Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended September 30, 2003

 

OR

 

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

 

Commission file number: 1-6523

 


 

Bank of America Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   56-0906609
(State of incorporation)   (IRS Employer Identification Number)

 

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina 28255

(Address of principal executive offices)

 

(704) 386-8486

(Registrant’s telephone number, including area code)

 


 

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  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes  x    No  ¨

 

On October 31, 2003, there were 1,485,804,534 shares of Bank of America Corporation Common Stock outstanding.

 



Table of Contents

Bank of America Corporation

 

September 30, 2003 Form 10-Q

 

INDEX

 

              Page

Part I

Financial
Information

  Item 1.   

Financial Statements:

    
      

Consolidated Statement of Income for the Three Months and Nine Months Ended September 30, 2003 and 2002

   2
        

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

   3
        

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

   4
        

Consolidated Statement of Cash Flows for the Nine Months Ended September 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    21
    Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   57
    Item 4.   

Controls and Procedures

   57
Part II Other Information   Item 1.   

Legal Proceedings

   57
    Item 2.   

Changes in Securities and Use of Proceeds

   59
    Item 6.   

Exhibits and Reports on Form 8-K

   59
   

Signature

   60
   

Index to Exhibits

   61


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

 

Bank of America Corporation and Subsidiaries

Consolidated Statement of Income

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 

(Dollars in millions, except per share information)


   2003

   2002

    2003

   2002

 

Interest income

                              

Interest and fees on loans and leases

   $ 5,328    $ 5,553     $ 16,088    $ 16,528  

Interest and dividends on securities

     623      1,104       2,412      2,974  

Federal funds sold and securities purchased under agreements to resell

     480      177       867      662  

Trading account assets

     975      1,006       3,024      2,832  

Other interest income

     449      345       1,184      1,044  
    

  


 

  


Total interest income

     7,855      8,185       23,575      24,040  
    

  


 

  


Interest expense

                              

Deposits

     1,278      1,414       3,730      4,142  

Short-term borrowings

     447      526       1,414      1,532  

Trading account liabilities

     345      342       969      971  

Long-term debt

     481      601       1,584      1,846  
    

  


 

  


Total interest expense

     2,551      2,883       7,697      8,491  
    

  


 

  


Net interest income

     5,304      5,302       15,878      15,549  

Noninterest income

                              

Consumer service charges

     824      762       2,394      2,185  

Corporate service charges

     634      585       1,788      1,718  
    

  


 

  


Total service charges

     1,458      1,347       4,182      3,903  
    

  


 

  


Consumer investment and brokerage services

     367      374       1,146      1,175  

Corporate investment and brokerage services

     222      173       591      521  
    

  


 

  


Total investment and brokerage services

     589      547       1,737      1,696  
    

  


 

  


Mortgage banking income

     666      220       1,630      551  

Investment banking income

     412      318       1,278      1,123  

Equity investment gains (losses)

     25      (216 )     —        (226 )

Card income

     794      687       2,237      1,885  

Trading account profits

     175      71       382      679  

Other income(1)

     320      246       933      530  
    

  


 

  


Total noninterest income

     4,439      3,220       12,379      10,141  
    

  


 

  


Total revenue

     9,743      8,522       28,257      25,690  

Provision for credit losses

     651      804       2,256      2,532  

Gains on sales of securities

     233      189       802      326  

Noninterest expense

                              

Personnel

     2,595      2,368       7,749      7,200  

Occupancy

     522      457       1,492      1,330  

Equipment

     252      291       789      832  

Marketing

     249      210       717      550  

Professional fees

     214      126       620      339  

Amortization of intangibles

     55      54       163      164  

Data processing

     275      295       803      726  

Telecommunications

     152      119       413      361  

Other general operating

     756      700       2,099      2,102  
    

  


 

  


Total noninterest expense

     5,070      4,620       14,845      13,604  
    

  


 

  


Income before income taxes

     4,255      3,287       11,958      9,880  

Income tax expense

     1,333      1,052       3,874      3,245  
    

  


 

  


Net income

   $ 2,922    $ 2,235     $ 8,084    $ 6,635  
    

  


 

  


Net income available to common shareholders

   $ 2,921    $ 2,233     $ 8,081    $ 6,631  
    

  


 

  


Per common share information

                              

Earnings

   $ 1.96    $ 1.49     $ 5.41    $ 4.34  
    

  


 

  


Diluted earnings

   $ 1.92    $ 1.45     $ 5.31    $ 4.22  
    

  


 

  


Dividends paid

   $ 0.80    $ 0.60     $ 2.08    $ 1.80  
    

  


 

  


Average common shares issued and outstanding (in thousands)

     1,490,103      1,504,017       1,494,369      1,526,946  
    

  


 

  



(1) Other income includes whole mortgage loan sale gains totaling $197 and $186 for the three months ended September 30, 2003 and 2002, respectively, and $723 and $328 for the nine months ended September 30, 2003 and 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

Bank of America Corporation and Subsidiaries

 

Consolidated Balance Sheet

 

(Dollars in millions)


  

September 30

2003


   

December 31

2002


 

Assets

                

Cash and cash equivalents

   $ 22,142     $ 24,973  

Time deposits placed and other short-term investments

     6,881       6,813  

Federal funds sold and securities purchased under agreements to resell (includes $66,780 and $44,779 pledged as collateral)

     67,729       44,878  

Trading account assets (includes $29,112 and $35,515 pledged as collateral)

     65,339       63,996  

Derivative assets

     36,810       34,310  

Securities:

                

Available-for-sale (includes $29,846 and $32,919 pledged as collateral)

     64,363       68,122  

Held-to-maturity, at cost (market value - $531 and $1,001)

     522       1,026  
    


 


Total securities

     64,885       69,148  
    


 


Loans and leases

     373,098       342,755  

Allowance for credit losses

     (6,716 )     (6,851 )
    


 


Loans and leases, net of allowance for credit losses

     366,382       335,904  
    


 


Premises and equipment, net

     5,956       6,717  

Mortgage banking assets

     2,426       2,110  

Goodwill

     11,456       11,389  

Core deposit intangibles and other intangibles

     966       1,095  

Other assets (1)

     86,116       59,125  
    


 


Total assets

   $ 737,088     $ 660,458  
    


 


Liabilities

                

Deposits in domestic offices:

                

Noninterest-bearing

   $ 122,669     $ 122,686  

Interest-bearing

     257,586       232,320  

Deposits in foreign offices:

                

Noninterest-bearing

     2,650       1,673  

Interest-bearing

     25,605       29,779  
    


 


Total deposits

     408,510       386,458  
    


 


Federal funds purchased and securities sold under agreements to repurchase

     79,775       65,079  

Trading account liabilities

     29,744       25,574  

Derivative liabilities

     25,120       23,566  

Commercial paper and other short-term borrowings

     41,739       25,234  

Accrued expenses and other liabilities

     35,293       17,052  

Long-term debt

     66,462       61,145  

Trust preferred securities

     —         6,031  
    


 


Total liabilities

     686,643       610,139  
    


 


Commitments and contingencies (Note 5)

                

Shareholders’ equity

                

Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,281,600 and 1,356,749 shares

     55       58  

Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and outstanding - 1,489,437,206 and 1,500,691,103 shares

     15       496  

Retained earnings

     52,320       48,517  

Accumulated other comprehensive income (loss)

     (1,776 )     1,232  

Other

     (169 )     16  
    


 


Total shareholders’ equity

     50,445       50,319  
    


 


Total liabilities and shareholders’ equity

   $ 737,088     $ 660,458  
    


 



(1) Other assets includes loans held for sale totaling $12,129 and $13,833 at September 30, 2003 and December 31, 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

 

(Dollars in millions,
shares in thousands)


  Preferred
Stock


    Common Stock

    Retained
Earnings


    Accumulated
Other
Comprehensive
Income (Loss) (1)


    Other

    Total
Share-
holders’
Equity


    Comprehensive
Income


 
    Shares

    Amount

           

Balance, December 31, 2001

  $ 65     1,559,297     $ 5,076     $ 42,980     $ 437     $ (38 )   $ 48,520          

Net income

                          6,635                       6,635     $ 6,635  

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

                                  1,256               1,256       1,256  

Net unrealized gains on foreign currency translation adjustments

                                  2               2       2  

Net unrealized losses on derivatives

                                  (1,082 )             (1,082 )     (1,082 )

Cash dividends paid:

                                                             

Common

                          (2,744 )                     (2,744 )        

Preferred

                          (4 )                     (4 )        

Common stock issued under employee plans and related tax benefits

          41,834       2,143                       14       2,157          

Common stock repurchased

          (99,200 )     (6,798 )                             (6,798 )        

Conversion of preferred stock

    (5 )   206       5                               —            

Other

          25       248       3               46       297          
   


 

 


 


 


 


 


 


Balance, September 30, 2002

  $ 60     1,502,162     $ 674     $ 46,870     $ 613     $ 22     $ 48,239     $ 6,811  
   


 

 


 


 


 


 


 


Balance, December 31, 2002

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

Net income

                          8,084                       8,084     $ 8,084  

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

                                  (267 )             (267 )     (267 )

Net unrealized gains on foreign currency translation adjustments

                                  15               15       15  

Net unrealized losses on derivatives

                                  (2,756 )             (2,756 )     (2,756 )

Cash dividends paid:

                                                             

Common

                          (3,113 )                     (3,113 )        

Preferred

                          (3 )                     (3 )        

Common stock issued under employee plans and related tax benefits

          62,435       3,797                       (138 )     3,659          

Common stock repurchased

          (73,815 )     (4,403 )     (1,162 )                     (5,565 )        

Conversion of preferred stock

    (3 )   126       3                               —            

Other

          —         122       (3 )             (47 )     72          
   


 

 


 


 


 


 


 


Balance, September 30, 2003

  $ 55     1,489,437     $ 15     $ 52,320     $ (1,776 )   $ (169 )   $ 50,445     $ 5,076  
   


 

 


 


 


 


 


 



(1) At September 30, 2003 and December 31, 2002, Accumulated Other Comprehensive Income (Loss) included net unrealized gains on available-for-sale and marketable equity securities of $227 and $494, respectively; foreign currency translation adjustments of $(153) and $(168), respectively; and net unrealized gains (losses) on derivatives of $(1,761) and $995, respectively.

 

See accompanying notes to consolidated financial statements.

 

 

4


Table of Contents

Bank of America Corporation and Subsidiaries

Consolidated Statement of Cash Flows

 

     Nine Months Ended
September 30


 

(Dollars in millions)


   2003

    2002

 

Operating activities

                

Net income

   $ 8,084     $ 6,635  

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

                

Provision for credit losses

     2,256       2,532  

Gains on sales of securities

     (802 )     (326 )

Depreciation and premises improvements amortization

     660       663  

Amortization of intangibles

     163       164  

Deferred income tax (benefit) expense

     (510 )     278  

Net increase in trading and hedging instruments

     (1,493 )     (5,049 )

Net increase in other assets

     (3,456 )     (4,153 )

Net increase (decrease) in accrued expenses and other liabilities

     20,616       (6,174 )

Other operating activities, net

     3       2,700  
    


 


Net cash provided by (used in) operating activities

     25,521       (2,730 )
    


 


Investing activities

                

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

     (68 )     (465 )

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

     (22,851 )     (12,263 )

Proceeds from sales of available-for-sale securities

     155,973       104,085  

Proceeds from maturities of available-for-sale securities

     25,875       17,191  

Purchases of available-for-sale securities

     (178,005 )     (123,058 )

Proceeds from maturities of held-to-maturity securities

     768       39  

Proceeds from sales of loans and leases

     28,342       20,904  

Other changes in loans and leases, net

     (70,622 )     (24,581 )

Purchases and originations of mortgage banking assets

     (1,300 )     (648 )

Net purchases of premises and equipment

     101       (757 )

Proceeds from sales of foreclosed properties

     48       117  

Investment in unconsolidated subsidiary

     (1,600 )     —    

Acquisition of business activities, net

     (141 )     (110 )

Other investing activities, net

     914       2,405  
    


 


Net cash used in investing activities

     (62,566 )     (17,141 )
    


 


Financing activities

                

Net increase in deposits

     22,052       3,920  

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

     14,696       14,096  

Net increase in commercial paper and other short-term borrowings

     4,283       12,204  

Proceeds from issuance of long-term debt

     7,867       8,556  

Retirement of long-term debt

     (9,597 )     (13,824 )

Proceeds from issuance of common stock

     3,524       2,143  

Common stock repurchased

     (5,565 )     (6,798 )

Cash dividends paid

     (3,116 )     (2,748 )

Other financing activities, net

     (60 )     (29 )
    


 


Net cash provided by financing activities

     34,084       17,520  
    


 


Effect of exchange rate changes on cash and cash equivalents

     130       (17 )
    


 


Net decrease in cash and cash equivalents

     (2,831 )     (2,368 )

Cash and cash equivalents at January 1

     24,973       26,837  
    


 


Cash and cash equivalents at September 30

   $ 22,142     $ 24,469  
    


 



Assets and liabilities of certain multi-seller asset-backed commercial paper conduits that were consolidated amounted to $12,222 and $0 for the nine months ended September 30, 2003 and 2002, respectively.

Net transfers of loans and leases from loans held for sale (included in other assets) to the loan portfolio for asset and liability management (ALM) purposes amounted to $9,556 and $11,022 for the nine months ended September 30, 2003 and 2002, respectively.

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

Bank of America Corporation and Subsidiaries

Notes to Consolidated Financial Statements

 

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the United States and in selected international markets. At September 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, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. 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 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 was effective immediately for VIEs created after January 31, 2003. As of October 9, 2003, the FASB deferred compliance under FIN 46 from July 1, 2003 to the first period ending after December 15, 2003 for VIEs created prior to February 1, 2003. However, the Corporation adopted FIN 46 on July 1, 2003, as originally issued, and consolidated the assets and liabilities related to certain of its multi-seller asset-backed commercial paper conduits. As of September 30, 2003, these assets and liabilities were approximately $12.2 billion. Prior periods were not restated. Prior to FIN 46, trust preferred securities were classified as a separate liability with distributions on these securities included in interest expense on long-term debt. Upon adoption of FIN 46, $6.1 billion of trust preferred securities vehicles, that were deemed to be VIEs, were de-consolidated with the resulting liabilities to the trust companies included as a component of long-term debt with no change in the reporting of distributions. 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,” (SFAS 123) to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Under the provisions of SFAS 148, the Corporation transitioned to the fair value based method of accounting for stock-based employee compensation costs using the prospective method as of January 1, 2003. Under the prospective method, all stock options granted under plans before the adoption date will continue to be accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) unless these stock options are modified or settled subsequent to adoption.

 

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Table of Contents

In accordance with SFAS 148, the Corporation provided 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 123 recognizes the impact of all outstanding employee stock options. The prospective method that the Corporation has adopted, which is one of the prescribed methods of recognition under SFAS 148, recognizes the impact of only newly issued employee stock options. The following table presents the effect on net income and earnings per share had the fair value based method been applied to all outstanding and unvested awards for the three months and nine months ended September 30, 2003 and 2002.

 

    

Three Months

Ended
September 30


   

Nine Months

Ended
September 30


 

(Dollars in millions, except per share data)


   2003

    2002

    2003

    2002

 

Net income

   $ 2,922     $ 2,235     $ 8,084     $ 6,635  

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

     20       —         58       —    

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

     (61 )     (110 )     (201 )     (301 )
    


 


 


 


Pro forma net income

   $ 2,881     $ 2,125     $ 7,941     $ 6,334  
    


 


 


 


As reported

                                

Earnings per common share

   $ 1.96     $ 1.49     $ 5.41     $ 4.34  

Diluted earnings per common share

     1.92       1.45       5.31       4.22  

Pro forma

                                

Earnings per common share

     1.93       1.41       5.31       4.15  

Diluted earnings per common share

     1.90       1.37       5.21       4.03  
    


 


 


 



(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 September 30, 2003 and 2002 was $56 and $67, respectively, and for the nine months ended September 30, 2003 and 2002 was $225 and $175, respectively.

 

On May 15, 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and was effective May 31, 2003 for all new and modified financial instruments and otherwise was 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 quarterly period ended March 31, 2003.

 

7


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Note 2 – Trading Account Assets and Liabilities

 

The Corporation engages in a variety of trading–related activities that are either for clients or its own account. For a detailed discussion of trading account assets and liabilities, see page 30 of the Corporation’s 2002 Annual Report.

 

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

 

(Dollars in millions)


   September 30
2003


   December 31
2002


Trading account assets

             

U.S. government and agency securities

   $ 13,229    $ 19,875

Foreign sovereign debt

     6,438      8,752

Corporate securities, trading loans, and other

     25,577      21,286

Equity securities

     11,207      5,380

Mortgage trading loans and asset-backed securities

     8,888      8,703
    

  

Total

   $ 65,339    $ 63,996
    

  

Trading account liabilities

             

U.S. government and agency securities

   $ 11,688    $ 8,531

Foreign sovereign debt

     4,622      3,465

Corporate securities, trading loans, and other

     5,971      7,320

Equity securities

     7,299      4,825

Mortgage trading loans and asset-backed securities

     164      1,433
    

  

Total

   $ 29,744    $ 25,574
    

  

 

Note 3 – Derivatives

 

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

 

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The following table presents the contract/notional and credit risk amounts at September 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 $20.0 billion and $16.7 billion of collateral on derivative positions, of which $12.6 billion and $11.4 billion could be applied against credit risk at September 30, 2003 and December 31, 2002, respectively.

 

Derivatives (1)

 

     September 30, 2003

   December 31, 2002

(Dollars in millions)


   Contract/
Notional


   Credit
Risk


   Contract/
Notional


   Credit
Risk


Interest rate contracts

                           

Swaps

   $ 8,334,284    $ 17,321    $ 6,781,629    $ 18,981

Futures and forwards

     2,178,857      1,599      2,510,259      283

Written options

     1,078,690      —        973,113      —  

Purchased options

     1,003,212      4,298      907,999      3,318

Foreign exchange contracts

                           

Swaps

     239,696      3,398      175,680      2,460

Spot, futures and forwards

     859,760      3,263      724,039      2,535

Written options

     135,703      —        81,263      —  

Purchased options

     132,651      531      80,395      452

Equity contracts

                           

Swaps

     28,951      474      16,830      679

Futures and forwards

     2,592      —        48,470      —  

Written options

     23,749      —        19,794      —  

Purchased options

     22,471      3,826      23,756      2,885

Commodity contracts

                           

Swaps

     15,586      1,291      11,776      1,117

Futures and forwards

     5,695      —        3,478      —  

Written options

     11,312      —        12,158      —  

Purchased options

     7,892      244      19,115      347

Credit derivatives

     123,063      565      92,098      1,253
    

  

  

  

Total derivative assets

          $ 36,810           $ 34,310
           

         


(1) Includes both long and short derivative positions.

 

The average fair value of derivative assets for the nine months ended September 30, 2003 and 2002 was $34.8 billion and $23.6 billion, respectively. The average fair value of derivative liabilities for the nine months ended September 30, 2003 and 2002 was $23.9 billion and $15.8 billion, respectively.

 

Fair Value and Cash Flow Hedges

 

The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates and exchange rates. The Corporation also uses these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities and anticipated transactions. For the nine months ended September 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 excluded from the assessment of hedge effectiveness. For the nine months ended September 30, 2002, there was no significant gain or loss recognized which represented the ineffective portion of fair value hedges. For the nine months ended September 30, 2003, the Corporation recognized in the Consolidated Statement of Income net gains of $15 million (included in mortgage banking income), which represented the ineffective portion of cash flow hedges. For the nine months ended September 30, 2002, the Corporation recognized in the Consolidated Statement of Income a net loss of $12 million (included in interest income and mortgage banking

 

9


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income) which represented the ineffective portion of cash flow hedges. At September 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 $226 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 nine months ended September 30, 2003 and 2002, the Corporation experienced net unrealized foreign currency pre-tax gains of $170 million and $60 million, respectively, related to its net investments in foreign operations. These unrealized gains were partially offset by net unrealized pre-tax losses of $147 million and $59 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 September 30, 2003 and December 31, 2002 were:

 

(Dollars in millions)


   September 30, 2003

   December 31, 2002

Commercial - domestic

   $ 94,870    $ 105,053

Commercial - foreign

     17,097      19,912

Commercial real estate - domestic

     19,377      19,910

Commercial real estate - foreign

     305      295
    

  

Total commercial

     131,649      145,170
    

  

Residential mortgage

     146,424      108,197

Home equity lines

     22,675      23,236

Direct/Indirect consumer

     33,391      31,068

Consumer finance

     6,020      8,384

Credit card

     30,993      24,729

Foreign consumer

     1,946      1,971
    

  

Total consumer

     241,449      197,585
    

  

Total

   $ 373,098    $ 342,755
    

  

 

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

 

     Three Months
Ended
September 30


    Nine Months
Ended
September 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Balance, beginning of period

   $ 6,841     $ 6,873     $ 6,851     $ 6,875  
    


 


 


 


Loans and leases charged off

     (975 )     (1,002 )     (2,892 )     (3,147 )

Recoveries of loans and leases previously charged off

     199       198       511       615  
    


 


 


 


Net charge-offs

     (776 )     (804 )     (2,381 )     (2,532 )
    


 


 


 


Provision for credit losses

     651       804       2,256       2,532  

Other, net

     —         (12 )     (10 )     (14 )
    


 


 


 


Balance, September 30

   $ 6,716     $ 6,861     $ 6,716     $ 6,861  
    


 


 


 


 

The following table presents the recorded investment in specific loans, without consideration to specific reserves, that were considered individually impaired at September 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)


   September 30,
2003


   December 31,
2002


Commercial - domestic

   $ 1,698    $ 2,553

Commercial - foreign

     768      1,355

Commercial real estate - domestic

     157      157

Commercial real estate - foreign

     3      2
    

  

Total impaired loans

   $ 2,626    $ 4,067
    

  

 

At September 30, 2003 and December 31, 2002, nonperforming loans, including certain loans that were considered impaired, totaled $3.4 billion and $5.0 billion, respectively. In addition, included in other assets was $82 million and $120 million of nonperforming assets at September 30, 2003 and December 31, 2002, respectively. Foreclosed properties amounted to $228 million and $225 million at September 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.

 

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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 September 30, 2003 and December 31, 2002. These unfunded commitments have been reduced by amounts participated to other financial institutions.

 

(Dollars in millions)


  

September 30

2003


  

December 31

2002


Loan commitments(1)

   $ 214,303    $ 212,704

Standby letters of credit and financial guarantees

     29,431      30,837

Commercial letters of credit

     3,745      3,109
    

  

Legally binding commitments

     247,479      246,650

Credit card lines

     92,522      85,801
    

  

Total commitments

   $ 340,001    $ 332,451
    

  


(1) Equity commitments of $1,962 and $2,197 primarily related to obligations to fund existing equity investments were included in loan commitments at September 30, 2003 and December 31, 2002, respectively.

 

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 September 30, 2003, the Corporation had commitments to purchase and sell when-issued securities of $145.3 billion and $142.4 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.

 

As of September 30, 2003, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $39.3 billion were not included in credit card line commitments in the table above. At September 30, 2003, the outstandings related to these charge cards were $284 million.

 

At September 30, 2003, the Corporation had forward whole mortgage loan purchase commitments of $704 million, which were settled in October 2003. At December 31, 2002, the Corporation had forward whole mortgage loan purchase commitments of $10.8 billion, all of which were settled in January 2003. At September 30, 2003 and 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 53.

 

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 September 30, 2003 and December 31, 2002, the notional amount of these guarantees totaled $30.9 billion and $23.8 billion, respectively. The increase was primarily due to new sales of stable value products for defined contribution plans. As of September 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 maximum potential future payment under indemnification agreements is difficult to assess for several reasons, including the inability to predict future changes in tax and other laws, the difficulty in determining how such laws would apply to parties in contracts, the absence of exposure limits contained in standard contract language and the timing of the early termination clause. Historically, any payments made under these guarantees have been de minimis. Management has assessed the probability of making such payments in the future as remote.

 

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Table of Contents

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 three years.

 

The Corporation has entered into additional guarantee agreements, including lease end obligation agreements, partial credit guarantees on certain leases, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $1.2 billion and $575 million at September 30, 2003 and December 31, 2002, respectively. As of September 30, 2003, the Corporation has made no material payments under these products.

 

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

 

Litigation and Regulatory Matters

 

Mutual Fund Operations

 

On September 3, 2003, the Office of the Attorney General for the State of New York (NYAG) simultaneously filed and settled a complaint against Canary Capital Partners, LLC, et al. (collectively, Canary). The complaint alleged, among other things, that Canary engaged in improper trading with certain mutual funds in the Nations Funds family (Nations Funds). Specifically, the NYAG alleged that Canary engaged in activities that it characterized as “market timing” and “late trading.” The Corporation is cooperating fully with the NYAG, the U.S. Securities and Exchange Commission (SEC) and other regulators in connection with these inquiries.

 

On September 16, 2003, the NYAG announced a criminal action, and the SEC announced a civil action, against a former employee of Banc of America Securities LLC (BAS). The complaints allege that this former employee played a key role in enabling Canary to engage in “late trading” of shares of Nations Funds and other mutual funds in violation of state and federal law.

 

The Corporation has announced that it will establish a restitution fund for shareholders of the Nations Funds who were harmed by Canary’s late trading and market timing practices. In addition, the Corporation announced that it will provide restitution for shareholders of third party mutual funds who were harmed by any late trading activities by Canary that are found to have occurred through the Corporation in the event restitution is not otherwise available from Canary, its affiliates, its investors or from any other third parties. The Corporation has also committed to return to the Nations Funds all funds management and advisory fees related to the Canary market timing agreement.

 

The Corporation has named several key leaders and advisors external to the Corporation to review mutual fund practices. These individuals will lead an independent review of the Corporation’s mutual fund policies and practices, conduct a complete legal and regulatory compliance review of the Corporation’s mutual fund business, and coordinate a detailed review of all technology, control, and compliance systems related to the mutual fund business, including all systems relating to sales, clearing, and derivative and brokerage operations.

 

The Corporation is developing new policies to eliminate all lending, derivatives, brokerage services or any other services relating to mutual fund trading activity by clients known to the Corporation to engage in active mutual fund market timing not permitted by the targeted funds. The Corporation has committed that the market timing policies being established will no longer permit special exceptions.

 

The independent trustees of the Board of Trustees of the Nations Funds have retained an independent firm to evaluate the extent of any adverse monetary impact to any Nations Fund in which the Nations Funds’ adviser permitted a discretionary market-timing agreement. They also announced that they would evaluate whether any additional steps are appropriate to assure Nations Funds shareholders that the Nations Funds are being managed in their best interests. In addition, the independent trustees announced that the Board of Trustees, with the assistance of the independent firm, will conduct a review of the issues relating to late trading in Nations Funds, consider the results of the review of these issues being conducted by the Corporation, and take action as appropriate.

 

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Table of Contents

As of the date hereof, a number of lawsuits have been filed against the Corporation, its affiliates and associates in connection with these circumstances, alleging, among other things, breaches of fiduciary duties, federal securities laws, the ERISA Act, and the Investment Advisers Act of 1940 as well as contractual and other common law claims. The Corporation has also received shareholder derivative actions purportedly brought on behalf of the Corporation alleging various claims, including breach of fiduciary duty, against the Board of Directors in connection with these matters. Additional lawsuits presenting similar or additional allegations and requests for relief arising out of these circumstances could be filed in the future against the Corporation and related parties.

 

During the quarter ended September 30, 2003, the Corporation recognized a $100 million charge to income in connection with these matters. The Corporation, however, cannot determine at this time the eventual outcome, timing or impact of these matters. Accordingly, it is possible that additional charges in the future may be required.

 

Enron Corporation (Enron) Securities Litigation

 

On September 29, 2003, plaintiffs in the Enron Securities Litigation and certain financial institution defendants, including the Corporation, participated in a nonbinding mediation of claims presented in both the Enron Securities Litigation and the Enron bankruptcy. The mediation failed to resolve any of the subject claims. A further session of the mediation is scheduled for January 8, 2004.

 

WorldCom, Inc. (WorldCom) Securities Litigation

 

The number of actions, in addition to 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 69 actions. Of these actions, approximately 42 have been consolidated with WorldCom Securities Litigation pending in the United States District Court for the Southern District of New York.

 

On October 3, 2003, the parties to the WorldCom Securities Litigation were ordered to attend a mandatory settlement conference on October 16, 2003. No claims were resolved and further sessions are scheduled for November 2003.

 

On October 24, 2003, a class consisting of all persons and entities who purchased or otherwise acquired publicly traded securities of WorldCom during the period beginning April 29, 1999 through and including June 25, 2002 and who were injured thereby, was certified by the United States District Court in the WorldCom Securities Litigation.

 

Regulatory

 

In the ordinary course of business, the Corporation is routinely subject to regulatory examinations, information gathering requests, inquiries and investigations. One of the Corporation’s subsidiaries, BAS, is a registered broker/dealer under the federal securities laws and is subject to regulation by the SEC, the National Association of Securities Dealers, the New York Stock Exchange and state securities regulators. In connection with on-going investigations by those agencies, BAS has received numerous requests and orders for documents, testimony and information in connection with various aspects of its regulated activities. In each instance, BAS is cooperating with the requesting agency. BAS has not been advised that any enforcement action against BAS is currently contemplated. There can be no assurance, however, that the investigations will not in the future result in such action.

 

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 September 30, 2003, the remaining buyback authority for common stock under this program totaled $8.6 billion, or 80 million shares. During the nine months ended September 30, 2003, the Corporation repurchased approximately 74 million shares of its common stock in

 

14


Table of Contents

open market repurchases and as a result of put options exercised, at an average per-share price of $75.39, which reduced shareholders’ equity by $5.6 billion and increased earnings per share by approximately $0.11. These repurchases were partially offset by the issuance of 62 million shares of common stock under employee plans, which increased shareholders’ equity by $3.7 billion, net of $138 million of deferred compensation related to restricted stock awards, and decreased earnings per share by approximately $0.09 for the nine months ended September 30, 2003. For the nine months ended September 30, 2002, the Corporation repurchased approximately 99 million shares of its common stock in open market repurchases and under an accelerated repurchase program at an average per-share price of $68.52, which reduced shareholders’ equity by $6.8 billion and increased earnings per share by approximately $0.13. These repurchases were partially offset by the issuance of 42 million shares of common stock under employee plans, which increased shareholders’ equity by $2.2 billion and decreased earnings per share by approximately $0.06 for the nine months ended September 30, 2002. The Corporation will continue to repurchase shares, from time to time, in the open market or private transactions through its previously approved repurchase plan.

 

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 $(3.5) billion and $1.4 billion for the nine months ended September 30, 2003 and 2002, respectively. The net change in accumulated OCI also includes adjustments for gains (losses) to net income during the current period that had been included in accumulated OCI in previous period ends. Pre-tax adjustments for gains included in the Consolidated Statement of Income for the nine months ended September 30, 2003 and 2002 were $1.1 billion and $531 million, respectively. The related income tax expense (benefit) was $(1.6) billion and $686 million for the nine months ended September 30, 2003 and 2002, respectively.

 

The Corporation has, from time to time, sold put options on its common stock to independent third parties. The put option program was designed to partially offset the cost of share repurchases. As of September 30, 2003, all put options under this program had matured and there were no remaining put options outstanding. For additional information on the put option program, see Note 14 of the consolidated financial statements of the Corporation’s 2002 Annual Report.

 

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

 

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


   Three Months Ended
September 30


    Nine Months Ended
September 30


 
   2003

    2002

    2003

    2002

 

Earnings per common share

                                

Net income

   $ 2,922     $ 2,235     $ 8,084     $ 6,635  

Preferred stock dividends

     (1 )     (2 )     (3 )     (4 )
    


 


 


 


Net income available to common shareholders

   $ 2,921     $ 2,233     $ 8,081     $ 6,631  
    


 


 


 


Average common shares issued and outstanding

     1,490,103       1,504,017       1,494,369       1,526,946  
    


 


 


 


Earnings per common share

   $ 1.96     $ 1.49     $ 5.41     $ 4.34  
    


 


 


 


Diluted earnings per common share

                                

Net income available to common shareholders

   $ 2,921     $ 2,233     $ 8,081     $ 6,631  

Preferred stock dividends

     1       2       3       4  
    


 


 


 


Net income available to common shareholders and assumed conversions

   $ 2,922     $ 2,235     $ 8,084     $ 6,635  
    


 


 


 


Average common shares issued and outstanding

     1,490,103       1,504,017       1,494,369       1,526,946  

Dilutive potential common shares (1,2)

     29,538       42,330       29,154       46,257  
    


 


 


 


Total diluted average common shares issued and outstanding

     1,519,641       1,546,347       1,523,523       1,573,203  
    


 


 


 


Diluted earnings per common share

   $ 1.92     $ 1.45     $ 5.31     $ 4.22  
    


 


 


 



(1) For the three months and nine months ended September 30, 2003, average options to purchase 5 million and 9 million shares, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive. For the three months and nine months ended September 30, 2002, average options to purchase 23 million and 22 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.

 

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Table of Contents

Note 7 – Business Segment Information

 

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

 

Consumer and Commercial Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. 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.

 

16


Table of Contents

The following table presents results of operations, selected performance ratios and selected average balance sheet categories for the three months and nine months ended September 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 September 30                                     
     Total Corporation

    Consumer and
Commercial Banking (1)


    Asset Management (1)

 

(Dollars in millions)


   2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income(2)

   $ 5,477     $ 5,465     $ 3,942     $ 3,888     $ 184     $ 190  

Noninterest income

     4,439       3,220       2,952       2,163       431       381  
    


 


 


 


 


 


Total revenue

     9,916       8,685       6,894       6,051       615       571  

Provision for credit losses

     651       804       496       420       (2 )     118  

Gains on sales of securities

     233       189       1       13       —         —    

Amortization of intangibles

     55       54       45       43       1       1  

Other noninterest expense

     5,015       4,566       3,022       2,950       433       363  
    


 


 


 


 


 


Income before income taxes

     4,428       3,450       3,332       2,651       183       89  

Income tax expense

     1,506       1,215       1,187       973       60       26  
    


 


 


 


 


 


Net income

   $ 2,922     $ 2,235     $ 2,145     $ 1,678     $ 123     $ 63  
    


 


 


 


 


 


Shareholder value added

   $ 1,624     $ 880     $ 1,633     $ 1,144     $ 48     $ (14 )

Net interest yield (fully taxable-equivalent basis)

     3.22 %     3.75 %     4.51 %     5.39 %     3.04 %     3.12 %

Return on average equity

     23.7       19.0       42.4       34.9       17.7       9.7  

Efficiency ratio (fully taxable-equivalent basis)

     51.1       53.2       44.5       49.4       70.5       63.7  

Average:

                                                

Total loans and leases

   $ 357,288     $ 340,484     $ 188,500     $ 182,142     $ 23,205     $ 23,637  

Total assets

     785,681       669,149       369,222       309,964       25,925       25,965  

Total deposits

     414,569       373,933       319,641       283,769       13,313       11,967  

Common equity/Allocated equity

     48,816       46,592       20,089       19,090       2,761       2,581  
    


 


 


 


 


 


 

For the three months ended September 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)

   $ 1,220     $ 1,211     $ (45 )   $ (40 )   $ 176     $ 216  

Noninterest income

     1,033       790       (35 )     (193 )     58       79  
    


 


 


 


 


 


Total revenue

     2,253       2,001       (80 )     (233 )     234       295  

Provision for credit losses

     98       203       —         —         59       63  

Gains (losses) on sales of securities

     —         (25 )     —         —         232       201  

Amortization of intangibles

     7       8       1       1       1       1  

Other noninterest expense

     1,391       1,200       26       27       143       26  
    


 


 


 


 


 


Income before income taxes

     757       565       (107 )     (261 )     263       406  

Income tax expense

     244       179       (39 )     (100 )     54       137  
    


 


 


 


 


 


Net income

   $ 513     $ 386     $ (68 )   $ (161 )   $ 209     $ 269  
    


 


 


 


 


 


Shareholder value added

   $ 262     $ 63     $ (126 )   $ (223 )   $ (193 )   $ (90 )

Net interest yield (fully taxable-equivalent basis)

     1.87 %     2.37 %     n/m       n/m       n/m       n/m  

Return on average equity

     21.9       14.0       (13.0 )%     (30.6 )%     n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     62.1       60.4       n/m       n/m       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 46,243     $ 61,032     $ 93     $ 446     $ 99,247     $ 73,227  

Total assets

     311,829       244,019       6,335       6,093       72,370       83,108  

Total deposits

     67,456       66,163       —         —         14,159       12,034  

Common equity/Allocated equity (3)

     9,298       10,935       2,093       2,079       14,575       11,907  
    


 


 


 


 


 


 

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Table of Contents

Business Segment Summary (continued)

 

For the nine months ended September 30                                     
     Total Corporation

   

Consumer and

Commercial Banking (1)


    Asset Management (1)

 

(Dollars in millions)


   2003

    2002

    2003

    2002

    2003

    2002

 

Net interest income (2)

   $ 16,362     $ 15,974     $ 11,642     $ 11,284     $ 552     $ 562  

Noninterest income

     12,379       10,141       7,875       6,140       1,253       1,229  
    


 


 


 


 


 


Total revenue

     28,741       26,115       19,517       17,424       1,805       1,791  

Provision for credit losses

     2,256       2,532       1,506       1,295       (3 )     288  

Gains on sale of securities

     802       326       12       44       —         —    

Amortization of intangibles

     163       164       134       132       4       4  

Other noninterest expense

     14,682       13,440       9,052       8,402       1,182       1,096  
    


 


 


 


 


 


Income before income taxes

     12,442       10,305       8,837       7,639       622       403  

Income tax expense

     4,358       3,670       3,230       2,817       214       136  
    


 


 


 


 


 


Net income

   $ 8,084     $ 6,635     $ 5,607     $ 4,822     $ 408     $ 267  
    


 


 


 


 


 


Shareholder value added

   $ 4,178     $ 2,546     $ 4,113     $ 3,224     $ 185     $ 54  

Net interest yield (fully taxable-equivalent basis)

     3.35 %     3.78 %     4.63 %     5.38 %     3.10 %     3.02 %

Return on average equity

     21.9       18.7       37.9       33.5       19.7       14.8  

Efficiency ratio (fully taxable-equivalent basis)

     51.7       52.1       47.1       49.0       65.7       61.4  

Average:

                                                

Total loans and leases

   $ 351,119     $ 334,703     $ 187,366     $ 181,863     $ 22,920     $ 24,242  

Total assets

     758,140       651,257       358,703       304,415       25,584       26,281  

Total deposits

     401,985       368,142       307,335       280,221       12,962       11,860  

Common equity/Allocated equity

     49,455       47,396       19,791       19,274       2,765       2,415  
    


 


 


 


 


 


 

For the nine months ended September 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)

   $ 3,702     $ 3,536     $ (118 )   $ (124 )   $ 584     $ 716  

Noninterest income

     3,156       3,056       (81 )     (222 )     176       (62 )
    


 


 


 


 


 


Total revenue

     6,858       6,592       (199 )     (346 )     760       654  

Provision for credit losses

     542       684       4       —         207       265  

Gains (losses) on sale of securities

     (17 )     (67 )     —         —         807       349  

Amortization of intangibles

     21       24       2       2       2       2  

Other noninterest expense

     4,116       3,782       80       61       252       99  
    


 


 


 


 


 


Income before income taxes

     2,162       2,035       (285 )     (409 )     1,106       637  

Income tax expense

     726       681       (103 )     (161 )     291       197  
    


 


 


 


 


 


Net income

   $ 1,436     $ 1,354     $ (182 )   $ (248 )   $ 815     $ 440  
    


 


 


 


 


 


Shareholder value added

   $ 642     $ 370     $ (351 )   $ (437 )   $ (411 )   $ (665 )

Net interest yield (fully taxable-equivalent basis)

     2.06 %     2.37 %     n/m       n/m       n/m       n/m  

Return on average equity

     19.4       16.1       (11.7 )%     (15.6 )%     n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     60.3       57.7       n/m       n/m       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 51,319     $ 64,029     $ 313     $ 440     $ 89,201     $ 64,129  

Total assets

     289,516       238,115       6,201       6,200       78,136       76,246  

Total deposits

     67,224       64,392       —         —         14,464       11,669  

Common equity/Allocated equity (3)

     9,904       11,229       2,074       2,132       14,921       12,346  
    


 


 


 


 


 



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 primarily represents equity of the Corporation not allocated to the business segments.

 

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

 

     Three Months
Ended
September 30


   

Nine Months
Ended

September 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Segments’ revenue

   $ 9,682     $ 8,390     $ 27,981     $ 25,461  

Adjustments:

                                

Revenue associated with unassigned capital

     154       160       496       504  

Asset and liability management activities (1)

     118       159       513       185  

Liquidating businesses

     83       87       235       367  

Fully taxable-equivalent basis adjustment

     (173 )     (163 )     (484 )     (425 )

Other

     (121 )     (111 )     (484 )     (402 )
    


 


 


 


Consolidated revenue

   $ 9,743     $ 8,522     $ 28,257     $ 25,690  
    


 


 


 


Segments’ net income

   $ 2,713     $ 1,966     $ 7,269     $ 6,195  

Adjustments, net of taxes:

                                

Gains on sales of securities

     159       137       546       234  

Earnings associated with unassigned capital

     106       109       335       338  

Asset and liability management activities (1)

     81       57       349       64  

Liquidating businesses

     4       —         (26 )     22  

Other

     (141 )     (34 )     (389 )     (218 )
    


 


 


 


Consolidated net income

   $ 2,922     $ 2,235     $ 8,084     $ 6,635  
    


 


 


 



(1) Includes whole mortgage loan sale gains.

 

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

 

Note 8 – Special Purpose Financing Entities

 

Securitizations

 

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

 

Variable Interest Entities

 

In January 2003, the FASB issued FIN 46 that addresses off-balance sheet financing entities. As of October 9, 2003, the FASB deferred compliance under FIN 46 from July 1, 2003 to the first period ending after December 15, 2003 for VIEs created prior to February 1, 2003. However, the Corporation adopted FIN 46 on July 1, 2003, as originally issued and consolidated the assets and liabilities related to certain of its multi-seller asset-backed commercial paper conduits. As of September 30, 2003, these assets and liabilities were approximately $12.2 billion. There was no material impact to Tier 1 Capital as a result of consolidation. Prior periods were not restated. Subsequent to September 30, 2003, the Corporation closed a transaction related to these conduits that resulted in the de-consolidation of approximately $8.0 billion of assets and liabilities. There was no impact to net income as a result of the de-consolidation. FIN 46 requires that when entities are consolidated, the assets should be initially recorded at their carrying amounts at the date the requirements of FIN 46 first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value on the first date FIN 46 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

 

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accounting change. There was no material impact to net income as a result of applying FIN 46 on July 1, 2003. At September 30, 2003, the consolidated assets and liabilities were reflected in other assets, and commercial paper and other short-term borrowings in the Global Corporate and Investment Banking business segment. The Corporation’s loss exposure associated with these entities including unfunded commitments was approximately $17.3 billion. Due to the legal isolation structure of these entities, general creditors and/or other beneficial interest holders of the VIEs have no recourse to the Corporation’s general credit. Management does not believe any losses resulting from its involvement with these entities will be material.

 

Additionally, the Corporation had significant involvement with other VIEs that it did not consolidate because it was 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. The Corporation typically obtains variable interests in these types of entities at the inception of the transaction. Total assets of these entities at September 30, 2003 were approximately $26.5 billion. At September 30, 2003, the Corporation’s loss exposure associated with these VIEs was approximately $15.8 billion, which is net of amounts syndicated. However, management does not believe any losses resulting from its involvement with these entities will be material.

 

Revenues from administration, liquidity, letters of credit and other services provided to the VIEs were approximately $123 million and $387 million for the nine months ended September 30, 2003 and 2002, respectively.

 

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.

 

Note 9 – Subsequent Event – FleetBoston Financial Corporation Merger

 

On October 27, 2003, the Corporation and FleetBoston Financial Corporation (FleetBoston) announced a definitive agreement to merge. The merger will be a stock-for-stock transaction initially valued at approximately $47 billion. The acquisition will be accounted for using the purchase method of accounting and each share of FleetBoston common stock will be exchanged for 0.5553 shares of the Corporation’s common stock. The Corporation and FleetBoston have generated a combined $10 billion in earnings in the first nine months of 2003. The agreement has been approved by both boards of directors and is subject to customary regulatory and shareholder approvals. The closing is expected in the first half of 2004.

 

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

 

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates,” other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of Bank of America Corporation and its subsidiaries (the Corporation) 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.

 

 

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Table of Contents

The Corporation is headquartered in Charlotte, North Carolina, operates in 21 states and the District of Columbia and has offices located in 30 countries. The Corporation provides a diversified range of banking and certain nonbanking financial services and products both domestically and internationally through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. At September 30, 2003, the Corporation had $737 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 nine months ended September 30, 2003 compared to the same period in 2002:

 

Net income totaled $8.1 billion, or $5.31 per diluted common share, 22 percent and 26 percent increases, respectively, from $6.6 billion, or $4.22 per diluted common share. The return on average common shareholders’ equity was 22 percent compared to 19 percent.

 

For the nine months ended September 30, 2003, we saw increased net income for all three of our major businesses and continued to experience strong core business fundamentals in the areas of customer satisfaction and product/market performance resulting in 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 five percent.

 

We added over one million net new checking accounts for the nine months ended September 30, 2003, exceeding the full-year goal of one million and almost doubling last year’s full-year net new checking growth of 528,000.

 

Our active online banking customers reached 6.6 million, a 52 percent increase. Forty-one percent of consumer households that hold checking accounts use online banking. Active bill pay customers increased 88 percent to 2.8 million. Active bill pay users paid $33.5 billion of bills compared to $18.0 billion.

 

First mortgage originations increased $56.7 billion to $112.8 billion, resulting primarily from elevated refinancing levels and 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 $33.1 billion.

 

We extended our lead as the No. 1 Small Business Administration (SBA) lender in the nation by issuing 9,406 SBA loans to entrepreneurs during the October 2002 to September 2003 SBA fiscal year. This is a 140 percent increase over the previous year’s 3,917 SBA loans.

 

Debit card purchase volumes grew 21 percent while credit card purchases increased 10 percent. Total managed consumer credit card revenue, including interest income, increased 24 percent. Managed average consumer credit card receivables grew 13 percent primarily due to new account growth from pre-approved direct mail programs and from the branch network.

 

Global Corporate and Investment Banking continued to maintain overall market share and gained in areas such as U.S. equities and convertibles, mortgage-backed securities and mergers and acquisitions.

 

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

 

Net interest income on a fully taxable-equivalent basis increased $388 million to $16.4 billion. This increase was driven by the impact of credit card loan growth, higher trading-related net interest income, higher mortgage warehouse levels and higher core deposit funding levels, partially offset by reductions in the large corporate, foreign loans, exited consumer loan businesses and the negative impact of declining rates net of asset and liability management (ALM) portfolio repositioning. The net interest yield on a fully taxable-equivalent basis declined 43 basis points (bps) to 3.35 percent primarily due to higher trading-related assets and the negative impact of declining rates net of ALM portfolio repositioning.

 

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Table of Contents

Noninterest income increased $2.2 billion, primarily due to increases in mortgage banking income driven by gains from higher volumes of mortgage loans sold into the secondary market and improved profit margins, 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. For the nine months ended September 30, 2003 and 2002, other noninterest income included gains from whole mortgage loan sales of $723 million and $328 million, respectively. Other noninterest income also included equity in the earnings of our investment in Grupo Financiero Santander Serfin (GFSS) of $85 million.

 

Gains on sales of securities were $802 million compared to $326 million as we continued to reposition the ALM portfolio in response to interest rate fluctuations.

 

The provision for credit losses declined $276 million to $2.3 billion primarily due to an improvement in the commercial portfolio. Net charge-offs were $2.4 billion and represented 0.91 percent of average loans and leases, a decrease of 10 bps. The decrease in net charge-offs in the commercial – domestic loan portfolio was partially offset by an increase in consumer credit card net charge-offs.

 

Nonperforming assets decreased $1.6 billion to $3.7 billion, or 0.98 percent of loans, leases and foreclosed properties at September 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.

 

Noninterest expense increased $1.2 billion, primarily due to increases in personnel, professional fees, marketing and occupancy expense. Higher personnel costs resulted from increased costs of certain employee benefits, incentives, mortgage production related salaries 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 from 9.5 percent for 2002 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. The increase in professional fees was driven by higher litigation accruals of $245 million associated with pending litigation principally related to securities matters. Marketing expense increased primarily due to higher advertising, as well as marketing investments in pre-approved direct mail for the credit card business. Higher occupancy costs were due to $90 million associated with vacating space in Tokyo and San Francisco related to exiting businesses and increased security and insurance expense. In addition, recorded in other expense during the third quarter was a $100 million charge related to issues surrounding our mutual funds practices.

 

Income tax expense was $3.9 billion reflecting an estimated effective tax rate of 32.4 percent compared to $3.2 billion and 32.8 percent, respectively. We revised our effective tax rate to 32.4 percent from 33 percent in the third quarter. The impact of this change was approximately $47 million.

 

On October 27, 2003, the Corporation and FleetBoston Financial Corporation (FleetBoston) announced a definitive agreement to merge. The merger will be a stock-for-stock transaction initially valued at approximately $47 billion. The acquisition will be accounted for using the purchase method of accounting and each share of FleetBoston common stock will be exchanged for 0.5553 shares of the Corporation’s common stock. The Corporation and FleetBoston have generated a combined $10 billion in earnings in the first nine months of 2003. The agreement has been approved by both boards of directors and is subject to customary regulatory and shareholder approvals. The closing is expected in the first half of 2004.

 

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Table of Contents

Table 1

 

Selected Financial Data

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions, except per share information)


   2003

    2002

    2003

    2002

 

Income statement

                                

Net interest income

   $ 5,304     $ 5,302     $ 15,878     $ 15,549  

Noninterest income

     4,439       3,220       12,379       10,141  

Total revenue

     9,743       8,522       28,257       25,690  

Provision for credit losses

     651       804       2,256       2,532  

Gains on sales of securities

     233       189       802       326  

Noninterest expense

     5,070       4,620       14,845       13,604  

Income before income taxes

     4,255       3,287       11,958       9,880  

Income tax expense

     1,333       1,052       3,874       3,245  

Net income

     2,922       2,235       8,084       6,635  

Average common shares issued and outstanding (in thousands)

     1,490,103       1,504,017       1,494,369       1,526,946  

Average diluted common shares issued and outstanding (in thousands)

     1,519,641       1,546,347       1,523,523       1,573,203  
    


 


 


 


Performance ratios

                                

Return on average assets

     1.48 %     1.33 %     1.43 %     1.36 %

Return on average common shareholders’ equity

     23.74       19.02       21.85       18.71  

Total equity to total assets (period end)

     6.84       7.31       6.84       7.31  

Total average equity to total average assets

     6.22       6.97       6.53       7.29  

Dividend payout

     40.85       40.25       38.53       41.37  
    


 


 


 


Per common share data

                                

Earnings

   $ 1.96     $ 1.49     $ 5.41     $ 4.34  

Diluted earnings

     1.92       1.45       5.31       4.22  

Dividends paid

     0.80       0.60       2.08       1.80  

Book value

     33.83       32.07       33.83       32.07  
    


 


 


 


Average balance sheet

                                

Total loans and leases

   $ 357,288     $ 340,484     $ 351,119     $ 334,703  

Total assets

     785,681       669,149       758,140       651,257  

Total deposits

     414,569       373,933       401,985       368,142  

Long-term debt (1)

     66,788       64,880       67,702       66,161  

Common shareholders’ equity

     48,816       46,592       49,455       47,396  

Total shareholders’ equity

     48,871       46,652       49,512       47,457  
    


 


 


 


Capital ratios (period end)

                                

Risk-based capital:

                                

Tier 1

     8.25 %     8.13 %     8.25 %     8.13 %

Total

     12.17       12.38       12.17       12.38  

Leverage

     5.96       6.35       5.96       6.35  
    


 


 


 


Market price per share of common stock

                                

Closing

   $ 78.04     $ 63.80     $ 78.04     $ 63.80  

High

     84.90       71.94       84.90       77.08  

Low

     74.58       57.90       64.26       57.51  
    


 


 


 



(1) Includes long-term debt related to trust preferred securities.

 

Supplemental Financial Data

 

Shareholder value added (SVA) is a performance measure used in managing our growth strategy and is not defined in accounting principles generally accepted in the U.S. 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 nine months ended September 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

 

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SVA reflecting the individual segment’s business and customer strategy. Investment resources and initiatives are aligned with these SVA growth goals during the planning and forecasting process. Investment, relationship and profitability models all have SVA as a key measure to support the implementation of SVA growth goals. SVA is defined as cash basis earnings less a charge for the use of capital. Cash basis earnings is net income adjusted to 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 64 percent to $4.2 billion for the nine months ended September 30, 2003 from the comparable 2002 period, due to both the $1.4 billion 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 percent to 11 percent in the first quarter of 2003. See Table 2 for the calculation of SVA and Business Segment Operations beginning on page 31 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
September 30


    Nine Months Ended
September 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Shareholder value added

                                

Net income

   $ 2,922     $ 2,235     $ 8,084     $ 6,635  

Amortization expense

     55       54       163       164  
    


 


 


 


Cash basis earnings

     2,977       2,289       8,247       6,799  

Capital charge

     (1,353 )     (1,409 )     (4,069 )     (4,253 )
    


 


 


 


Shareholder value added

   $ 1,624     $ 880     $ 4,178     $ 2,546  
    


 


 


 


Fully taxable-equivalent basis data

                                

Net interest income

   $ 5,477     $ 5,465     $ 16,362     $ 15,974  

Total revenue

     9,916       8,685       28,741       26,115  

Net interest yield

     3.22 %     3.75 %     3.35 %     3.78 %

Efficiency ratio

     51.13       53.19       51.65       52.09  
    


 


 


 


 

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. We evaluate our trading results by combining trading-related net interest income with trading account profits, as discussed in the Global Corporate and Investment Banking business segment discussion beginning on page 34, as trading strategies are evaluated based on total revenue.

 

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Table of Contents

Table 3 below provides a reconciliation of net interest income on a fully taxable-equivalent basis presented in Tables 4 and 5 to core net interest income for the three months and nine months ended September 30, 2003 and 2002. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Table 3

Core Net Interest Income

 

    

Three Months Ended

September 30


   

Nine Months Ended

September 30


 

(Dollars in millions)


   2003

    2002

    2003

    2002

 

Net interest income

                                

As reported on a fully taxable-equivalent basis

   $ 5,477     $ 5,465     $ 16,362     $ 15,974  

Trading-related net interest income

     (540 )     (487 )     (1,699 )     (1,388 )

Impact of revolving securitizations

     78       112       265       412  
    


 


 


 


Core net interest income

   $ 5,015     $ 5,090     $ 14,928     $ 14,998  
    


 


 


 


Average earning assets

                                

As reported

   $ 677,308     $ 580,248     $ 651,535     $ 563,964  

Trading-related earning assets

     (199,727 )     (126,280 )     (176,066 )     (121,295 )

Impact of revolving securitizations

     3,112       5,277       3,778       6,682  
    


 


 


 


Core average earning assets

   $ 480,693     $ 459,245     $ 479,247     $ 449,351  
    


 


 


 


Net interest yield on earning assets

                                

As reported

     3.22 %     3.75 %     3.35 %     3.78 %

Impact of trading-related activities

     0.90       0.62       0.76       0.62  

Impact of revolving securitizations

     0.03       0.04       0.03       0.06  
    


 


 


 


Core net interest yield on earning assets

     4.15 %     4.41 %     4.14 %     4.46 %
    


 


 


 


 

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

 

Core average earning assets increased $29.9 billion for the nine months ended September 30, 2003 from the comparable 2002 period primarily due to higher levels of residential mortgages, mortgage warehouse, credit card loans, and securities, partially offset by reductions in the levels of large corporate, foreign and middle market loans, and exited consumer loan businesses.

 

The core net interest yield decreased 32 bps for the nine months ended September 30, 2003 from the comparable 2002 period mainly due to the negative impact of declining rates net of ALM repositioning, partially offset by credit card loan growth and the impact of higher levels of core deposit funding.

 

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Table of Contents

Table 4

 

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

 

     Third Quarter 2003

    Second 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

   $ 10,062    $ 41    1.63 %   $ 7,888    $ 39    1.99 %

Federal funds sold and securities purchased under agreements to resell

     90,236      479    2.11       70,054      194    1.11  

Trading account assets

     96,105      991    4.11       99,129      1,022    4.13  

Securities

     65,024      639    3.93       95,614      1,028    4.30  

Loans and leases (1):

                                        

Commercial - domestic

     96,086      1,719    7.10       100,721      1,746    6.95  

Commercial - foreign

     16,885      151    3.55       18,004      170    3.79  

Commercial real estate - domestic

     19,681      210    4.23       20,039      218    4.36  

Commercial real estate - foreign

     280      3    4.16       305      3    3.95  
    

  

  

 

  

  

Total commercial

     132,932      2,083    6.22       139,069      2,137    6.16  
    

  

  

 

  

  

Residential mortgage

     130,948      1,656    5.05       120,754      1,703    5.64  

Home equity lines

     22,539      255    4.48       22,763      263    4.64  

Direct/Indirect consumer

     33,278      488    5.82       32,248      495    6.17  

Consumer finance

     6,528      121    7.39       7,244      137    7.58  

Credit card

     29,113      742    10.11       26,211      690    10.56  

Foreign consumer

     1,950      17    3.43       1,990      17    3.47  
    

  

  

 

  

  

Total consumer

     224,356      3,279    5.82       211,210      3,305    6.27  
    

  

  

 

  

  

Total loans and leases

     357,288      5,362    5.97       350,279      5,442    6.23  
    

  

  

 

  

  

Other earning assets

     58,593      516    3.50       40,536      429    4.24  
    

  

  

 

  

  

Total earning assets (2)

     677,308      8,028    4.72       663,500      8,154    4.92  
    

  

  

 

  

  

Cash and cash equivalents

     22,660                   23,203              

Other assets, less allowance for credit losses

     85,713                   87,941              
    

  

  

 

  

  

Total assets

   $ 785,681                 $ 774,644              
    

  

  

 

  

  

Interest-bearing liabilities

                                        

Domestic interest-bearing deposits:

                                        

Savings

   $ 25,285    $ 20    0.31 %   $ 24,420    $ 35    0.58 %

NOW and money market deposit accounts

     151,424      249    0.65       146,284      295    0.81  

Consumer CDs and IRAs

     71,216      872    4.85       69,506      742    4.28  

Negotiable CDs, public funds and other time deposits

     7,771      25    1.27       12,912      45    1.41  
    

  

  

 

  

  

Total domestic interest-bearing deposits

     255,696      1,166    1.81       253,122      1,117    1.77  
    

  

  

 

  

  

Foreign interest-bearing deposits (3):

                                        

Banks located in foreign countries

     12,273      59    1.90       16,150      87    2.16  

Governments and official institutions

     2,032      6    1.21       2,392      8    1.42  

Time, savings and other

     18,792      47    1.00       19,209      57    1.18  
    

  

  

 

  

  

Total foreign interest-bearing deposits

     33,097      112    1.35       37,751      152    1.61  
    

  

  

 

  

  

Total interest-bearing deposits

     288,793      1,278    1.76       290,873      1,269    1.75  
    

  

  

 

  

  

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

     162,080      447    1.09       152,722      514    1.35  

Trading account liabilities

     36,903      345    3.71       38,610      316    3.28  

Long-term debt (4)

     66,788      481    2.88       68,927      531    3.08  
    

  

  

 

  

  

Total interest-bearing liabilities (2)

     554,564      2,551    1.83       551,132      2,630    1.91  
    

  

  

 

  

  

Noninterest-bearing sources:

                                        

Noninterest-bearing deposits

     125,776                   114,434              

Other liabilities

     56,470                   58,809              

Shareholders’ equity

     48,871                   50,269              
    

  

  

 

  

  

Total liabilities and shareholders’ equity

   $ 785,681                 $ 774,644              
    

  

  

 

  

  

Net interest spread

                 2.89                   3.01  

Impact of noninterest-bearing sources

                 0.33                   0.32  
    

  

  

 

  

  

Net interest income/yield on earning assets

          $ 5,477    3.22 %          $ 5,524    3.33 %
    

  

  

 

  

  


(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis.
(2) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $925, $587 and $576 in the third, second and first quarters of 2003 and $517 and $397 in the fourth and third quarters of 2002, respectively. These amounts were substantially offset by corresponding decreases in the income earned on the underlying assets. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $141, $28 and $46 in the third, second and first quarters of 2003 and $62 and $69 in the fourth and third quarters of 2002, respectively. These amounts were substantially offset by corresponding increases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 52.
(3) Primarily consists of time deposits in denominations of $100,000 or more.
(4) Includes long-term debt related to trust preferred securities.

 

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Table of Contents
     First Quarter 2003

    Fourth Quarter 2002

    Third Quarter 2002

 

(Dollars in millions)


  

Average

Balance


  

Interest

Income/

Expense


  

Yield/

Rate


   

Average

Balance


  

Interest

Income/

Expense


  

Yield/

Rate


   

Average

Balance


  

Interest

Income/

Expense


  

Yield/

Rate


 

Earning assets

                                                            

Time deposits placed and other short-term investments

   $ 6,987    $ 43    2.49 %   $ 8,853    $ 56    2.49 %   $ 10,396    $ 63    2.41 %

Federal funds sold and securities purchased under agreements to resell

     57,873      194    1.35       49,169      208    1.68       40,294      178    1.76  

Trading account assets

     99,085      1,053    4.27       84,181      994    4.71       85,129      1,017    4.76  

Securities

     67,784      793    4.69       83,751      1,078