative liabilities for the six months ended June 30, 2003 and 2002 was $24.6 billion and $14.0 billion, respectively. The change in the average fair value largely reflects the impact of the decrease in interest rates.

 

Fair Value and Cash Flow Hedges

 

The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates and

 

9


exchange rates. The Corporation also uses these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities and anticipated transactions. For the six months ended June 30, 2003, the Corporation recognized in the Consolidated Statement of Income a net loss of $94 million (included in interest income) related to fair value hedges. This loss represents the expected change in the forward values of forward contracts and is defined as “ineffectiveness” by SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. For the six months ended June 30, 2002, there was no significant gain or loss recognized which represented the ineffective portion of fair value hedges. For the six months ended June 30, 2003, the Corporation recognized in the Consolidated Statement of Income net gains of $13 million (included in mortgage banking income), which represented the ineffective portion of cash flow hedges. For the six months ended June 30, 2002, there was no significant gain or loss recognized which represented the ineffective portion of cash flow hedges. At June 30, 2003 and December 31, 2002, the Corporation has determined that there were no cash flow hedging positions where it was probable that certain forecasted transactions may not occur within the originally designated time period.

 

For cash flow hedges, gains and losses on derivative contracts reclassified from accumulated other comprehensive income to current period earnings are included in the line item in the Consolidated Statement of Income in which the hedged item is recorded and in the same period the hedged item affects earnings. During the next 12 months, losses on derivative instruments included in accumulated other comprehensive income, of approximately $139 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.

 

Hedges of Net Investments in Foreign Operations

 

The Corporation uses forward exchange contracts, currency swaps and nonderivative cash instruments that provide an economic hedge on portions of its net investments in foreign operations against adverse movements in foreign currency exchange rates. For the six months ended June 30, 2003 and 2002, the Corporation experienced net unrealized foreign currency pre-tax gains of $229 million and $92 million, respectively, related to its net investments in foreign operations. These unrealized gains were partially offset by net unrealized pre-tax losses of $137 million and $92 million, respectively, related to derivative and nonderivative instruments designated as hedges of the foreign currency exposure during these same periods. These unrealized gains and losses were recorded as components of accumulated other comprehensive income.

 

Note 4—Outstanding Loans and Leases

 

Outstanding loans and leases at June 30, 2003 and December 31, 2002 were:

 

(Dollars in millions)


  

June 30,

2003


          December 31,
2002


Commercial—domestic

   $ 97,099           $ 105,053

Commercial—foreign

     17,473             19,912

Commercial real estate—domestic

     19,922             19,910

Commercial real estate—foreign

     264             295
    

         

Total commercial

     134,758             145,170
    

         

Residential mortgage

     133,831             108,197

Home equity lines

     22,670             23,236

Direct/Indirect consumer

     32,786             31,068

Consumer finance

     6,874             8,384

Credit card

     27,419             24,729

Foreign consumer

     1,967             1,971
    

         

Total consumer

     225,547             197,585
    

         

Total

   $ 360,305           $ 342,755
    

         

 

10


The following table summarizes the changes in the allowance for credit losses for the three months and six months ended June 30, 2003 and 2002:

 

     Three Months Ended
June 30


    Six Months Ended
June 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Balance, beginning of period

   $ 6,853     $ 6,869     $ 6,851     $ 6,875  
    


 


 


 


Loans and leases charged off

     (933 )     (1,076 )     (1,915 )     (2,145 )

Recoveries of loans and leases previously charged off

     161       188       310       417  
    


 


 


 


Net charge-offs

     (772 )     (888 )     (1,605 )     (1,728 )
    


 


 


 


Provision for credit losses

     772       888       1,605       1,728  

Other, net

     (12 )     4       (10 )     (2 )
    


 


 


 


Balance, June 30

   $ 6,841     $ 6,873     $ 6,841     $ 6,873  
    


 


 


 


 

The following table presents the recorded investment in specific loans that were considered individually impaired at June 30, 2003 and December 31, 2002 in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as described in the Corporation’s 2002 Annual Report on page 80:

 

(Dollars in millions)


  

June 30,

2003


    

December 31,

2002


Commercial—domestic

   $ 2,143      $ 2,553

Commercial—foreign

     1,052        1,355

Commercial real estate—domestic

     161        157

Commercial real estate—foreign

     2        2
    

    

Total impaired loans

   $ 3,358      $ 4,067
    

    

 

At June 30, 2003 and December 31, 2002, nonperforming loans, including certain loans that were considered impaired, totaled $4.2 billion and $5.0 billion, respectively. In addition, included in other assets was $98 million and $120 million of nonperforming assets at June 30, 2003 and December 31, 2002, respectively. Foreclosed properties amounted to $243 million and $225 million at June 30, 2003 and December 31, 2002, respectively.

 

Note 5—Commitments and Contingencies

 

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those recorded on the balance sheet.

 

Credit Extension Commitments

 

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of its customers. For additional information on credit extension commitments, see Note 13 of the consolidated financial statements of the Corporation’s 2002 Annual Report. The following table summarizes outstanding unfunded commitments to extend credit at June 30, 2003 and December 31, 2002. These unfunded commitments have been reduced by amounts participated to other financial institutions.

 

(Dollars in millions)


   June 30 2003

     December 31
2002


Loan commitments

   $ 213,259      $ 212,704

Standby letters of credit and financial guarantees

     30,493        30,837

Commercial letters of credit

     3,538        3,109
    

    

Legally binding commitments

     247,290        246,650

Credit card lines

     77,403        73,779
    

    

Total commitments

   $ 324,693      $ 320,429
    

    

 

 

11


Other Commitments

 

When-issued securities are commitments to purchase or sell securities during the time period between the announcement of a securities offering and the issuance of those securities. Changes in market price between commitment date and issuance are reflected in trading account profits. At June 30, 2003, the Corporation had commitments to purchase and sell when-issued securities of $203.5 billion and $204.9 billion, respectively. At December 31, 2002, the Corporation had commitments to purchase and sell when-issued securities of $166.1 billion and $164.5 billion, respectively.

 

At June 30, 2003, the Corporation had forward whole mortgage loan purchase commitments of $15.4 billion of which $9.1 billion were settled in July 2003. The remaining commitments of $2.6 billion and $3.7 billion are expected to settle in August and September 2003, respectively. At December 31, 2002, the Corporation had forward whole mortgage loan purchase commitments of $10.8 billion, all of which were settled in January 2003. At June 30, 2003, the Corporation had $6.4 billion of forward whole mortgage loan sale commitments of which $6.2 billion settled in July 2003 and the remaining are expected to settle in August 2003. At December 31, 2002, the Corporation had no forward whole mortgage loan sale commitments. For further discussion on ALM activities, see Interest Rate and Foreign Exchange Derivative Contracts beginning on page 50.

 

Other Guarantees

 

The Corporation sells products that offer book value protection primarily to plan sponsors of ERISA-governed pension plans such as 401(k) plans, 457 plans, etc. The Corporation also sells products that guarantee the return of principal to investors at a preset future date. At June 30, 2003 and December 31, 2002, the notional amount of these guarantees totaled $27.7 billion and $23.8 billion, respectively. As of June 30, 2003 and December 31, 2002, the Corporation has not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.

 

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

 

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

 

The Corporation has entered into additional guarantee agreements, including lease end obligation agreements, partial credit guarantees on certain leases, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $2.1 billion and $575 million at June 30, 2003 and December 31, 2002, respectively. This increase was primarily due to written put options requiring gross settlement.

 

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

 

Litigation

 

On May 14, 2003, plaintiffs in the Enron Corporation (Enron) Securities Litigation, pending before the United States District Court for the Southern District of Texas, filed a second amended complaint adding Banc of America Securities LLC (BAS) as a defendant to the action. The claims against the Corporation and BAS in the second amended complaint include claims under Sections 11 and 15 of the 1933 Securities Act relating to two securities

 

12


offerings, and a claim under Sections 12(a)(2) and 15 of the 1933 Securities Act relating to a third securities offering.

 

On May 28, 2003, judges in the Enron Securities Litigation and the Enron bankruptcy issued a joint order requiring Enron, plaintiffs in the Enron Securities Litigation and certain financial institution defendants, including the Corporation, to participate in a nonbinding mediation of claims presented in both the Enron Securities Litigation and the Enron bankruptcy. The mediation is currently scheduled to take place September 29 and 30, 2003.

 

The number of actions, in addition to WorldCom, Inc. (Worldcom) Securities Litigation, in which the Corporation or BAS has been named as a defendant arising out of alleged accounting irregularities in the books and records of WorldCom, has increased to approximately 50 actions. Of these actions, approximately 29 have been consolidated with WorldCom Securities Litigation pending in the United States District Court for the Southern District of New York.

 

For a more detailed discussion on Litigation, see Note 13 of the consolidated financial statements of the Corporation’s 2002 Annual Report.

 

Note 6—Shareholders’ Equity and Earnings Per Common Share

 

On January 22, 2003, the Board authorized a stock repurchase program of up to 130 million shares of the Corporation’s common stock at an aggregate cost of $12.5 billion. At June 30, 2003, the remaining buyback authority for common stock under this program totaled $10.6 billion, or 105 million shares. The 2001 repurchase plan was completed during the second quarter of 2003. During the six months ended June 30, 2003, the Corporation repurchased approximately 49 million shares of its common stock in open market repurchases and as a result of put options exercised, at an average per-share price of $72.67, which reduced shareholders’ equity by $3.5 billion and increased earnings per share by approximately $0.04. These repurchases were partially offset by the issuance of 44 million shares of common stock under employee plans, which increased shareholders’ equity by $2.4 billion, net of $155 million of deferred compensation related to restricted stock awards, and decreased earnings per share by approximately $0.03 for the six months ended June 30, 2003. For the six months ended June 30, 2002, the Corporation repurchased approximately 82 million shares of its common stock in open market repurchases and under an accelerated repurchase program at an average per-share price of $68.92, which reduced shareholders’ equity by $5.7 billion and increased earnings per share by approximately $0.05 for the six months ended June 30, 2002. These repurchases were partially offset by the issuance of 39 million shares of common stock under employee plans, which increased shareholders’ equity by $2.0 billion and decreased earnings per share by approximately $0.03 for the six months ended June 30, 2002. The Corporation anticipates it will continue to repurchase shares at least equal to shares issued under its various stock option plans.

 

Accumulated other comprehensive income (OCI) includes pre-tax net unrealized gains (losses) related to available-for-sale and marketable equity securities, foreign currency translation adjustments, derivatives and other of $(1.8) billion and $1.3 billion for the six months ended June 30, 2003 and 2002, respectively. The net change in accumulated OCI also includes reclassification adjustments for gains (losses) to net income during the current period that had been included in accumulated OCI in previous period ends. Pre-tax reclassification adjustments for gains included in the Consolidated Statement of Income for the six months ended June 30, 2003 and 2002 were $475 million and $310 million, respectively. The related income tax expense (benefit) was $(798) million and $727 million for the six months ended June 30, 2003 and 2002, respectively.

 

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

 

13


The calculation of earnings per common share and diluted earnings per common share for the three months and six months ended June 30, 2003 and 2002 is presented below.

 

    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

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


   2003

    2002

    2003

    2002

 

Earnings per common share

                                

Net income

   $ 2,738     $ 2,221     $ 5,162     $ 4,400  

Preferred stock dividends

     (1 )     (1 )     (2 )     (2 )
    


 


 


 


Net income available to common shareholders

   $ 2,737     $ 2,220     $ 5,160     $ 4,398  
    


 


 


 


Average common shares issued and outstanding

     1,494,094       1,533,783       1,496,827       1,538,600  
    


 


 


 


Earnings per common share

   $ 1.83     $ 1.45     $ 3.45     $ 2.86  
    


 


 


 


Diluted earnings per common share

                                

Net income available to common shareholders

   $ 2,737     $ 2,220     $ 5,160     $ 4,398  

Preferred stock dividends

     1       1       2       2  
    


 


 


 


Net income available to common shareholders and assumed conversions

   $ 2,738     $ 2,221     $ 5,162     $ 4,400  
    


 


 


 


Average common shares issued and outstanding

     1,494,094       1,533,783       1,496,827       1,538,600  

Dilutive potential common shares(1, 2)

     29,212       58,467       27,888       48,236  
    


 


 


 


Total diluted average common shares issued and outstanding

     1,523,306       1,592,250       1,524,715       1,586,836  
    


 


 


 


Diluted earnings per common share

   $ 1.80     $ 1.40     $ 3.39     $ 2.77  
    


 


 


 



(1)   For the three months and six months ended June 30, 2003, average options to purchase 13 million and 16 million shares, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive. For the three months and six months ended June 30, 2002, average options to purchase 18 million and 23 million shares, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive.
(2)   Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units and stock options.

 

Note 7—Business Segment Information

 

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

 

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

 

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

 

Total revenue includes net interest income on a fully-taxable equivalent basis and noninterest income. The net interest income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net interest income also reflects an allocation of net interest income generated by assets and liabilities used in the Corporation’s ALM activities.

 

14


The following table presents results of operations, selected performance ratios and selected average balance sheet categories for the three months and six months ended June 30, 2003 and 2002 for each business segment. Certain prior period amounts have been reclassified among segments to conform to the current period presentation.

 

 

Business Segment Summary

                                                

For the three months ended June 30

                                                
     Total Corporation

   

Consumer and

Commercial Banking(1)


    Asset Management(1)

 

(Dollars in millions)


   2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income(2)

   $ 5,524     $ 5,262     $ 3,968     $ 3,713     $ 189     $ 185  

Noninterest income

     4,255       3,481       2,622       2,010       423       437  
    


 


 


 


 


 


Total revenue

     9,779       8,743       6,590       5,723       612       622  

Provision for credit losses

     772       888       522       449       3       143  

Gains on sales of securities

     296       93       2       6       —         —    

Amortization of intangibles

     54       55       45       44       1       1  

Other noninterest expense

     5,004       4,435       3,057       2,721       384       379  
    


 


 


 


 


 


Income before income taxes

     4,245       3,458       2,968       2,515       224       99  

Income tax expense

     1,507       1,237       1,097       928       80       33  
    


 


 


 


 


 


Net income

   $ 2,738     $ 2,221     $ 1,871     $ 1,587     $ 144     $ 66  
    


 


 


 


 


 


Shareholder value added

   $ 1,414     $ 834     $ 1,381     $ 1,056     $ 70     $ (2 )

Net interest yield (fully taxable-equivalent basis)

     3.33 %     3.75 %     4.69 %     5.34 %     3.19 %     2.98 %

Return on average equity

     21.9       18.5       38.5       33.1       21.1       11.4  

Efficiency ratio (fully taxable-equivalent basis)

     51.7       51.3       47.1       48.3       63.2       61.0  

Average:

                                                

Total loans and leases

   $ 350,279     $ 335,684     $ 187,811     $ 182,012     $ 22,866     $ 24,308  

Total assets

     774,644       646,599       362,036       303,119       25,657       26,150  

Total deposits

     405,307       365,986       306,447       280,161       12,710       11,776  

Common equity/Allocated equity

     50,212       48,213       19,510       19,249       2,751       2,337  
    


 


 


 


 


 


For the three months ended June 30

    

Global Corporate and

Investment Banking(1)


    Equity Investments(1)

    Corporate Other

 

(Dollars in millions)


   2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income(2)

   $ 1,204     $ 1,161     $ (36 )   $ (41 )   $ 199     $ 244  

Noninterest income

     1,058       1,145       24       (43 )     128       (68 )
    


 


 


 


 


 


Total revenue

     2,262       2,306       (12 )     (84 )     327       176  

Provision for credit losses

     172       216       3       —         72       80  

Gains (losses) on sales of securities

     (4 )     (18 )     —         —         298       105  

Amortization of intangibles

     7       8       1       1       —         1  

Other noninterest expense

     1,412       1,288       28       8       123       39  
    


 


 


 


 


 


Income before income taxes

     667       776       (44 )     (93 )     430       161  

Income tax expense

     227       267       (16 )     (38 )     119       47  
    


 


 


 


 


 


Net income

   $ 440     $ 509     $ (28 )   $ (55 )   $ 311     $ 114  
    


 


 


 


 


 


Shareholder value added

   $ 175     $ 183     $ (84 )   $ (120 )   $ (128 )   $ (283 )

Net interest yield (fully taxable-equivalent basis)

     2.07 %     2.31 %     n/m       n/m       n/m       n/m  

Return on average equity

     17.8       18.3       (5.5 )%     (10.1 )%     n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     62.7       56.2       n/m       n/m       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 51,285     $ 64,114     $ 414     $ 448     $ 87,903     $ 64,802  

Total assets

     286,247       238,412       6,153       6,255       94,551       72,663  

Total deposits

     66,900       63,770       —         —         19,250       10,279  

Common equity/Allocated equity(3)

     9,914       11,168       2,050       2,198       15,987       13,261  
    


 


 


 


 


 


 

 

15


 

Business Segment Summary (continued)  

For the six months ended June 30

    Total Corporation

    Consumer and
Commercial Banking(1)


    Asset Management(1)

 

(Dollars in millions)


  2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income(2)

  $ 10,885     $ 10,509     $ 7,700     $ 7,396     $ 368     $ 371  

Noninterest income

    7,940       6,921       4,923       3,977       822       849  
   


 


 


 


 


 


Total revenue

    18,825       17,430       12,623       11,373       1,190       1,220  

Provision for credit losses

    1,605       1,728       1,010       875       (1 )     170  

Gains on sale of securities

    569    

 

137

 

    11       31       —         —    

Amortization of intangibles

    108       110       89       88       3       3  

Other noninterest expense

    9,667       8,874       6,030       5,454       750       734  
   


 


 


 


 


 


Income before income taxes

    8,014       6,855       5,505       4,987       438       313  

Income tax expense

    2,852       2,455       2,043       1,843       154       110  
   


 


 


 


 


 


Net income

  $ 5,162     $ 4,400     $ 3,462     $ 3,144     $ 284     $ 203  
   


 


 


 


 


 


Shareholder value added

  $ 2,554     $ 1,666     $ 2,480     $ 2,080     $ 136     $ 67  

Net interest yield (fully taxable-equivalent basis)

    3.42 %     3.80 %     4.70 %     5.38 %     3.13 %     2.97 %

Return on average equity

    20.9       18.6       35.5       32.7       20.7       17.6  

Efficiency ratio (fully taxable-equivalent basis)

    51.9       51.5       48.5       48.7       63.3       60.4  

Average:

                                               

Total loans and leases

  $ 347,983     $ 331,765     $ 186,789     $ 181,721     $ 22,775     $ 24,550  

Total assets

    744,141       642,163       353,356       301,595       25,411       26,442  

Total deposits

    395,587       365,198       301,080       278,418       12,784       11,806  

Common equity/Allocated equity

    49,780       47,805       19,640       19,367       2,769       2,331  
   


 


 


 


 


 


For the six months ended June 30

    Global Corporate and
Investment Banking(1)


    Equity Investments(1)

    Corporate Other

 

(Dollars in millions)


  2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income(2)

  $ 2,482     $ 2,325     $ (73 )   $ (83 )   $ 408     $ 500  

Noninterest income

    2,123       2,266       (46 )     (29 )     118       (142 )
   


 


 


 


 


 


Total revenue

    4,605       4,591       (119 )     (112 )     526       358  

Provision for credit losses

    444       481       4       —         148       202  

Gains (losses) on sale of securities

    (17 )     (42 )     —         —         575       148  

Amortization of intangibles

    14       16       1       1       1       2  

Other noninterest expense

    2,729       2,583       54       35       104       68  
   


 


 


 


 


 


Income before income taxes

    1,401       1,469       (178 )     (148 )     848       234  

Income tax expense

    480       502       (64 )     (61 )     239       61  
   


 


 


 


 


 


Net income

  $ 921     $ 967     $ (114 )   $ (87 )   $ 609     $ 173  
   


 


 


 


 


 


Shareholder value added

  $ 378     $ 306     $ (225 )   $ (215 )   $ (215 )   $ (572 )

Net interest yield (fully taxable-equivalent basis)

    2.17 %     2.37 %     n/m       n/m       n/m       n/m  

Return on average equity

    18.2       17.1       (11.1 )%     (8.2 )%     n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

    59.6       56.6       n/m       n/m       n/m       n/m  

Average:

                                               

Total loans and leases

  $ 53,899     $ 65,552     $ 424     $ 437     $ 84,096     $ 59,505  

Total assets

    279,899       235,114       6,134       6,254       79,341       72,758  

Total deposits

    67,106       63,492       —         —         14,617       11,482  

Common equity/Allocated equity(3)

    10,214       11,380       2,064       2,159       15,093       12,568  
   


 


 


 


 


 



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

 

 

16


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

 

    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

(Dollars in millions)


       2003

        2002

        2003

        2002

 

Segments’ revenue

       $9,452         $8,567         $18,299         $17,072  

Adjustments:

                        

Asset and liability management activities(1)

   232     32     396     25  

Revenue associated with unassigned capital

   171     183     343     344  

Liquidating businesses

   46     123     152     280  

Fully taxable-equivalent basis adjustment

   (159 )   (168 )   (311 )   (262 )

Other

   (122 )   (162 )   (365 )   (291 )
    

 

 

 

Consolidated revenue

   $9,620     $8,575     $18,514     $17,168  
    

 

 

 

Segments’ net income

   $2,427     $2,107     $  4,553     $  4,227  

Adjustments, net of taxes:

                        

Gains on sales of securities

   200     71     385     99  

Asset and liability management activities(1)

   147     (30 )   255     (41 )

Earnings associated with unassigned capital

   115     124     230     230  

Liquidating businesses

   (31 )   11     (30 )   23  

Other

   (120 )   (62 )   (231 )   (138 )
    

 

 

 

Consolidated net income

   $2,738     $2,221     $  5,162     $  4,400  
    

 

 

 


(1)    Includeswhole mortgage loan sale gains.

                        

 

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

 

Note 8—Special Purpose Financing Entities

 

Securitizations

 

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

 

Variable Interest Entities

 

In January 2003, the FASB issued FIN 46, which provides a new framework for identifying VIEs and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. As a result of the requirements of FIN 46, the Corporation will begin consolidating certain of our multi-seller conduits in the third quarter of 2003. As of June 30, 2003, the assets of these entities were approximately $15.0 billion. However, management is assessing alternatives with regards to these entities including restructuring the entities and/or alternative sources of cost-efficient funding for the Corporation’s customers and with the objective that the amount of assets that is ultimately consolidated at September 30, 2003 will be less than the $15.0 billion. The actual amount that will be consolidated and reported as of September 30, 2003 will depend on actions taken by the Corporation and its customers subsequent to June 30, 2003. FIN 46 requires that when entities are consolidated, the assets should be initially recorded at their carrying amounts at the date the requirements of the interpretation first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value on the first date the interpretation applies. Any difference between the net amount added to the Corporation’s Consolidated Balance Sheet and the amount of any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change.

 

17


Revenues from administration, liquidity, letters of credit and other services provided to these entities were approximately $95 million and $82 million for the six months ended June 30, 2003 and 2002, respectively. There was no material impact to net income as a result of applying FIN 46 on July 1, 2003. At June 30, 2003, the Corporation’s liquidity and letter of credit exposure associated with the multi-seller conduits administered by the Corporation was approximately $18.1 billion.

 

Additionally, the Corporation has significant involvement with other VIEs that it will not likely consolidate because it is not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns, or both. These entities facilitate client transactions, and the Corporation functions as administrator for all of these and provides either liquidity and letters of credit or derivatives to the VIE. Total assets of these entities at June 30, 2003 were approximately $18.7 billion. At June 30, 2003, the Corporation’s loss exposure associated with these VIEs was approximately $14.4 billion, which is net of amounts syndicated. However, management does not believe any losses resulting from its involvement with these entities will be material.

 

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

 

18



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


 

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Corporation’s Form 10-Q should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed in the Corporation’s 2002 Annual Report. The statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

 

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

 

19


The Corporation is headquartered in Charlotte, North Carolina, operates in 21 states and the District of Columbia and has offices located in 30 countries. The Corporation provides a diversified range of banking and certain nonbanking financial services and products both domestically and internationally through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. At June 30, 2003, the Corporation had $769 billion in assets and approximately 133,000 full-time equivalent employees. Notes to the consolidated financial statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Performance overview for the six months ended June 30, 2003 compared to the same period in 2002:

 

Net income totaled $5.2 billion, or $3.39 per diluted common share, 17 percent and 22 percent increases, respectively, from $4.4 billion, or $2.77 per diluted common share. The return on average common shareholders’ equity was 21 percent compared to 19 percent.

 

For the first half of 2003, we continued to experience strong core business fundamentals in the areas of customer satisfaction and product/market performance that have created momentum for the remainder of the year.

 

Customer satisfaction continued to increase, 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 14 percent.

 

We increased net new consumer checking accounts by approximately 581,000 compared to a net increase of approximately 528,000 for all of 2002 driven by increased sales production and strong account retention.

 

Our active online banking customers reached 5.7 million, a 51 percent increase. This represents 37% of our active checking customers who use this service. Active bill pay customers increased more than 100 percent to 2.4 million. For the second quarter, active bill pay users paid over $10.9 billion of bills.

 

First mortgage originations increased $41.1 billion to $73.2 billion, as low mortgage interest rates drove home purchase and refinance volumes, coupled with expanded market coverage from our deployment of LoanSolutions®, which was first rolled out in the second quarter of 2002. Total mortgages funded through LoanSolutions® totaled $20.8 billion.

 

Banc of America Securities continued to maintain overall market share and gained in areas such as US equities, syndications and mortgage-backed securities.

 

Financial highlights for the six months ended June 30, 2003 compared to the same period in 2002:

 

Net interest income on a fully taxable-equivalent basis increased $376 million to $10.9 billion. This increase was driven by the impact of credit card loan growth, higher mortgage warehouse levels, higher trading-related net interest income and higher core funding levels, partially offset by reductions in the large corporate, foreign and middle market loans, and exited consumer loan businesses and the net negative impact of rates and discretionary portfolio repositioning in a declining rate environment. The net interest yield on a fully taxable-equivalent basis declined 38 basis points to 3.42% primarily due to the net negative impact of rates and discretionary portfolio repositioning in a declining rate environment and higher trading-related assets, partially offset by credit card loan growth and higher core funding levels.

 

Noninterest income increased $1.0 billion, primarily due to increases in mortgage banking income driven by gains from mortgage loans sold into the secondary market due to higher levels of refinancing activity and home purchases; card income; consumer-based fee income; and gains recognized in our whole mortgage loan portfolio as we sold some whole mortgage loans to manage prepayment risk due to the longer than anticipated low interest rate environment. Market-based trading activities, primarily credit fixed income showed strong results; however, these results were offset by trading losses in the commodity portfolio primarily due to the adverse impact on jet fuel prices from the outbreak of Severe Acute Respiratory Syndrome (SARS). Also offsetting trading profits were losses of $190 million on derivatives used to hedge credit risk in the loan portfolio and a net reduction in the value of our mortgage banking

 

20


assets and the related derivative instruments of $162 million mainly attributed to lower interest rates and faster prepayment speeds. Other noninterest income included gains from whole mortgage loan sales of $524 million compared to $138 million. Other noninterest income also included equity in the earnings of our investment in Grupo Financiero Santander Serfin (GFSS) of $55 million.

 

Gains on sales of securities were $569 million compared to $137 million as we continued to reposition the discretionary portfolio to take advantage of interest rate fluctuations.

 

The provision for credit losses declined $123 million to $1.6 billion. Net charge-offs were $1.6 billion and represented 0.93 percent of average loans and leases, a decrease of 12 basis points. The decrease in net charge-offs in the commercial—domestic loan portfolio was partially offset by an increase in credit card net charge-offs.

 

Nonperforming assets decreased $832 million to $4.4 billion, or 1.23 percent of loans, leases and foreclosed properties at June 30, 2003 compared to 1.53 percent at December 31, 2002. This decline was primarily driven by reduced levels of inflows to nonperforming assets in Global Corporate and Investment Banking, together with loan sales and payoffs facilitated by higher levels of liquidity in the capital markets. In addition, commercial asset quality improved in Asset Management and Consumer and Commercial Banking.

 

Noninterest expense increased $791 million, primarily due to increases in personnel, professional fees, marketing, occupancy expense and data processing. Higher personnel costs resulted from increased costs of certain employee benefits, incentives and initiative related contract labor. Employee benefits expense increased as we began expensing stock options in the first quarter of 2003 and due to the impacts of a change in the expected long-term rate of return on plan assets to 8.5 percent for 2003 and a change in the discount rate from 7.25 percent in 2002 to 6.75 percent in 2003 for the Bank of America Pension Plan. Increase in professional fees was driven by increased litigation accruals of $145 million associated with pending litigation principally related to securities matters. Marketing expense increased primarily due to increased advertising and marketing investments in online banking and bill pay and card products. Higher occupancy costs were due to $32 million associated with vacating space in Tokyo and San Francisco related to exiting businesses and increased security and insurance expense. Data processing expense reflects increases in online bill payers and card processing due to higher volumes.

 

Income tax expense was $2.5 billion reflecting an estimated effective tax rate of 33.0 percent, compared to $2.2 billion and 33.3 percent, respectively.

 

21


Table 1

 

Selected Financial Data


    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

(Dollars in millions, except per share information)


   2003

    2002

    2003

    2002

 

Income statement

                                

Net interest income

   $ 5,365     $ 5,094     $ 10,574     $ 10,247  

Noninterest income

     4,255       3,481       7,940       6,921  

Total revenue

     9,620       8,575       18,514       17,168  

Provision for credit losses

     772       888       1,605       1,728  

Gains on sales of securities

     296       93       569       137  

Noninterest expense

     5,058       4,490       9,775       8,984  

Income before income taxes

     4,086       3,290       7,703       6,593  

Income tax expense

     1,348       1,069       2,541       2,193  

Net income

     2,738       2,221       5,162       4,400  

Average common shares issued and outstanding
(in thousands)

     1,494,094       1,533,783       1,496,827       1,538,600  

Average diluted common shares issued and outstanding
(in thousands)

     1,523,306       1,592,250       1,524,715       1,586,836  
    


 


 


 


Performance ratios

                                

Return on average assets

     1.42 %     1.38 %     1.40 %     1.38 %

Return on average common shareholders' equity

     21.86       18.47       20.90       18.55  

Total equity to total assets (period end)

     6.63       7.48       6.63       7.48  

Total average equity to total average assets

     6.49       7.47       6.70       7.45  

Dividend payout ratio

     35.06       41.40       37.21       41.93  
    


 


 


 


Per common share data

                                

Earnings

   $ 1.83     $ 1.45     $ 3.45     $ 2.86  

Diluted earnings

     1.80       1.40       3.39       2.77  

Dividends paid

     0.64       0.60       1.28       1.20  

Book value

     34.06       31.47       34.06       31.47  
    


 


 


 


Average balance sheet

                                

Total loans and leases

   $ 350,279     $ 335,684     $ 347,983     $ 331,765  

Total assets

     774,644       646,599       744,141       642,163  

Total deposits

     405,307       365,986       395,587       365,198  

Long-term debt

     62,767       60,410       62,071       61,058  

Trust preferred securities

     6,160       5,530       6,096       5,754  

Common shareholders' equity

     50,212       48,213       49,780       47,805  

Total shareholders' equity

     50,269       48,274       49,837       47,867  
    


 


 


 


Capital ratios (period end)

                                

Risk-based:

                                

Tier 1 capital

     8.08 %     8.09 %     8.08 %     8.09 %

Total capital

     11.95       12.42       11.95       12.42  

Leverage ratio

     5.93       6.47       5.93       6.47  
    


 


 


 


Market price per share of common stock

                                

Closing

   $ 79.03     $ 70.36     $ 79.03     $ 70.36  

High

     80.00       77.08       80.00       77.08  

Low

     67.20       66.82       64.26       57.51  
    


 


 


 


 

Supplemental Financial Data

 

Shareholder value added (SVA) is a performance measure used in managing our growth strategy and is not defined in GAAP (generally accepted accounting principles). We also calculate certain measures, such as net interest income, core net interest income, net interest yield and efficiency ratio, on a fully taxable-equivalent basis. Other companies may define or calculate supplemental financial data differently. See Tables 2 and 3 for supplemental financial data for the three months and six months ended June 30, 2003 and 2002.

 

SVA is a key measure of performance used in managing our growth strategy orientation and strengthening our focus on generating long-term growth and shareholder value. SVA is used in measuring performance of our different business units and is an integral component for allocating resources. Each business segment has a goal for growth in SVA reflecting the individual segment’s business and customer strategy. Investment resources and initiatives are aligned with these SVA growth goals during the planning and forecasting process. Investment, relationship and

 

22


profitability models all have SVA as a key measure to support the implementation of SVA growth goals. SVA is defined as cash basis earnings less a charge for the use of capital. Cash basis earnings is net income adjusted to exclude amortization of intangibles. The charge for the use of capital is calculated by multiplying 11 percent (management’s estimate of the shareholders’ minimum required rate of return on capital invested) by average total common shareholders’ equity at the corporate level and by average allocated equity at the business segment level. Equity is allocated to the business segments using a risk-adjusted methodology for each segment’s credit, market, country and operational risk. SVA increased 53 percent to $2.6 billion for the six months ended June 30, 2003 from the comparable 2002 period, due to both the $760 million increase in cash basis earnings and the decrease in capital charge, which was driven by the reduction in management’s estimate of the rate used to calculate the charge for the use of capital from 12% to 11% in the first quarter of 2003. See Table 2 for the calculation of SVA and Business Segment Operations beginning on page 25 for additional discussion on SVA.

 

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

 

Table 2

 

Supplemental Financial Data

 

 

    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Shareholder value added

                                

Net income

   $ 2,738     $ 2,221     $ 5,162     $ 4,400  

Amortization expense

     54       55       108       110  

Capital charge

     (1,378 )     (1,442 )     (2,716 )     (2,844 )
    


 


 


 


Shareholder value added

   $ 1,414     $ 834     $ 2,554     $ 1,666  
    


 


 


 


Fully taxable-equivalent basis data

                                

Net interest income

   $ 5,524     $ 5,262     $ 10,885     $ 10,509  

Total revenue

     9,779       8,743       18,825       17,430  

Net interest yield

     3.33 %     3.75 %     3.42 %     3.80 %

Efficiency ratio

     51.73       51.34       51.93       51.54  
    


 


 


 


 

Additionally, we review “core net interest income,” which adjusts reported net interest income on a fully taxable-equivalent basis for the impact of Global Corporate and Investment Banking’s trading-related activities and loans that we originated and sold into revolving credit card and commercial securitizations. Noninterest income, rather than net interest income and provision for credit losses, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. For purposes of internal analysis, we combine trading-related net interest income with trading account profits, as discussed in the Global Corporate and Investment Banking business segment discussion beginning on page 28, as trading strategies are evaluated based on total revenue.

 

23


Table 3 below provides a reconciliation of net interest income on a taxable-equivalent basis presented in Tables 4 and 5 to core net interest income for the three months and six months ended June 30, 2003 and 2002:

 

Table 3

 

Core Net Interest Income


    

Three Months Ended

June 30


   

Six Months Ended

June 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Net interest income

                                

As reported on a fully taxable-equivalent basis

   $ 5,524     $ 5,262     $ 10,885     $ 10,509  

Trading-related net interest income

     (552 )     (469 )     (1,160 )     (902 )

Impact of revolving securitizations

     89       144       187       301  
    


 


 


 


Core net interest income

   $ 5,061     $ 4,937     $ 9,912     $ 9,908  
    


 


 


 


Average earning assets

                                

As reported

   $ 663,500     $ 562,192     $ 638,435     $ 555,688  

Trading-related earning assets

     (169,626 )     (124,409 )     (164,040 )     (118,762 )

Impact of revolving securitizations

     3,759       6,551       4,116       7,397  
    


 


 


 


Core average earning assets

   $ 497,633     $ 444,334     $ 478,511     $ 444,323  
    


 


 


 


Net interest yield on earning assets

                                

As reported

     3.33 %     3.75 %     3.42 %     3.80 %

Impact of trading-related activities

     0.70       0.64       0.70       0.61  

Impact of revolving securitizations

     0.04       0.06       0.04       0.07  
    


 


 


 


Core net interest yield on earning assets

     4.07 %     4.45 %     4.16 %     4.48 %
    


 


 


 


 

Core net interest income was virtually unchanged for the six months ended June 30, 2003 from the comparable 2002 period as credit card loan growth, higher mortgage warehouse levels and higher core funding levels were offset by reduced loan levels in the large corporate, foreign and middle market loans, and exited consumer loan businesses and the net negative impact of rates and discretionary portfolio repositioning in the declining rate environment.

 

Core average earning assets increased $34.2 billion for the six months ended June 30, 2003 from the comparable 2002 period primarily due to higher levels of residential mortgage and credit card loans, securities and loans held for sale, partially offset by reductions in loan levels in the large corporate, foreign and middle market loans, and exited consumer loan businesses.

 

The core net interest yield decreased 32 basis points for the six months ended June 30, 2003 from the comparable 2002 period mainly due to the net negative impact of rates and discretionary portfolio repositioning in the declining rate environment, partially offset by credit card loan growth and the impact of higher levels of core deposit funding.

 

Complex Accounting Estimates and Principles

 

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

 

See Note 1 of the consolidated financial statements for Recently Issued Accounting Pronouncements.

 

24


Business Segment Operations

 

We provide our customers and clients both traditional banking and nonbanking financial products and services through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. Certain subsegments are managed through a single business segment. Descriptions of each business segment and subsegment can be found in the Corporation’s 2002 Annual Report on pages 32 through 36.

 

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

 

Consumer and Commercial Banking

 

Our Consumer and Commercial Banking strategy is to attract, retain and deepen customer relationships. A critical component of that strategy includes continuously improving customer satisfaction. We believe this focus will help us achieve our goal of being recognized as the best retail bank in America. Customers reporting that they were delighted with their service increased 14 percent at June 30, 2003 compared to June 30, 2002. We added 581,000 net new checking accounts for the six months ended June 30, 2003, surpassing last year’s total net new checking growth of 528,000. This growth resulted from an 18 percent increase in sales production and strong account retention. Access to our services through online banking, which saw a 51 percent increase in active online subscribers, our network of domestic banking centers, card products, ATMs, telephone and internet channels, and our product innovations such as an expedited mortgage application process through LoanSolutions® contributed to revenue growth and success with our customers.

 

Net interest income increased $304 million primarily due to overall credit card portfolio and deposit growth. These increases were partially offset by the compression of deposit interest margins and the results of asset and liability management (ALM) activities. SVA increased 19 percent due to the increase in net income and the decrease in the capital charge due to the reduction in the rate used to calculate the charge for the use of capital. Net interest income was positively impacted by the $5.1 billion, or three percent, increase in average loans and leases for the six months ended June 30, 2003, compared to the same period in 2002, as an increase in consumer loans was partially offset by a decline in commercial loans. Average on-balance sheet credit card outstandings increased 28 percent, primarily due to new account growth and an increase in new advances on previously securitized balances that are recorded on our balance sheet after the revolving period of the securitization. Average managed credit card outstandings, which include securitized credit card loans, increased 11 percent. Average residential mortgage loans were relatively unchanged. A six percent increase in average direct/indirect loans and a three percent increase in average home equity lines also contributed to growth in the consumer loan portfolio. Average commercial loans declined three percent for the six months ended June 30, 2003, primarily due to the reduced demand for new loans, compared to the same period in 2002. However, compared to December 31, 2002, average commercial loans increased $2.4 billion as we began to see signs of growth driven by loans to home builders and more general industries.

 

Deposit growth also positively impacted net interest income. Higher consumer deposit balances as a result of our efforts to add new customers, as evidenced by the increase in net new checking accounts and money market accounts, higher escrow balances and customer preference for stable investments in these uncertain economic times, drove the $22.7 billion, or eight percent, increase in average deposits for the six months ended June 30, 2003.

 

25


Significant Noninterest Income Components


     Three Months Ended
June 30


   Six Months Ended
June 30


(Dollars in millions)


   2003

    2002

   2003

    2002

Service charges

       $ 1,072         $ 999        $ 2,125     $ 1,955

Mortgage banking income

     559       136      964       331

Card income

     762       621      1,443       1,198

Trading account profits

     (49 )     29      (170 )     21
    


 

  


 

 

Increases in both corporate and consumer service charges led to the $170 million, or nine percent, increase in service charges. Increased levels of deposit fees from new account growth and favorable repricing drove the $148 million, or 11 percent, increase in consumer service charges. Corporate service charges increased $22 million, or four percent, as customers opted to pay service charges rather than maintain additional deposit balances in the current low rate environment.

 

Gains from mortgage loans sold into the secondary market, due to higher levels of refinancing activity and home purchases, drove the $633 million increase in mortgage banking income. Originated first mortgage loans increased $41.1 billion to $73.2 billion for the six months ended June 30, 2003 substantially the result of elevated refinancing levels. Subsequent to June 30, 2003, we saw a noticeable increase in mortgage rates and a decrease in mortgage applications. While we believe that the mix of channels we originate mortgages through should help to reduce the impact of future decreases in retail origination levels after the current refinancing boom fades away, we are not in a position to determine the ultimate impact on our mortgage banking business at this time. Gains from secondary loan sales increased $246 million to $225 million for the six months ended June 30, 2003 compared to the same period in 2002. First mortgage loan origination volume was composed of approximately $50.2 billion of retail loans and $23.0 billion of wholesale loans for the six months ended June 30, 2003, compared to $22.4 billion of retail loans and $9.7 billion of wholesale loans for the six months ended June 30, 2002. Increased mortgage prepayments resulting from the significant decrease in mortgage interest rates led to a $35.5 billion decline in the average portfolio of first mortgage loans serviced to $255.1 billion for the six months ended June 30, 2003.

 

Increases in both debit and credit card income resulted in the 20 percent increase in card income. The increase in debit card income of $83 million, or 23 percent, was primarily due to increases in purchase volumes, new account growth and higher activation and penetration levels. Higher interchange fees, primarily driven by increased credit card purchase volumes, as well as higher late and overlimit fees contributed to the $162 million, or 19 percent, increase in credit card income. Card income included activity from the securitized portfolio of $78 million and $72 million for the six months ended June 30, 2003 and 2002, respectively. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. New advances under these previously securitized balances will be recorded on our balance sheet after the revolving period of the securitization, which has the effect of increasing loans on our balance sheet and increasing net interest income and charge-offs, with a corresponding reduction in noninterest income. Beginning in the third quarter of 2003, we expect earnings to be impacted as a result of an agreement entered into by Visa U.S.A. For additional information regarding this agreement, see “Visa U.S.A. Settlement” on page 52.

 

Trading account profits represents the net mark-to-market adjustments on mortgage banking assets and related derivative instruments. Impacting trading account profits for the six months ended June 30, 2003 was a net reduction in the value of our mortgage banking assets and related derivative instruments of $162 million, primarily due to the impact of faster prepayment speeds. Mortgage banking assets decreased to $1.7 billion at June 30, 2003 compared to $2.1 billion at December 31, 2002 due to higher prepayments resulting in the decreased value of servicing in the lower interest rate environment.

 

Higher provision in the credit card loan portfolio, partially offset by a decline in provision for commercial loans resulted in a $135 million, or 15 percent, increase in the provision for credit losses. The increase in credit card provision was primarily attributable to the continued seasoning of outstandings from prior years’ new account growth, new advances on previously securitized balances, and current economic conditions including higher

 

26


bankruptcies. Seasoning refers to the length of time passed since an account was opened. Commercial loan provision declined consistent with the improvement in credit quality.

 

Noninterest expense increased $577 million, or 10 percent, primarily due to increases in personnel expense, marketing and promotional fees and data processing expense. Personnel expense increased primarily as a result of higher incentive compensation driven by strong mortgage sales production. Marketing and promotional fees were up primarily due to increased advertising and marketing investments in online banking and bill pay and card products. The increase in data processing expense was primarily attributable to increases in online bill payers and card processing associated with higher volumes of activity.

 

Asset Management

 

Despite the drop in average market indices of more than 17 percent from a year ago, total revenue declined only $30 million, or two percent, for the six months ended June 30, 2003 and net income increased 40 percent, primarily due to a lower provision charge. SVA more than doubled as the increase in net income and the decrease in the capital charge were partially offset by an increase in capital levels. The increase in capital levels was driven by additional goodwill recorded in 2002 representing final contingent consideration in connection with the acquisition of the remaining 50 percent of Marsico Capital Management, LLC. All conditions related to this contingent consideration have been met. Asset Management is continuing to focus on expanding its distribution capabilities to better serve the financial needs of its clients across the franchise, and is on target with its goal to increase the number of financial advisors in 2003 by approximately 20 percent.

 

Client Assets


     June 30

(Dollars in billions)


   2003

   2002

Assets under management

   $ 314.9    $ 295.2

Client brokerage assets

     90.6      90.5

Assets in custody

     47.9      41.0
    

  

Total client assets

   $ 453.4    $ 426.7
    

  

 

Assets under management, which consist largely of mutual funds, equities and bonds, generate fees based on a percentage of their market value. Compared to a year ago, assets under management increased $19.7 billion, or seven percent, primarily due to increased investment flows in money market mutual funds, bonds and equities. Client brokerage assets, a source of commission revenue, remained relatively flat compared to a year ago. Client brokerage assets consist largely of investments in bonds, money market mutual funds, annuities and equities. Assets in custody increased $6.9 billion or 17 percent and 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 remained relatively flat as lower loan balances and the results of ALM activities were offset by growth in deposits and increased loan spreads. Average loans and leases declined $1.8 billion, or seven percent, for the six months ended June 30, 2003. Average deposits increased $978 million, or eight percent, for the six months ended June 30, 2003.

 

 

Significant Noninterest Income Components


     Three Months Ended
June 30


        Six Months Ended
June 30


(Dollars in billions)


   2003

   2002

        2003

   2002

Asset management fees(1)

   $ 294    $ 300         $ 571    $ 571

Brokerage income

     104      111           200      222
    

  

       

  

Total investment and brokerage services

   $ 398    $ 411         $ 771    $ 793
    

  

       

  


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

      

 

27


Noninterest income decreased $27 million, or three percent for the six months ended June 30, 2003. This decline was primarily due to a decrease in brokerage income, consistent with the current years’ market environment. Declines in personal asset management fees were offset by increases in mutual fund fees.

 

Provision for credit losses decreased $171 million, primarily due to one large charge-off recorded in the second quarter of 2002.

 

Noninterest expense increased $16 million, or two percent, as increased expenses related to the addition of financial advisors over the past five quarters were partially offset by lower revenue-related incentive compensation.

 

Global Corporate and Investment Banking

 

Total revenue was relatively flat for the six months ended June 30, 2003, as increases in net interest income and investment banking income were offset by a decline in trading account profits. Net income decreased $46 million, or five percent. SVA increased by 24 percent as a result of lower economic capital and a decrease in the capital charge.

 

Net interest income increased $157 million, or seven percent, due to trading-related activities partially offset by lower loan levels and ALM activities. Average loans and leases declined $11.7 billion, or 18 percent, for the six months ended June 30, 2003.

 

Significant Noninterest Income Components


     Three Months Ended
June 30


        Six Months Ended
June 30


(Dollars in millions)


   2003

   2002

        2003

   2002

Service charges

   $ 290    $ 290         $ 583    $ 582

Investment and brokerage services

     187      168           338      320

Investment banking income

     462      443           835      771

Trading account profits

     109      287           413      646
    

  

       

  

 

Noninterest income decreased $143 million, or six percent, for the six months ended June 30, 2003, as a decline in trading account profits was partially offset by increases in investment banking income and investment and brokerage services. Service charges remained flat.

 

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.

 

28


Trading-related Revenue in

Global Corporate and Investment Banking


    

Three Months Ended

June 30


  

Six Months Ended

June 30


(Dollars in millions)


           2003  

            2002  

           2003  

            2002  

Net interest income(1)

   $552     $469    $1,160     $902

Trading account profits

   109     287    413     646
    

 
  

 

Total trading-related revenue

   $661     $756    $1,573     $1,548
    

 
  

 

Revenue by product

                     

Foreign exchange

   $124     $139    $259     $268

Interest rate(1)

   239     281    469     545

Credit(2)

   279     202    658     451

Equities

   100     104    215     229

Commodities

   (81 )   30    (28 )   55
    

 
  

 

Total trading-related revenue

   $661     $756    $1,573     $1,548
    

 
  

 

(1)    Presented on a fully taxable-equivalent basis.

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

 

Trading-related revenue increased $25 million, as the $258 million increase in net interest income was partially offset by a $233 million decrease in trading account profits for the six months ended June 30, 2003. The overall increase was primarily due to an increase in revenue from credit related trading of $207 million. For the six months ended June 30, 2003 and 2002, credit trading related revenue included $190 million in losses and $65 million in gains from credit default swaps, that were used in the overall credit risk management of the loan portfolio. See “Concentrations of Credit Risk” on page 38 for a discussion on credit derivatives used in the credit risk management process. Adjusted for the impact of credit default swaps, credit fixed income trading increased by $462 million for the six months ended June 30, 2003 compared to the same period in 2002. This growth reflects the strength of our debt securities trading platform which capitalized on credit spreads tightening in the high grade and high yield markets. Additionally, revenues from commodities trading declined $83 million in 2003 primarily due to the adverse impact on jet fuel prices from the SARS outbreak and a decline in interest rate products of $76 million resulting from volatile markets after the war in Iraq.

 

Investment Banking Income in

Global Corporate and Investment Banking


     Three Months Ended
June 30


  

Six Months Ended

June 30


(Dollars in millions)


           2003

           2002    

           2003    

           2002

Securities underwriting

   $293    $231    $493    $425

Syndications

   112    120    214    188

Advisory services

   43    80    102    138

Other

   14    12    26    20
    
  
  
  

Total

   $462    $443    $835    $771
    
  
  
  

 

Investment banking income increased $64 million, or eight percent, for the six months ended June 30, 2003. We continued to maintain overall market share and gained in areas such as U.S. equities, syndications and mortgage-backed securities. The market for securities underwriting declined for high grade and equity offerings; however, our continued strong market share in equity offerings resulted in a 16 percent increase in securities underwriting fees. We also continued to maintain strong market share in syndicated loan products, which drove an increase in syndication fees of $26 million. Advisory services income decreased $36 million.

 

Improved credit quality in our large corporate portfolio drove the $37 million, or eight percent, decrease in provision for credit losses. In addition to credit losses reflected in provision expense, included in other income for the six months ended June 30, 2003 were losses from writedowns of approximately $31 million related to partnership interests in leveraged leases to the airline industry.

 

29


Noninterest expense increased $144 million, or six percent, primarily due to higher expenses from ongoing litigation and costs associated with downsizing operations in South America and Asia.

 

While we have begun to see signs of improvement in some markets and realized success in portions of our trading business, it is anticipated that the remainder of 2003 will be challenging for the investment banking industry. We will continue to monitor market developments and take actions necessary to adjust resources accordingly to maintain our focus on revenue, net income and SVA.

 

Equity Investments

 

For the six months ended June 30, 2003, revenue decreased $7 million, or six percent and net income decreased $27 million, or 31 percent primarily due to reduced cash gains. The equity investment portfolio in Principal Investing was $5.8 billion at both June 30, 2003 and December 31, 2002.

 

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

 

Equity Investment Gains (Losses) in Principal Investing

     Three Months Ended
June 30


       Six Months Ended
June 30


(Dollars in millions)


   2003

   2002

       2003

   2002

Cash gains

       $87        $135        $132    $285

Fair value adjustments

   41    37        —      45

Impairments

   (107)    (220)        (184)    (362)
    
  

    
  

Total

   $21        $(48 )      $(52)    $(32)
    
  

    
  

 

Noninterest income primarily consists of equity investment gains (losses). Weakness in the private equity markets for the six months ended June 30, 2003 was the primary driver for the increase in equity investment losses. Impairments recorded for the six months ended June 30, 2003 and 2002 were driven primarily by continuing depressed levels of economic activity across many sectors both domestically and internationally.

 

Risk Management

 

Our corporate governance structure enables us to manage all major aspects of our business through an integrated planning and review process that includes strategic, financial, associate and risk planning. We derive our revenue from assuming and managing customer risk for profit. Through a robust governance structure, risk and return is evaluated with the goal of producing sustainable revenue, to reduce earnings volatility and increase shareholder value. Our business exposes us to four major risks: liquidity, credit, market and operational. For additional detail on risk management activities, see pages 36 through 37 of the Corporation’s 2002 Annual Report.

 

30


Table 4

 

Quarterly Average Balances and Interest Rates—Fully Taxable-Equivalent Basis


     Second Quarter 2003

   

First Quarter 2003


 

(Dollars in millions)


   Average
Balance


  

Interest

Income/

Expense


  

Yield/

Rate


   

Average

Balance


  

Interest

Income/

Expense


  

Yield/

Rate


 

Earning assets

                                        

Time deposits placed and other short-term investments

   $ 7,888    $ 39    1.99 %   $ 6,987    $ 43    2.49 %

Federal funds sold and securities purchased under agreements to resell

     70,054      194    1.11       57,873      194    1.35  

Trading account assets

     99,129      1,022    4.13       99,085      1,053    4.27  

Securities

     95,614      1,028    4.30       67,784      793    4.69  

Loans and leases(1):

                                        

Commercial—domestic

     100,721      1,746    6.95       103,663      1,836    7.18  

Commercial—foreign

     18,004      170    3.79       18,876      156    3.35  

Commercial real estate—domestic

     20,039      218    4.36       19,955      215    4.37  

Commercial real estate—foreign

     305      3    3.95       301      3    3.88  
    

  

  

 

  

  

Total commercial

     139,069      2,137    6.16       142,795      2,210    6.27