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, 2004
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:
1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State of incorporation:
Delaware
IRS Employer Identification Number:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina 28255
Registrants telephone number, including area code:
(704) 386-8486
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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, 2004, there were 4,039,176,560 shares of Bank of America Corporation Common Stock outstanding.
September 30, 2004 Form 10-Q
INDEX
1
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) |
2004 |
2003 |
2004 |
2003 | |||||||||
Interest income |
|||||||||||||
Interest and fees on loans and leases |
$ | 7,508 | $ | 5,328 | $ | 20,294 | $ | 16,088 | |||||
Interest and dividends on securities |
2,078 | 600 | 5,197 | 2,342 | |||||||||
Federal funds sold and securities purchased under agreements to resell |
484 | 480 | 1,331 | 867 | |||||||||
Trading account assets |
968 | 975 | 2,988 | 3,024 | |||||||||
Other interest income |
480 | 472 | 1,288 | 1,254 | |||||||||
Total interest income |
11,518 | 7,855 | 31,098 | 23,575 | |||||||||
Interest expense |
|||||||||||||
Deposits |
1,711 | 1,278 | 4,446 | 3,730 | |||||||||
Short-term borrowings |
1,183 | 447 | 2,960 | 1,414 | |||||||||
Trading account liabilities |
333 | 345 | 965 | 969 | |||||||||
Long-term debt |
626 | 481 | 1,680 | 1,584 | |||||||||
Total interest expense |
3,853 | 2,551 | 10,051 | 7,697 | |||||||||
Net interest income |
7,665 | 5,304 | 21,047 | 15,878 | |||||||||
Noninterest income |
|||||||||||||
Service charges |
1,899 | 1,458 | 5,098 | 4,182 | |||||||||
Investment and brokerage services |
945 | 594 | 2,539 | 1,752 | |||||||||
Mortgage banking income (loss) |
(250 | ) | 666 | 258 | 1,630 | ||||||||
Investment banking income |
438 | 412 | 1,389 | 1,278 | |||||||||
Equity investment gains |
220 | 25 | 437 | | |||||||||
Card income |
1,257 | 794 | 3,208 | 2,237 | |||||||||
Trading account profits |
184 | 175 | 600 | 382 | |||||||||
Other income |
202 | 322 | 523 | 940 | |||||||||
Total noninterest income |
4,895 | 4,446 | 14,052 | 12,401 | |||||||||
Total revenue |
12,560 | 9,750 | 35,099 | 28,279 | |||||||||
Provision for credit losses |
650 | 651 | 2,063 | 2,256 | |||||||||
Gains on sales of securities |
732 | 233 | 2,022 | 802 | |||||||||
Noninterest expense |
|||||||||||||
Personnel |
3,540 | 2,595 | 9,941 | 7,749 | |||||||||
Occupancy |
622 | 522 | 1,731 | 1,492 | |||||||||
Equipment |
309 | 252 | 888 | 789 | |||||||||
Marketing |
364 | 249 | 1,012 | 717 | |||||||||
Professional fees |
194 | 214 | 521 | 620 | |||||||||
Amortization of intangibles |
200 | 55 | 455 | 163 | |||||||||
Data processing |
340 | 275 | 954 | 803 | |||||||||
Telecommunications |
180 | 152 | 514 | 413 | |||||||||
Other general operating |
1,024 | 763 | 3,250 | 2,121 | |||||||||
Merger and restructuring charges |
221 | | 346 | | |||||||||
Total noninterest expense |
6,994 | 5,077 | 19,612 | 14,867 | |||||||||
Income before income taxes |
5,648 | 4,255 | 15,446 | 11,958 | |||||||||
Income tax expense |
1,884 | 1,333 | 5,152 | 3,874 | |||||||||
Net income |
$ | 3,764 | $ | 2,922 | $ | 10,294 | $ | 8,084 | |||||
Net income available to common shareholders |
$ | 3,759 | $ | 2,921 | $ | 10,283 | $ | 8,081 | |||||
Per common share information |
|||||||||||||
Earnings |
$ | 0.93 | $ | 0.98 | $ | 2.80 | $ | 2.70 | |||||
Diluted earnings |
$ | 0.91 | $ | 0.96 | $ | 2.76 | $ | 2.65 | |||||
Dividends paid |
$ | 0.45 | $ | 0.40 | $ | 1.25 | $ | 1.04 | |||||
Average common shares issued and outstanding (in thousands) |
4,052,304 | 2,980,206 | 3,666,298 | 2,988,739 | |||||||||
Average diluted common shares issued and outstanding (in thousands) |
4,121,375 | 3,039,282 | 3,729,120 | 3,047,046 | |||||||||
See accompanying notes to Consolidated Financial Statements.
2
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions) |
September 30, 2004 |
December 31, 2003 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 29,252 | $ | 27,084 | ||||
Time deposits placed and other short-term investments |
11,021 | 8,051 | ||||||
Federal funds sold and securities purchased under agreements to resell (includes $104,466 and $76,446 pledged as collateral) |
104,570 | 76,492 | ||||||
Trading account assets (includes $22,828 and $18,722 pledged as collateral) |
102,925 | 68,547 | ||||||
Derivative assets |
35,247 | 36,507 | ||||||
Securities: |
||||||||
Available-for-sale (includes $67,592 and $20,858 pledged as collateral) |
163,438 | 66,382 | ||||||
Held-to-maturity, at cost (market value - $420 and $254) |
420 | 247 | ||||||
Total securities |
163,858 | 66,629 | ||||||
Loans and leases |
511,639 | 371,463 | ||||||
Allowance for loan and lease losses |
(8,723 | ) | (6,163 | ) | ||||
Loans and leases, net of allowance |
502,916 | 365,300 | ||||||
Premises and equipment, net |
7,884 | 6,036 | ||||||
Mortgage servicing rights |
2,453 | 2,762 | ||||||
Goodwill |
44,709 | 11,455 | ||||||
Core deposit intangibles and other intangibles |
3,726 | 908 | ||||||
Other assets |
80,435 | 66,674 | ||||||
Total assets |
$ | 1,088,996 | $ | 736,445 | ||||
Liabilities |
||||||||
Deposits in domestic offices: |
||||||||
Noninterest-bearing |
$ | 155,406 | $ | 118,495 | ||||
Interest-bearing |
380,956 | 262,032 | ||||||
Deposits in foreign offices: |
||||||||
Noninterest-bearing |
5,632 | 3,035 | ||||||
Interest-bearing |
49,264 | 30,551 | ||||||
Total deposits |
591,258 | 414,113 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
142,992 | 78,046 | ||||||
Trading account liabilities |
36,825 | 26,844 | ||||||
Derivative liabilities |
19,039 | 24,526 | ||||||
Commercial paper and other short-term borrowings |
71,434 | 42,478 | ||||||
Accrued expenses and other liabilities (includes $446 and $416 of Reserve for unfunded lending commitments) |
28,851 | 27,115 | ||||||
Long-term debt |
100,586 | 75,343 | ||||||
Total liabilities |
990,985 | 688,465 | ||||||
Commitments and contingencies (Note 9) |
||||||||
Shareholders equity |
||||||||
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,090,189 and 2,539,200 shares |
271 | 54 | ||||||
Common stock and additional paid-in capital, $0.01 par value; authorized 7,500,000,000 and 5,000,000,000 shares; issued and outstanding - 4,049,062,685 and 2,882,287,572 shares |
44,756 | 29 | ||||||
Retained earnings |
55,979 | 50,198 | ||||||
Accumulated other comprehensive loss |
(2,669 | ) | (2,148 | ) | ||||
Other |
(326 | ) | (153 | ) | ||||
Total shareholders equity |
98,011 | 47,980 | ||||||
Total liabilities and shareholders equity |
$ | 1,088,996 | $ | 736,445 | ||||
See accompanying notes to Consolidated Financial Statements.
3
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders Equity
(Dollars in millions, shares in thousands) |
Preferred Stock |
Common Stock and Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss)(1) |
Other |
Total Share- holders |
Comprehensive Income |
||||||||||||||||||||||||
Shares |
Amount |
||||||||||||||||||||||||||||||
Balance, December 31, 2002 |
$ | 58 | 3,001,382 | $ | 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 |
124,870 | 3,797 | (138 | ) | 3,659 | ||||||||||||||||||||||||||
Common stock repurchased |
(147,630 | ) | (4,403 | ) | (1,162 | ) | (5,565 | ) | |||||||||||||||||||||||
Conversion of preferred stock |
(3 | ) | 252 | 3 | | ||||||||||||||||||||||||||
Other |
| 137 | (18 | ) | (47 | ) | 72 | ||||||||||||||||||||||||
Balance, September 30, 2003 |
$ | 55 | 2,978,874 | $ | 30 | $ | 52,305 | $ | (1,776 | ) | $ | (169 | ) | $ | 50,445 | $ | 5,076 | ||||||||||||||
Balance, December 31, 2003 |
$ | 54 | 2,882,288 | $ | 29 | $ | 50,198 | $ | (2,148 | ) | $ | (153 | ) | $ | 47,980 | ||||||||||||||||
Net income |
10,294 | 10,294 | $ | 10,294 | |||||||||||||||||||||||||||
Net unrealized losses on available-for-sale and marketable equity securities |
(390 | ) | (390 | ) | (390 | ) | |||||||||||||||||||||||||
Net unrealized losses on foreign currency translation adjustments |
(9 | ) | (9 | ) | (9 | ) | |||||||||||||||||||||||||
Net unrealized losses on derivatives |
(122 | ) | (122 | ) | (122 | ) | |||||||||||||||||||||||||
Cash dividends paid: |
|||||||||||||||||||||||||||||||
Common |
(4,629 | ) | (4,629 | ) | |||||||||||||||||||||||||||
Preferred |
(11 | ) | (11 | ) | |||||||||||||||||||||||||||
Common stock issued under employee plans and related tax benefits |
89,603 | 3,037 | (172 | ) | 2,865 | ||||||||||||||||||||||||||
Stocks issued in acquisition (2) |
271 | 1,186,728 | 46,480 | 46,751 | |||||||||||||||||||||||||||
Common stock repurchased |
(113,796 | ) | (4,837 | ) | 88 | (4,749 | ) | ||||||||||||||||||||||||
Conversion of preferred stock |
(54 | ) | 4,240 | 53 | (1 | ) | |||||||||||||||||||||||||
Other |
(6 | ) | 39 | (1 | ) | 32 | |||||||||||||||||||||||||
Balance, September 30, 2004 |
$ | 271 | 4,049,063 | $ | 44,756 | $ | 55,979 | $ | (2,669 | ) | $ | (326 | ) | $ | 98,011 | $ | 9,773 | ||||||||||||||
(1) | At September 30, 2004 and December 31, 2003, Accumulated Other Comprehensive Income (Loss) included Net Unrealized Losses on Available-for-sale and Marketable Equity Securities of $460 and $70, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $175 and $166, respectively; and Net Unrealized Losses on Derivatives of $1,930 and $1,808, respectively. |
(2) | Includes adjustment for the fair value of outstanding FleetBoston Financial Corporation (FleetBoston) stock options of $862. |
See accompanying Notes to Consolidated Financial Statements.
4
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
Nine Months Ended September 30 |
||||||||
(Dollars in millions) |
2004 |
2003 |
||||||
Operating activities |
||||||||
Net income |
$ | 10,294 | $ | 8,084 | ||||
Reconciliation of net income to net cash provided by (used in) operating activities: |
||||||||
Provision for credit losses |
2,063 | 2,256 | ||||||
Gains on sales of securities |
(2,022 | ) | (802 | ) | ||||
Depreciation and premises improvements amortization |
723 | 660 | ||||||
Amortization of intangibles |
455 | 163 | ||||||
Deferred income tax benefit |
(402 | ) | (510 | ) | ||||
Net increase in trading and hedging instruments |
(26,892 | ) | (1,493 | ) | ||||
Net (increase) decrease in other assets |
2,556 | (3,467 | ) | |||||
Net increase (decrease) in accrued expenses and other liabilities |
(8,131 | ) | 20,616 | |||||
Other operating activities, net |
(1,043 | ) | (93 | ) | ||||
Net cash provided by (used in) operating activities |
(22,399 | ) | 25,414 | |||||
Investing activities |
||||||||
Net (increase) decrease in time deposits placed and other short-term investments |
193 | (68 | ) | |||||
Net increase in federal funds sold and securities purchased under agreements to resell |
(17,090 | ) | (22,851 | ) | ||||
Proceeds from sales of available-for-sale securities |
74,449 | 155,973 | ||||||
Proceeds from maturities of available-for-sale securities |
23,652 | 25,875 | ||||||
Purchases of available-for-sale securities |
(165,890 | ) | (177,994 | ) | ||||
Proceeds from maturities of held-to-maturity securities |
63 | 768 | ||||||
Proceeds from sales of loans and leases |
3,192 | 28,342 | ||||||
Other changes in loans and leases, net |
(18,938 | ) | (70,622 | ) | ||||
Originations and purchases of mortgage servicing rights |
(841 | ) | (1,352 | ) | ||||
Net (purchases) dispositions of premises and equipment |
(970 | ) | 101 | |||||
Proceeds from sales of foreclosed properties |
145 | 144 | ||||||
Investment in unconsolidated subsidiary |
| (1,600 | ) | |||||
Cash equivalents acquired net of purchase acquisitions |
5,593 | (141 | ) | |||||
Other investing activities, net |
788 | 966 | ||||||
Net cash used in investing activities |
(95,654 | ) | (62,459 | ) | ||||
Financing activities |
||||||||
Net increase in deposits |
37,111 | 22,052 | ||||||
Net increase in federal funds purchased and securities sold under agreements to repurchase |
59,003 | 14,696 | ||||||
Net increase in commercial paper and other short-term borrowings |
22,774 | 4,283 | ||||||
Proceeds from issuance of long-term debt |
19,080 | 7,867 | ||||||
Retirement of long-term debt |
(11,286 | ) | (9,597 | ) | ||||
Proceeds from issuance of common stock |
2,941 | 3,524 | ||||||
Common stock repurchased |
(4,749 | ) | (5,565 | ) | ||||
Cash dividends paid |
(4,640 | ) | (3,116 | ) | ||||
Other financing activities, net |
(41 | ) | (60 | ) | ||||
Net cash provided by financing activities |
120,193 | 34,084 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
28 | 130 | ||||||
Net increase (decrease) in cash and cash equivalents |
2,168 | (2,831 | ) | |||||
Cash and cash equivalents at January 1 |
27,084 | 24,973 | ||||||
Cash and cash equivalents at September 30 |
$ | 29,252 | $ | 22,142 | ||||
Net transfers of Loans and Leases from loans held for sale (included in Other Assets) to the loan portfolio for Asset and Liability Manangement (ALM) purposes amounted to $73 and $9,556 for the nine months ended September 30, 2004 and 2003, respectively.
The fair values of noncash assets acquired and liabilities assumed in the merger with FleetBoston were $224,546 and $182,916, respectively.
Approximately 1.2 billion shares of common stock, valued at approximately $45,622, were issued in connection with the merger with
FleetBoston.
See accompanying Notes to Consolidated Financial Statements.
5
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the United States and in selected international markets. At September 30, 2004, the Corporation operated its banking activities primarily under three charters: Bank of America, National Association (Bank of America, N.A.), Bank of America, N.A. (USA) and Fleet National Bank.
On April 1, 2004, the Corporation acquired all of the outstanding stock of FleetBoston (the Merger). FleetBostons results of operations were included in the Corporations results beginning on April 1, 2004. The Merger was accounted for as a purchase. For informational and comparative purposes, certain tables have been expanded to include a column entitled FleetBoston, April 1, 2004. This represents balances acquired from FleetBoston as of April 1, 2004, including purchase accounting adjustments.
Note 1 Summary of 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, normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts were reclassified to conform to current period presentation and certain conforming accounting adjustments were made in conjunction with the Merger.
During the second quarter of 2004, the Corporations Board of Directors (the Board) approved a 2-for-1 stock split in the form of a common stock dividend effective August 27, 2004 to common shareholders of record on August 6, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.
Business Combinations
Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations (SFAS 141) requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The purchase method of accounting requires that the cost of an acquired entity be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The difference between the fair values and the purchase price is recorded to Goodwill. Also under SFAS 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements.
Recently Issued Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) finalized and issued EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides recognition and measurement guidance regarding when impairments of equity and debt securities are considered other-than-temporary requiring a charge to earnings, and also requires additional annual disclosures for investments in unrealized loss positions. The additional annual disclosure requirements were previously issued by the EITF in November 2003 and were effective for the Corporation for the year ended December 31, 2003. In September 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. We are currently evaluating the effect of the recognition and measurement provisions of EITF 03-1. While our analysis is pending the FASBs revisions to EITF 03-1, we currently believe the adoption of EITF 03-1 will not result in a material impact on the Corporations results of operations or financial condition.
6
In the third quarter of 2004, the Corporation adopted FSP No. FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP No. 106-2), which superseded FSP No. FAS 106-1. FSP No. 106-2 provides authoritative guidance on accounting for the federal subsidy and other provisions of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The effects of these provisions will be recognized prospectively from July 1, 2004. A remeasurement on that date resulted in a reduction of $53 million in the Corporations accumulated postretirement benefit obligation. In addition, the Corporations net periodic benefit cost for other postretirement benefits has decreased by $8 million for the third quarter and for the nine months ended September 30, 2004 as a result of the remeasurement.
On December 12, 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3). SOP 03-3 requires acquired loans with poor credit quality to be recorded at fair value and prohibits carrying over or creation of valuation allowances in the initial accounting for the loans. SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3 applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. SOP 03-3 is not expected to have a material impact on the Corporations results of operations or financial condition.
On March 31, 2004, the FASB issued an Exposure Draft, Share-Based Payment - an Amendment of Statements No. 123 and 95, (SFAS 123R) which would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require that such transactions be accounted for using a fair value-based method. The FASB is presently redeliberating the Exposure Draft and a final statement is expected to be issued in the fourth quarter of 2004. SFAS 123R would be effective for the Corporation beginning July 1, 2005. The Corporation adopted the fair value-based method of accounting for stock-based employee compensation prospectively as of January 1, 2003, and as a result, adoption of SFAS 123R is not expected to have a material impact on the Corporations results of operations or financial condition.
7
Stock-based Compensation
As permitted by SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123 (SFAS 148), the Corporation has elected to follow the prospective method of accounting for stock options. Under the prospective method, only the impact of newly-issued employee stock options are recognized. In accordance with SFAS 148, the Corporation provides disclosures as if it had adopted the fair value-based method of measuring all outstanding employee stock options during the three and nine months ended September 30, 2004 and 2003 as indicated in the following table. The following table presents the effect on Net Income and Earnings per Common Share had the fair value-based method been applied to all outstanding and unvested awards for the three and nine months ended September 30, 2004 and 2003.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions, except per share data) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Net income (as reported) |
$ | 3,764 | $ | 2,922 | $ | 10,294 | $ | 8,084 | ||||||||
Stock-based employee compensation expense recognized during period, net of related tax effects |
40 | 20 | 118 | 58 | ||||||||||||
Stock-based employee compensation expense determined under fair value-based method, net of related tax effects (1) |
(52 | ) | (61 | ) | (161 | ) | (201 | ) | ||||||||
Pro forma net income |
$ | 3,752 | $ | 2,881 | $ | 10,251 | $ | 7,941 | ||||||||
As reported |
||||||||||||||||
Earnings per common share |
$ | 0.93 | $ | 0.98 | $ | 2.80 | $ | 2.70 | ||||||||
Diluted earnings per common share |
0.91 | 0.96 | 2.76 | 2.65 | ||||||||||||
Pro forma |
||||||||||||||||
Earnings per common share |
0.93 | 0.97 | 2.79 | 2.66 | ||||||||||||
Diluted earnings per common share |
0.91 | 0.95 | 2.75 | 2.61 |
(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, 2004 and 2003 was $90 and $56, respectively, and for the nine months ended September 30, 2004 and 2003 was $258 and $225, respectively. |
Mortgage Servicing Rights
Pursuant to agreements between the Corporation and its counterparties, $2.2 billion of Excess Spread Certificates (the Certificates) were converted into Mortgage Servicing Rights (MSRs) on June 1, 2004. Prior to the conversion of the Certificates into MSRs, the Certificates were accounted for on a mark to market basis (i.e. fair value) and changes in the value were recognized as Trading Account Profits. On the date of the conversion, the Corporation recorded these MSRs at the Certificates fair market value, and that value became their new cost basis. Subsequent to the conversion, the Corporation accounts for the MSRs at the lower of cost or market with impairment recognized as a reduction of Mortgage Banking Income. Except for Note 6 of the Consolidated Financial Statements, what are now referred to as MSRs include the Certificates for periods prior to the conversion. For additional information on the Certificates, see Note 1 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
During the third quarter, the Corporation concluded its discussions with the Securities and Exchange Commission Staff (the Staff) regarding the prior accounting for the Certificates. Following discussions with the Staff, the conclusion was reached that the Certificates lacked sufficient separation from the MSRs to be accounted for as described above (i.e. fair value). Accordingly, the Corporation should have continued to account for the Certificates as MSRs (i.e. lower of cost or market). The effect on our previously filed consolidated financial statements of following lower of cost or market accounting for the Certificates compared to fair value accounting (i.e. the prior accounting) is not material. Consequently, no revisions will be made to previously filed consolidated financial statements.
When applying SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) hedge accounting for derivative financial instruments that have been designated to hedge MSRs, these derivatives have a daily documented hedge period. Loans underlying the MSRs being hedged are stratified into pools that possess similar
8
interest rate and prepayment risk exposures. The Corporation has designated the hedged risk as the change in the overall fair value of these stratified pools within a hedge period. The Corporation performs both prospective and retrospective hedge effectiveness evaluations, using regression analyses. A prospective test is performed to determine whether the hedge is expected to be highly effective at the inception of the hedge. A retrospective test is performed at the end of the hedge period to determine whether the hedge was actually effective during the hedge period.
Other derivatives are used as economic hedges of the MSRs, but are not designated as hedges under SFAS 133. These derivatives are marked to market and recognized through Mortgage Banking Income. Securities are also used as economic hedges of MSRs, but do not qualify as hedges under SFAS 133 and, therefore, are accounted for as Available-for-sale (AFS) Securities with realized gains recorded in Gains on Sales of Securities and unrealized gains or losses recorded in Accumulated Other Comprehensive Income (OCI).
For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
Note 2 Merger and Restructuring Activity
Pursuant to the Agreement and Plan of Merger, dated October 27, 2003, by and between the Corporation and FleetBoston (the Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of FleetBoston on April 1, 2004 in order to expand the Corporations presence in the Northeast. FleetBostons results of operations were included in the Corporations results beginning April 1, 2004.
As provided by the Merger Agreement, approximately 1.069 billion shares of FleetBoston common stock were exchanged for approximately 1.187 billion shares of the Corporations common stock, as adjusted for the stock split. At the date of the Merger, this represented approximately 29 percent of the Corporations outstanding common stock. FleetBoston shareholders also received cash of $4 million instead of any fractional shares of the Corporations common stock that would have otherwise been issued on April 1, 2004. Holders of FleetBoston preferred stock received 1.1 million shares of the Corporations preferred stock. The Corporations preferred stock that was exchanged was valued using the book value of FleetBoston preferred stock. The depositary shares underlying the FleetBoston preferred stock, each representing a one-fifth interest in the FleetBoston preferred stock prior to the Merger, now represent a one-fifth interest in a share of the Corporations preferred stock. FleetBoston shares totaling 15.7 million that were previously held by the Corporation were cancelled.
9
The Merger is being accounted for in accordance with SFAS 141. Accordingly, the purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the Merger date as summarized below. In the third quarter, the allocation of assets acquired and liabilities assumed was updated principally for certain change in control and severance liabilities. The final allocation of the purchase price will be determined after completion of a final analysis of the fair values of FleetBostons tangible and identifiable intangible assets and liabilities, and final decisions regarding integration activities.
(Dollars in millions) |
|||||||
Purchase price |
|||||||
FleetBoston common stock exchanged (in thousands) |
1,068,635 | ||||||
Exchange ratio (as adjusted for the stock split) |
1.1106 | ||||||
Total shares of the Corporations common stock exchanged (in thousands) |
1,186,826 | ||||||
Purchase price per share of the Corporations common stock(1) |
$ | 38.44 | |||||
Total value of the Corporations common stock exchanged |
$ | 45,622 | |||||
FleetBoston preferred stock converted to the Corporations preferred stock |
271 | ||||||
Fair value of outstanding stock options, direct acquisition costs and the effect of FleetBoston shares already owned by the Corporation |
1,360 | ||||||
Total purchase price |
$ | 47,253 | |||||
Allocation of the purchase price |
|||||||
FleetBoston stockholders equity |
$ | 19,329 | |||||
FleetBoston goodwill and other intangible assets |
(4,709 | ) | |||||
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value: |
|||||||
Securities |
(82 | ) | |||||
Loans and leases |
(699 | ) | |||||
Premises and equipment |
(727 | ) | |||||
Identified intangibles |
3,243 | ||||||
Other assets and deferred income tax |
203 | ||||||
Deposits |
(313 | ) | |||||
Other liabilities |
(290 | ) | |||||
Exit and termination liabilities |
(708 | ) | |||||
Long-term debt |
(1,182 | ) | |||||
Estimated fair value of net assets acquired |
14,065 | ||||||
Estimated goodwill resulting from the Merger |
$ | 33,188 | |||||
(1) | The value of the shares of common stock exchanged with FleetBoston shareholders was based upon the average of the closing prices of the Corporations common stock for the period commencing two trading days before, and ending two trading days after, October 27, 2003, the date of the Merger Agreement, as adjusted for the stock split. |
10
Unaudited Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation had the Merger taken place at January 1, 2003. For more information on the unaudited pro forma condensed combined financial information, refer to the Form 8-K/A filed by the Corporation with the Securities and Exchange Commission on October 14, 2004.
Three Months Ended September 30 2003 |
Nine Months Ended September 30 | ||||||||
(Dollars in millions except per common share information) |
2004 |
2003 | |||||||
Net interest income |
$ | 6,916 | $ | 22,834 | $ | 20,890 | |||
Noninterest income |
5,902 | 15,570 | 16,319 | ||||||
Provision for credit losses |
916 | 2,063 | 3,086 | ||||||
Gains on sales of securities |
268 | 2,071 | 906 | ||||||
Merger and restructuring charges |
| 346 | | ||||||
Other noninterest expense |
6,852 | 21,379 | 20,128 | ||||||
Income before income taxes |
5,318 | 16,687 | 14,901 | ||||||
Net income |
3,567 | 11,054 | 9,860 | ||||||
Per common share information |
|||||||||
Earnings |
$ | 0.86 | $ | 2.72 | $ | 2.37 | |||
Diluted earnings |
0.85 | 2.67 | 2.34 | ||||||
Average common shares issued and outstanding (in thousands) |
4,144,231 | 4,061,487 | 4,152,040 | ||||||
Average diluted common shares issued and outstanding (in thousands) |
4,208,371 | 4,130,927 | 4,213,903 | ||||||
Merger and Restructuring Charges
Merger and Restructuring Charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate Bank of America and FleetBostons operations. These charges represent costs associated with these one-time activities and do not represent on-going costs of the fully integrated combined organization. Systems Integrations and Related Charges, and Other, as shown in the table below, are expensed as incurred.
In addition, Merger and Restructuring Charges include costs related to an infrastructure initiative undertaken in the third quarter to simplify the Corporations business model. Management is engaged in a thorough review of major business units and supporting functions to ensure the Corporation is operating in a cost efficient manner. As a result of this review, and additional opportunities the Corporation has identified to operate more efficiently through the Merger, the Corporation announced that it will reduce its workforce by approximately 2.5 percent, or 4,500 positions resulting in severance costs of $150 million. Included in Merger and Restructuring Charges are $65 million incurred for this initiative. An additional $28 million of severance liabilities was recorded related to this initiative for legacy FleetBoston associates resulting in an increase in Goodwill. See analysis of exit costs and restructuring reserves on page 12. The Corporation expects to incur additional severance costs related to this initiative of approximately $60 million over the next two quarters.
Three Months Ended |
Nine Months Ended | |||||
(Dollars in millions) |
September 30, 2004 | |||||
Severance and employee-related charges: |
||||||
FleetBoston Merger |
$ | 33 | $ | 97 | ||
Infrastructure initiative |
65 | 65 | ||||
System integrations and related charges |
86 | 115 | ||||
Other |
37 | 69 | ||||
Total merger and restructuring charges |
$ | 221 | $ | 346 | ||
11
Exit Costs and Restructuring Reserves
On April 1, 2004, $680 million of liabilities for FleetBostons exit and termination costs were recorded as purchase accounting adjustments resulting in an increase in Goodwill. Included in the $680 million were $507 million for severance, relocation and other employee-related costs, $168 million for contract terminations, and $5 million for other charges. As previously mentioned, during the third quarter 2004, $28 million of additional liabilities was recorded related to severance costs for legacy FleetBoston associates. During the three and nine months ended September 30, 2004, cash payments of $87 million and $149 million, respectively, have been charged against this liability including $86 million and $145 million, respectively, of severance, relocation and other employee-related costs, and $1 million and $4 million, respectively, of contract terminations.
Restructuring charges through September 30, 2004 include the establishment of a reserve for legacy Bank of America associate severance and other employee-related charges of $64 million during the second quarter of 2004. During the third quarter, an additional $98 million of liabilities were added to this reserve. Of the $98 million of additional reserves recorded in the third quarter, $65 million were related to the infrastructure initiative. For the three and nine months ended September 30, 2004, cash payments of $19 million and $29 million, respectively, have been charged against this reserve.
Payments under these reserves are expected to be substantially completed by the end of 2005.
Exit Costs and Restructuring Reserves
(Dollars in millions) |
Exit Costs Reserves(1) |
Restructuring Reserves(2) |
||||||
Balance, April 1, 2004 |
$ | | $ | | ||||
FleetBoston exit costs |
680 | | ||||||
Restructuring charges |
| 64 | ||||||
Infrastructure initiative |
| | ||||||
Cash payments |
(62 | ) | (10 | ) | ||||
Balance, June 30, 2004 |
$ | 618 | $ | 54 | ||||
FleetBoston exit costs |
28 | | ||||||
Restructuring charges |
| 33 | ||||||
Infrastructure initiative |
| 65 | ||||||
Cash payments |
(87 | ) | (19 | ) | ||||
Balance, September 30, 2004 |
$ | 559 | $ | 133 | ||||
(1) | Exit costs reserves were established in purchase accounting resulting in an increase in Goodwill. |
(2) | Restructuring reserves were established by a charge to income. |
12
Note 3Trading Account Assets and Liabilities
The following table presents the fair values of the components of Trading Account Assets and Liabilities at September 30, 2004 and December 31, 2003.
(Dollars in millions) |
September 30 2004 |
December 31 2003 |
FleetBoston April 1, 2004 | ||||||
Trading account assets |
|||||||||
U.S. government and agency securities |
$ | 16,606 | $ | 16,073 | $ | 561 | |||
Corporate securities, trading loans, and other |
37,792 | 25,647 | 353 | ||||||
Equity securities |
19,599 | 11,445 | 2 | ||||||
Mortgage trading loans and asset-backed securities |
21,432 | 8,221 | 2,199 | ||||||
Foreign sovereign debt |
7,496 | 7,161 | 94 | ||||||
Total |
$ | 102,925 | $ | 68,547 | $ | 3,209 | |||
Trading account liabilities |
|||||||||
U.S. government and agency securities |
$ | 15,054 | $ | 7,304 | $ | 64 | |||
Equity securities |
8,415 | 8,863 | | ||||||
Corporate securities, trading loans, and other |
8,533 | 5,379 | 356 | ||||||
Foreign sovereign debt |
4,617 | 5,276 | | ||||||
Mortgage trading loans and asset-backed securities |
206 | 22 | 355 | ||||||
Total |
$ | 36,825 | $ | 26,844 | $ | 775 | |||
Note 4Derivatives
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 activities and the ALM process is presented in Note 6 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
13
The following table presents the contract/notional and credit risk amounts at September 30, 2004 and December 31, 2003 of the Corporations derivative positions held for trading and hedging purposes. These derivative positions are primarily executed in the over-the-counter market. The credit risk amounts presented in the following table do not consider the value of any collateral held but take into consideration the effects of legally enforceable master netting agreements. The Corporation held $21.6 billion of collateral on derivative positions, of which $14.6 billion could be applied against credit risk at September 30, 2004.
Derivatives (1)
September 30, 2004 |
December 31, 2003 |
FleetBoston April 1, 2004 | ||||||||||||||||
(Dollars in millions) |
Contract/ Notional |
Credit Risk |
Contract/ Notional |
Credit Risk |
Contract/ Notional |
Credit Risk | ||||||||||||
Interest rate contracts |
||||||||||||||||||
Swaps |
$ | 10,892,801 | $ | 13,185 | $ | 8,873,600 | $ | 14,893 | $ | 105,366 | $ | 1,671 | ||||||
Futures and forwards |
1,870,337 | 955 | 2,437,907 | 633 | 18,383 | 2 | ||||||||||||
Written options |
1,035,699 | | 1,174,014 | | 104,118 | | ||||||||||||
Purchased options |
1,213,479 | 3,472 | 1,132,486 | 3,471 | 159,408 | 91 | ||||||||||||
Foreign exchange contracts |
||||||||||||||||||
Swaps |
286,356 | 5,259 | 260,210 | 4,473 | 9,928 | 307 | ||||||||||||
Spot, futures and forwards |
995,437 | 2,033 | 775,105 | 4,202 | 33,941 | 403 | ||||||||||||
Written options |
161,875 | | 138,474 | | 2,854 | | ||||||||||||
Purchased options |
161,207 | 349 | 133,512 | 669 | 2,776 | 58 | ||||||||||||
Equity contracts |
||||||||||||||||||
Swaps |
30,268 | 823 | 30,850 | 364 | 1,026 | 127 | ||||||||||||
Futures and forwards |
4,395 | | 3,234 | | | | ||||||||||||
Written options |
34,706 | | 25,794 | | 779 | | ||||||||||||
Purchased options |
30,825 | 5,188 | 24,119 | 5,370 | 811 | 55 | ||||||||||||
Commodity contracts |
||||||||||||||||||
Swaps |
13,873 | 2,873 | 15,491 | 1,554 | | | ||||||||||||
Futures and forwards |
7,073 | 1 | 5,726 | | 275 | | ||||||||||||
Written options |
12,034 | | 11,695 | | | | ||||||||||||
Purchased options |
7,504 | 657 | 7,223 | 294 | | | ||||||||||||
Credit derivatives |
385,207 | 452 | 136,788 | 584 | 29,763 | 75 | ||||||||||||
Total derivative assets |
$ | 35,247 | $ | 36,507 | $ | 2,789 | ||||||||||||
(1) | Includes both long and short derivative positions. |
The average fair value of Derivative Assets for the nine months ended September 30, 2004 and 2003 was $35.4 billion and $34.8 billion, respectively. The average fair value of Derivative Liabilities for the nine months ended September 30, 2004 and 2003 was $22.8 billion and $23.9 billion, respectively. Included in the average fair value of Derivative Assets and Derivative Liabilities for the nine months ended September 30, 2004 was $1.3 billion and $944 million, respectively, from the addition of derivatives acquired from FleetBoston.
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 various types of interest rate contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and anticipated transactions. During the next 12 months, net losses on derivative instruments included in Accumulated OCI, of approximately $365 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease revenue or increase expense on the respective hedged items.
14
The following table summarizes certain information related to the Corporations hedging activities for the nine months ended September 30, 2004 and 2003.
Nine Months Ended September 30 |
||||||||
(Dollars in millions) |
2004 |
2003 |
||||||
Fair value hedges |
||||||||
Hedge ineffectiveness recognized in earnings (1) |
$ | 13 | $ | | ||||
Net loss excluded from assessment of effectiveness (2) |
(4 | ) | (94 | ) | ||||
Cash flow hedges |
||||||||
Hedge ineffectiveness recognized in earnings (3) |
94 | 43 | ||||||
Net investment hedges |
||||||||
Gains (losses) included in foreign currency translation adjustments within accumulated other comprehensive income |
13 | (147 | ) |
(1) | Included $(7) recorded in Net Interest Income and $20 recorded in Mortgage Banking Income in the Consolidated Statement of Income for the nine months ended September 30, 2004. |
(2) | Included $(5) and $(94), respectively, recorded in Net Interest Income related to the excluded time value of certain hedges and $1 and $0, respectively, recorded in Mortgage Banking Income in the Consolidated Statement of Income for the nine months ended September 30, 2004 and 2003. |
(3) | Included $98 and $43, respectively, recorded in Mortgage Banking Income in the Consolidated Statement of Income and ($4) recorded in Net Interest Income from other various cash flow hedges for the nine months ended September 30, 2004 and 2003. |
Note 5Outstanding Loans and Leases, and Allowance for Credit Losses
Outstanding loans and leases at September 30, 2004 and December 31, 2003 were:
(Dollars in millions) |
September 30 2004 |
December 31 2003 |
FleetBoston April 1, 2004 | ||||||
Commercial - domestic |
$ | 122,211 | $ | 91,491 | $ | 31,796 | |||
Commercial - foreign |
18,976 | 10,754 | 9,160 | ||||||
Commercial real estate (1) |
30,719 | 19,367 | 9,982 | ||||||
Commercial lease financing |
19,991 | 9,692 | 10,720 | ||||||
Total commercial |
191,897 | 131,304 | 61,658 | ||||||
Residential mortgage |
179,673 | 140,513 | 34,571 | ||||||
Home equity lines |
46,497 | 23,859 | 13,799 | ||||||
Direct/Indirect consumer |
38,378 | 33,415 | 6,113 | ||||||
Credit card |
47,554 | 34,814 | 6,848 | ||||||
Other consumer (2) |
7,640 | 7,558 | 1,272 | ||||||
Total consumer |
319,742 | 240,159 | 62,603 | ||||||
Total |
$ | 511,639 | $ | 371,463 | $ | 124,261 | |||
(1) | Includes domestic and foreign commercial real estate loans of $30,255 and $464 at September 30, 2004, respectively, and $19,043 and $324 at December 31, 2003, respectively. |
(2) | Includes consumer finance, foreign consumer and consumer lease financing of $3,564, $3,433 and $643 at September 30, 2004, respectively, and $3,905, $1,969 and $1,684 at December 31, 2003, respectively. |
15
The following table presents the gross recorded investment in specific loans, without consideration to the specific component of the Allowance for Loan and Lease Losses, that were considered individually impaired in accordance with SFAS No. 114 Accounting by Creditors for Impairment of a Loan (SFAS 114) at September 30, 2004 and December 31, 2003. SFAS 114 impairment includes performing troubled debt restructurings, and excludes all commercial leases.
(Dollars in millions) |
September 30 2004 |
December 31 2003 |
FleetBoston April 1, 2004 | ||||||
Commercial - domestic |
$ | 1,003 | $ | 1,404 | $ | 349 | |||
Commercial - foreign |
475 | 581 | 480 | ||||||
Commercial real estate |
137 | 153 | 85 | ||||||
Total impaired loans |
$ | 1,615 | $ | 2,138 | $ | 914 | |||
At September 30, 2004 and December 31, 2003, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $2.5 billion and $2.9 billion, respectively. Nonperforming securities, which are primarily related to international securities held in the AFS portfolio, were obtained through troubled debt restructurings, largely acquired through FleetBoston, and amounted to $157 million at September 30, 2004. Foreclosed properties amounted to $133 million and $148 million at September 30, 2004 and December 31, 2003, respectively, and are included in Other Assets on the Consolidated Balance Sheet. In addition, included in Other Assets was $100 million and $202 million of nonperforming assets that were held for sale at September 30, 2004 and December 31, 2003, respectively.
The following table summarizes the changes in the Allowance for Credit Losses for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Allowance for loan and lease losses, beginning of period |
$ | 8,767 | $ | 6,366 | $ | 6,163 | $ | 6,358 | ||||||||
FleetBoston balance, April 1, 2004 |
| | 2,763 | | ||||||||||||
Loans and leases charged off |
(982 | ) | (975 | ) | (2,968 | ) | (2,892 | ) | ||||||||
Recoveries of loans and leases previously charged off |
263 | 199 | 700 | 511 | ||||||||||||
Net charge-offs |
(719 | ) | (776 | ) | (2,268 | ) | (2,381 | ) | ||||||||
Provision for loan and lease losses |
690 | 668 | 2,118 | 2,291 | ||||||||||||
Transfers (1) |
(15 | ) | | (53 | ) | (10 | ) | |||||||||
Allowance for loan and lease losses, September 30 |
$ | 8,723 | $ | 6,258 | $ | 8,723 | $ | 6,258 | ||||||||
Reserve for unfunded lending commitments, beginning of period |
$ | 486 | $ | 475 | $ | 416 | $ | 493 | ||||||||
FleetBoston balance, April 1, 2004 |
| | 85 | | ||||||||||||
Provision for unfunded lending commitments |
(40 | ) | (17 | ) | (55 | ) | (35 | ) | ||||||||
Reserve for unfunded lending commitments, September 30 |
$ | 446 | $ | 458 | $ | 446 | $ | 458 | ||||||||
Total |
$ | 9,169 | $ | 6,716 | $ | 9,169 | $ | 6,716 | ||||||||
(1) | Includes transfers to loans held for sale. |
16
Note 6Mortgage Servicing Rights
The Corporation has retained MSRs from the sale or securitization of mortgage loans. The activity in MSRs for the three and nine months ended September 30, 2004 and 2003 is as follows:
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Balance, beginning of period |
$ | 3,005 | $ | 395 | $ | 479 | $ | 499 | ||||||||
Additions |
179 | 44 | 2,806 | 164 | ||||||||||||
Amortization |
(136 | ) | (34 | ) | (220 | ) | (116 | ) | ||||||||
Change in value attributed to SFAS 133 hedged MSRs(1) |
(208 | ) | | (193 | ) | | ||||||||||
(Impairment) recovery, net |
(387 | ) | 37 | (419 | ) | (105 | ) | |||||||||
Balance, September 30 |
$ | 2,453 | $ | 442 | $ | 2,453 | $ | 442 | ||||||||
(1) | Excludes $221 and $213, respectively, of offsetting hedge gains recognized in Mortgage Banking Income for the three and nine months ended September 30, 2004. See page 45 for an analysis of Mortgage Banking Income. |
Impairment of MSRs totaled $387 million and $419 million for the three and nine months ended September 30, 2004. See page 46 for discussion of economic hedges on MSRs. For the comparable 2003 periods, changes in the value of the Certificates and MSRs were recognized as Trading Account Profits. Impairment charges in the three months ended September 30, 2004 included prepayment adjustments and changes to valuation assumptions related to expectations regarding future prepayment speeds and other assumptions totaling $190 million. Additional impairment reflects decreases in the value of MSRs primarily due to increased probability of prepayments driven by decreases in market interest rates during the third quarter 2004.
The estimated fair value of MSRs was $2.5 billion and $479 million at September 30, 2004 and December 31, 2003, respectively. The additions during the nine months ended September 30, 2004 include $2.2 billion of MSRs as a result of the conversion of Certificates discussed in Note 1 of the Consolidated Financial Statements.
At September 30, 2004, key economic assumptions and the sensitivities of the valuations of the MSRs to immediate changes in those assumptions were analyzed. The sensitivity analysis included the impact on fair value of modeled prepayment and discount rate changes under favorable and adverse conditions. The discount rate is the rate used to calculate the present value of the expected future servicing cash flows associated with the MSRs. A decrease of 10 percent and 20 percent in modeled prepayments would result in an increase in value of $123 million and $259 million, respectively; and an increase in modeled prepayments of 10 percent and 20 percent would result in a decrease in value of $112 million and $214 million, respectively. A decrease of 100 and 200 basis points (bps) in the discount rate would result in an increase in value of $92 million and $191 million, respectively; and an increase in the discount rate of 100 and 200 bps would result in a decrease in value of $85 million and $165 million, respectively.
Note 7Special Purpose Financing Entities
Securitizations
The Corporation securitizes assets and may retain a portion or all of the securities, subordinated tranches, interest-only strips and, in some cases, a cash reserve account, all of which are considered retained interests in the securitized assets. Those assets may be serviced by the Corporation or by third parties to whom the servicing has been sold.
Variable Interest Entities
In December 2003, the FASB issued FIN 46R that addresses VIEs. FIN 46R is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the standard and based on whether a company
17
has adopted FIN 46. The Corporation early adopted FIN 46 in July 2003 and adopted FIN 46R on March 31, 2004. As a result of the adoption of FIN 46R, there was no material impact on the Corporations results of operations or financial condition. At September 30, 2004, the consolidated assets and liabilities of one multi-seller asset-backed commercial paper conduit were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in the Global Corporate and Investment Banking business segment. At September 30, 2004, the Corporation held $5.4 billion of assets of this entity while the Corporations maximum loss exposure associated with this entity including unfunded lending commitments was approximately $6.9 billion.
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 typically functions as administrator for these entities and provides either liquidity and letters of credit or derivatives to the VIE. The Corporation also provides asset management and related services to other special purpose vehicles. 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, 2004 and December 31, 2003 were approximately $31.9 billion and $36.9 billion, respectively; revenues associated with administration, liquidity, letters of credit and other services were approximately $178 million and $123 million for the nine months ended September 30, 2004 and 2003, respectively. At September 30, 2004 and December 31, 2003, the Corporations maximum loss exposure associated with these VIEs was approximately $33.7 billion and $28.7 billion, respectively, which is net of amounts syndicated.
Additionally, the Corporation had contractual relationships with other VIEs that engaged in leasing or lending activities and were consolidated by the Corporation prior to FIN 46. The amount of assets of these entities at September 30, 2004 and December 31, 2003 was $2.5 billion and $1.5 billion, respectively, and the Corporations maximum loss exposure was $2.2 billion and $1.3 billion, respectively.
Management does not believe losses resulting from its involvement with the entities discussed above will be significant. See Notes 1 and 9 of the Corporations 2003 Annual Report for additional discussion of special purpose financing entities.
Note 8Goodwill and Other Intangibles
The following table presents allocated goodwill at September 30, 2004 and December 31, 2003 for each business segment. The increases from December 31, 2003 were due to the Merger.
(Dollars in millions) |
September 30 2004 |
December 31 2003 | ||||
Consumer and Small Business Banking |
$ | 21,905 | $ | 6,000 | ||
Commercial Banking |
13,269 | 1,144 | ||||
Global Corporate and Investment Banking |
4,501 | 1,953 | ||||
Wealth and Investment Management |
4,638 | 2,223 | ||||
Corporate Other |
396 | 135 | ||||
Total |
$ | 44,709 | $ | 11,455 | ||
18
The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at September 30, 2004 and December 31, 2003 are presented below:
September 30, 2004 |
December 31, 2003 | |||||||||||
(Dollars in millions) |
Gross Carrying Value |
Accumulated Amortization |
Gross Carrying Value |
Accumulated Amortization | ||||||||
Core deposit intangibles |
$ | 3,669 | $ | 1,214 | $ | 1,495 | $ | 886 | ||||
Other intangibles |
1,886 | 615 | 787 | 488 | ||||||||
Total |
$ | 5,555 | $ | 1,829 | $ | 2,282 | $ | 1,374 | ||||
As a result of the Merger, the Corporation recorded $2.2 billion of core deposit intangibles and $1.1 billion of other intangibles. As of September 30, 2004, the weighted average amortization period for the core deposit intangibles as well as the other intangibles was approximately 10 years.
Amortization expense on core deposit intangibles and other intangibles was $200 million and $55 million for the three months ended September 30, 2004 and 2003, respectively, and $455 million and $163 million for the nine months ended September 30, 2004 and 2003, respectively. The Corporation estimates that aggregate amortization expense will be approximately $212 million for the fourth quarter of 2004. In addition, the Corporation estimates that aggregate amortization expense will be $827 million, $764 million, $628 million, $532 million and $412 million for 2005, 2006, 2007, 2008 and 2009, respectively.
Note 9Commitments 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 Corporations Balance Sheet. For additional information on commitments and contingencies, see Note 13 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
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. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $21.3 billion and $12.5 billion at September 30, 2004 and December 31, 2003, respectively. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at September 30, 2004 and December 31, 2003 was $535 million and $418 million, respectively.
(Dollars in millions) |
September 30 2004 |
December 31 2003 |
FleetBoston April 1, 2004 | ||||||
Loan commitments(1) |
$ | 303,255 | $ | 211,781 | $ | 74,903 | |||
Standby letters of credit and financial guarantees |
42,542 | 31,150 | 12,914 | ||||||
Commercial letters of credit |
5,920 | 3,260 | 1,689 | ||||||
Legally binding commitments |
351,717 | 246,191 | 89,506 | ||||||
Credit card lines |
184,955 | 93,771 | 77,997 | ||||||
Total |
$ | 536,672 | $ | 339,962 | $ | 167,503 | |||
(1) | Equity commitments of $2,128 and $1,678 related to obligations to fund existing equity investments were included in loan commitments at September 30, 2004 and December 31, 2003, respectively. Included in loan commitments at September 30, 2004, were $885 of equity commitments related to obligations to fund existing equity investments acquired from FleetBoston. |
19
Other Commitments
Interest rate lock commitments associated with mortgages are commitments to extend credit at a specified interest rate and are recorded as derivatives at fair value with changes in fair value recorded in the Consolidated Statement of Income.
At September 30, 2004 and December 31, 2003, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $12.2 billion and $13.7 billion, respectively, were not included in credit card line commitments in the previous table. The outstandings related to these charge cards were $249 million and $233 million, respectively.
At September 30, 2004, the Corporation had whole mortgage loan purchase commitments of $3.4 billion, of which $2.8 billion settled in October 2004, and $555 million will settle in November 2004. At December 31, 2003, the Corporation had whole mortgage loan purchase commitments of $4.6 billion, all of which were settled in January and February 2004. At September 30, 2004 and December 31, 2003, the Corporation had no forward whole mortgage loan sale commitments.
Other Guarantees
The Corporation sells products that offer book value protection primarily to plan sponsors of Employee Retirement Income Security Act of 1974 (ERISA)-governed pension plans such as 401(k) plans, 457 plans, etc. At September 30, 2004 and December 31, 2003, the notional amount of these guarantees totaled $25.9 billion and $24.9 billion, respectively, with estimated maturity dates between 2006 and 2034. As of September 30, 2004 and December 31, 2003, the Corporation has not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.
The Corporation also sells products that guarantee the return of principal to investors at a preset future date. At September 30, 2004 and December 31, 2003, the notional amount of these guarantees totaled $8.7 billion and $7.4 billion, respectively; however, at September 30, 2004 and December 31, 2003, the Corporation had not made a payment under these products, and management believes that the probability of payments under these guarantees is remote. These guarantees have various maturities ranging from 2006 to 2016.
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 $1.8 billion and $1.3 billion at September 30, 2004 and December 31, 2003, respectively. The estimated maturity dates of these obligations are between 2004 and 2033. At September 30, 2004 and December 31, 2003, the Corporation had made no material payments under these products.
The Corporation provides credit and debit card processing services to various merchants, processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholders favor and the merchant defaults upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. For the nine months ended September 30, 2004 and the full year ended December 31, 2003, the Corporation processed $67.7 billion and $71.8 billion, respectively, of transactions and recorded losses as a result of these chargebacks of $3 million and $6 million, respectively.
At September 30, 2004 and December 31, 2003, the Corporation held as collateral approximately $239 million and $182 million, respectively, of merchant escrow deposits which the Corporation has the right to set off against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. Management believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa® and
20
MasterCard® for the last four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2004 and December 31, 2003, the maximum potential exposure totaled approximately $32.7 billion and $25.0 billion, respectively.
For additional information on recourse obligations related to mortgage loans sold and other guarantees related to securitizations, see Note 13 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
Litigation and Regulatory Matters
The following disclosure supplements the disclosure in the Corporations Annual Report on Form 10-K for the fiscal year ended December 31, 2003, the Current Reports on Form 8-K filed since December 31, 2003 and the quarterly reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
In Re Initial Public Offering Securities Litigation
On October 13, 2004, the United States District Court for the Southern District of New York granted in part and denied in part plaintiffs motions to certify as class actions six of 309 cases filed. The court granted the plaintiffs motions to certify the classes, but narrowed the scope of the proposed classes for both the Section 10(b) and Section 11 claims.
Parmalat Finanziaria S.p.A. and its related entities (Parmalat)
In July 2004, the Italian Ministry of Production Activities approved a plan of reorganization, as amended, for the restructuring of the Parmalat group companies that are included in the Italian extraordinary administration proceeding.
In August 2004, the Extraordinary Commissioner filed objections to certain claims with the Court of Parma, Italy. In that filing on behalf of Parmalat, the Extraordinary Commissioner rejected all the Corporations claims on various grounds. On September 18, 2004, the Corporation filed its responses to the filing with the Court of Parma. The Court of Parma has not yet resolved these objections.
A preliminary hearing regarding the previously disclosed administrative charge against the Corporation in the Court of Milan, Italy was held on October 5, 2004. At this hearing, a number of persons filed requests to participate in the proceedings as damaged civil parties under Italian law. Additional preliminary hearings have been scheduled.
On October 7, 2004, the Extraordinary Commissioner filed an action in the United States District Court for the Western District of North Carolina against the Corporation and various related entities, entitled Dr. Enrico Bondi, Extraordinary Commissioner of Parmalat Finanziaria, S.p.A., et al v. Bank of America Corporation, et al. The complaint alleges federal and state RICO claims and various state law claims, including fraud. The plaintiffs seek $10 billion in damages.
WorldCom
Judge Cote in the class action case filed in the United States District Court for the Southern District of New York entered an order moving the trial date from January 10, 2005 to February 28, 2005.
The Corporation previously disclosed that an institutional investor filed an individual action in an Alabama state court. That investor, the Retirement Systems of Alabama (RSA), alleged liability under Alabama law in connection with certain WorldCom offerings. On September 29, 2004, the Corporation, Banc of America Securities LLC (BAS), J.P. Morgan Chase & Co., J.P. Morgan Securities, Inc., Citigroup, Inc., Salomon Smith Barney, Inc., and Arthur Andersen, LLP, entered into a settlement agreement with RSA pursuant to which RSA agreed to dismiss its claims in exchange for payment by those defendants in the aggregate amount of $111 million. The Corporation and BAS contributed $13 million, which is expected to be reduced by anticipated reimbursements from certain co-defendants to approximately $10 million.
21
Pension Plans
An amended putative class action complaint, entitled Anita Pothier, et al v. Bank of America Corp., et al, was filed on July 1, 2004 in the United States District Court for the Southern District of Illinois on behalf of all participants in or beneficiaries of any cash balance formula defined benefit plan maintained by the Corporation or its predecessors. The amended complaint named as defendants the Corporation, Bank of America, N.A., the Bank of America Pension Plan (formerly known as the NationsBank Cash Balance Plan) and its predecessor plans, the Bank of America 401(k) Plan and its predecessor plans, members of the Bank of America Corporate Benefits Committee, various current and former directors of the Corporation and certain of its predecessors, and PricewaterhouseCoopers LLP. The named plaintiffs are alleged to be current or former participants in one or more employee benefit pension plans sponsored or participated in by the Corporation or its predecessors.
The amended complaint alleges the defendants violated various provisions of ERISA, including that the cash balance formula of the Bank of America Pension Plan and the BankAmerica Pension Plan violated ERISAs defined benefit pension plan standards. In addition, the amended complaint alleges age discrimination in the design and operation of the identified cash balance plans, improper benefit to the Corporation and its predecessors, and various prohibited transactions and fiduciary breaches. The amended complaint further alleges that certain voluntary transfers by participants of assets from the NationsBank, Barnett Banks, Inc., and Bank of America 401(k) plans to the Bank of America Pension Plan violated ERISA.
The amended complaint alleges that the participants in these plans are entitled to greater benefits than they have received and seeks declaratory relief, monetary relief in an unspecified amount, equitable relief, attorneys fees and interest.
The Internal Revenue Service is conducting an audit of the 1998 and 1999 tax returns of the Bank of America Pension Plan and the Bank of America 401(k) Plan. This audit includes a review of voluntary transfers by participants of 401(k) plan assets to the Bank of America Pension Plan and whether such transfers were in accordance with applicable law.
On September 29, 2004, a putative class action complaint, entitled Donna C. Richards vs. FleetBoston Financial Corp. and the FleetBoston Financial Pension Plan, was filed in the United States District Court of the District of Connecticut on behalf of former or current employees of FleetBoston who on December 31, 1996 were not yet 50 years of age with 15 years of vesting service, who participated in the FleetBoston Financial Pension Plan (Fleet Plan) before January 1, 1997, and who have participated in the Fleet Plan at any time since January 1, 1997.
The complaint alleges that FleetBoston violated ERISA by amending the Fleet Plan to be a cash balance plan without notifying participants that the amendment significantly reduced their plan benefits, by conditioning the amount of benefits payable under the Fleet Plan upon the form of benefit elected, by reducing the rate of benefit accruals on account of age, and by failing to inform participants of the correct amount of their pensions and related claims. The complaint also alleges that the Fleet Plan violates the anti-backloading rule of ERISA.
The complaint seeks equitable and remedial relief, including a declaration that the cash balance amendment to the Fleet Plan was ineffective, additional unspecified benefit payments, attorneys fees and interest.
22
Note 10 - Shareholders Equity and Earnings Per Common Share
The following table presents the changes in Accumulated OCI for the nine months ended September 30, 2004 and 2003.
Nine Months Ended September 30 |
||||||||||||||||||||||||
2004 |
2003 |
|||||||||||||||||||||||
(Dollars in millions) |
Pre-tax Amount |
Income Tax Expense (Benefit) |
After-tax Amount |
Pre-tax Amount |
Income Tax Expense (Benefit) |
After-tax Amount |
||||||||||||||||||
Balance, January 1 |
$ | (3,242 | ) | $ | (1,094 | ) | $ | (2,148 | ) | $ | 1,944 | $ | 712 | $ | 1,232 | |||||||||
Net unrealized gains (losses) (1) |
1,417 | 622 | 795 | (3,497 | ) | (1,217 | ) | (2,280 | ) | |||||||||||||||
Less: Net realized gains recorded to net income |
2,346 | 1,030 | 1,316 | 1,117 | 389 | 728 | ||||||||||||||||||
Balance, September 30 |
$ | (4,171 | ) | $ | (1,502 | ) | $ | (2,669 | ) | $ | (2,670 | ) | $ | (894 | ) | $ | (1,776 | ) | ||||||
(1) | Net unrealized gains (losses) include the valuation changes of AFS and marketable equity securities, foreign currency translation adjustments, derivatives, and other. |
The calculation of earnings per common share and diluted earnings per common share for the three and nine months ended September 30, 2004 and 2003 is presented below.
(Dollars in millions, except per share information; shares in thousands) |
Three Months Ended September 30 |
Nine Months Ended September 30 |
||||||||||||||
2004 |
2003 |
2004 |
2003 |
|||||||||||||
Earnings per common share |
||||||||||||||||
Net income |
$ | 3,764 | $ | 2,922 | $ | 10,294 | $ | 8,084 | ||||||||
Preferred stock dividends |
(5 | ) | (1 | ) | (11 | ) | (3 | ) | ||||||||
Net income available to common shareholders |
$ | 3,759 | $ | 2,921 | $ | 10,283 | $ | 8,081 | ||||||||
Average common shares issued and outstanding |
4,052,304 | 2,980,206 | 3,666,298 | 2,988,739 | ||||||||||||
Earnings per common share |
$ | 0.93 | $ | 0.98 | $ | 2.80 | $ | 2.70 | ||||||||
Diluted earnings per common share |
||||||||||||||||
Net income available to common shareholders |
$ | 3,759 | $ | 2,921 | $ | 10,283 | $ | 8,081 | ||||||||
Preferred stock dividends |
5 | 1 | 11 | 3 | ||||||||||||
Net income available to common shareholders and assumed conversions |
$ | 3,764 | $ | 2,922 | $ | 10,294 | $ | 8,084 | ||||||||
Average common shares issued and outstanding |
4,052,304 | 2,980,206 | 3,666,298 | 2,988,739 | ||||||||||||
Dilutive potential common shares (1,2) |
69,071 | 59,076 | 62,822 | 58,307 | ||||||||||||
Total diluted average common shares issued and outstanding |
4,121,375 | 3,039,282 | 3,729,120 | 3,047,046 | ||||||||||||
Diluted earnings per common share |
$ | 0.91 | $ | 0.96 | $ | 2.76 | $ | 2.65 | ||||||||
(1) | For the three and nine months ended September 30, 2004, average options to purchase 11 million and 10 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive. For the three and nine months ended September 30, 2003, average options to purchase 10 million and 18 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive. |
(2) | Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units, restricted stock shares and stock options. |
During the second quarter of 2004, the Corporations Board of Directors approved a 2-for-1 stock split in the form of a common stock dividend and increased the quarterly cash dividends 12.5 percent from $0.40 to $0.45 per post-split share. The common stock dividend was effective August 27, 2004 to common shareholders of record on August 6, 2004 and the cash dividend was effective September 24, 2004 to common shareholders of record on September 3, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.
23
Note 11 Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory, nonqualified pension plans and postretirement health and life plans. A detailed discussion of these plans is provided in Note 16 of the Consolidated Financial Statements of the Corporations 2003 Annual Report.
Net periodic benefit cost of the Corporations plans for the three months ended September 30, 2004 and 2003, included the following components:
Three Months Ended September 30 |
||||||||||||||||||||||
Qualified Pension Plan |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||||||||
Service cost |
$ | 53 | $ | 44 | $ | 6 | $ | 7 | $ | 2 | $ | 2 | ||||||||||
Interest cost |
133 | 128 | 11 | 12 | 16 | 17 | ||||||||||||||||
Expected return on plan assets |
(194 | ) | (185 | ) | | | (3 | ) | (4 | ) | ||||||||||||
Amortization of transition obligation |
| | | | 8 | 8 | ||||||||||||||||
Amortization of prior service cost |
14 | 14 | 1 | | | 1 | ||||||||||||||||
Recognized net actuarial loss |
23 | 11 | 4 | 3 | 12 | 22 | ||||||||||||||||
Net periodic benefit cost |
$ | 29 | $ | 12 | $ | 22 | $ | 22 | $ | 35 | $ | 46 | ||||||||||
Net periodic benefit cost of the Corporations plans for the nine months ended September 30, 2004 and 2003, included the following components:
Nine Months Ended September 30 |
||||||||||||||||||||||
Qualified Pension Plan |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||||||||
Service cost |
$ | 159 | $ | 142 | $ | 19 | $ | 19 | $ | 7 | $ | 7 | ||||||||||
Interest cost |
399 | 386 | 34 | 33 | 51 | 51 | ||||||||||||||||
Expected return on plan assets |
(581 | ) | (551 | ) | | | (10 | ) | (11 | ) | ||||||||||||
Amortization of transition obligation |
| | | | 24 | 24 | ||||||||||||||||
Amortization of prior service cost |
41 | 42 | 2 | 2 | | 3 | ||||||||||||||||
Recognized net actuarial loss |
69 | 35 | 11 | 8 | 55 | 67 | ||||||||||||||||
Net periodic benefit cost |
$ | 87 | $ | 54 | $ | 66 | $ | 62 | $ | 127 | $ | 141 | ||||||||||
The Corporation previously disclosed that it expected to contribute at least a combined $63 million to its Qualified Pension Plan, Nonqualified Pension Plans and Postretirement Health and Life Plans in 2004. At September 30, 2004, that estimate has not changed. At September 30, 2004, the Corporation had contributed $48 million to these plans.
As a result of the Merger, the Corporation assumed the obligations related to the plans of former FleetBoston. These plans are substantially similar to the legacy Bank of America plans discussed above. The following tables include activity beginning on April 1, 2004.
24
Net periodic benefit cost of the former FleetBoston plans for the three months ended September 30, 2004 included the following components:
Three Months Ended September 30, 2004 |
|||||||||||
(Dollars in millions) |
Qualified Pension Plan |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
||||||||
Components of net periodic benefit cost |
|||||||||||
Service cost |
$ | 15 | $ | 1 | $ | | |||||
Interest cost |
31 | 5 | 3 | ||||||||
Expected return on plan assets |
(47 | ) | | (1 | ) | ||||||
Net periodic benefit cost |
$ | (1 | ) | $ | 6 | $ | 2 | ||||
Net periodic benefit cost of the former FleetBoston plans for the nine months ended September 30, 2004 included the following components:
Nine Months Ended September 30, 2004 |
|||||||||||
(Dollars in millions) |
Qualified Pension Plan |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
||||||||
Components of net periodic benefit cost |
|||||||||||
Service cost |
$ | 30 | $ | 1 | $ | | |||||
Interest cost |
61 | 11 | 6 | ||||||||
Expected return on plan assets |
(94 | ) | | (2 | ) | ||||||
Net periodic benefit cost |
$ | (3 | ) | $ | 12 | $ | 4 | ||||
The Corporation previously disclosed that it expects to contribute at least an aggregate of $41 million to the former FleetBoston plans during 2004. At September 30, 2004, this estimate has not changed. At September 30, 2004, the Corporation had contributed $26 million to these plans.
Note 12 Business Segment Information
In connection with the Merger, the Corporation realigned its business segment reporting to reflect the new business model of the combined company. Prior period information has been reclassified to conform to the current period presentation. The Corporation reports the results of its operations through four business segments: Consumer and Small Business Banking, Commercial Banking, Global Corporate and Investment Banking, and Wealth and Investment Management. Certain operating segments have been aggregated into a single business segment. The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.
Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. Commercial Banking primarily provides commercial lending and treasury management services to middle market companies. Global Corporate and Investment Banking provides capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for our clients as well as traditional bank deposit and loan products, treasury management and payment services to large corporations and institutional clients. Wealth and Investment Management offers investment, fiduciary and comprehensive banking and credit expertise, asset management services to institutional clients, high-net-worth individuals and retail customers, investment, securities and financial planning services to affluent and high-net-worth individuals, and retail clearing services for broker/dealers.
Corporate Other consists primarily of Latin America, Equity Investments, Noninterest Income and Expense amounts associated with the ALM process, including Gains on Sales of Securities, and the results of certain consumer finance and commercial lending businesses that are being liquidated. Latin America includes the Corporations full-service Latin American operations in Brazil, Argentina, Chile and Uruguay, but excludes Mexico.
25
Total Revenue includes Net Interest Income on a fully taxable-equivalent basis and Noninterest Income. The adjustment of Net Interest Income to a fully taxable-equivalent basis results in a corresponding increase in Income Tax Expense. 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 Corporations ALM process. The business segments Provision for Credit Losses is based on the methodology applied at the consolidated level.
Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing and item processing costs. Data processing costs are allocated to the segments based on equipment usage. Additionally, item processing costs are allocated to the segments based on the volume of items processed for each segment.
26
The following tables present results of operations, selected performance ratios and selected average balance sheet categories for the three and nine months ended September 30, 2004 and 2003 for each business segment.
Business Segment Summary
For the three months ended September 30
Total Corporation |
Consumer and Small Business Banking (1) |
Commercial Banking (1) |
||||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||||
Net interest income (fully taxable-equivalent basis) |
$ | 7,836 | $ | 5,477 | $ | 4,710 | $ | 3,013 | $ | 1,243 | $ | 792 | ||||||||||||
Noninterest income |
4,895 | 4,446 | 2,315 | 2,548 | 578 | 373 | ||||||||||||||||||
Total revenue |
12,731 | 9,923 | 7,025 | 5,561 | 1,821 | 1,165 | ||||||||||||||||||
Provision for credit losses |
650 | 651 | 999 | 409 | (63 | ) | 122 | |||||||||||||||||
Gains on sales of securities |
732 | 233 | 117 | 1 | | | ||||||||||||||||||
Amortization of intangibles |
200 | 55 | 138 | 37 | 25 | 5 | ||||||||||||||||||
Other noninterest expense |
6,794 | 5,022 | 3,366 | 2,507 | 598 | 425 | ||||||||||||||||||
Income before income taxes |
5,819 | 4,428 | 2,639 | 2,609 | 1,261 | 613 | ||||||||||||||||||
Income tax expense |
2,055 | 1,506 | 957 | 930 | 437 | 213 | ||||||||||||||||||
Net income |
$ | 3,764 | $ | 2,922 | $ | 1,682 | $ | 1,679 | $ | 824 | $ | 400 | ||||||||||||
Net interest yield (fully taxable-equivalent basis) |
3.28 | % | 3.22 | % | 5.36 | % | 4.79 | % | 3.39 | % | 3.19 | % | ||||||||||||
Return on average equity |
15.56 | 23.74 | 17.35 | 50.13 | 14.42 | 27.26 | ||||||||||||||||||
Efficiency ratio (fully taxable-equivalent basis) |
54.94 | 51.16 | 49.85 | 45.76 | 34.23 | 36.85 | ||||||||||||||||||
Average: |
||||||||||||||||||||||||
Total loans and leases |
$ | 503,078 | $ | 357,288 | $ | 150,334 | $ | 92,509 | $ | 139,983 | $ | 93,451 | ||||||||||||
Total assets |
1,110,124 | 786,155 | 383,907 | 264,230 | 169,547 | 104,337 | ||||||||||||||||||
Total deposits |
587,878 | 414,569 | 339,565 | 246,048 | 58,175 | 31,505 | ||||||||||||||||||
Common equity/Allocated equity |
96,120 | 48,816 | 38,564 | 13,286 | 22,735 | 5,825 | ||||||||||||||||||
For the three months ended September 30 |
||||||||||||||||||||||||
Global Corporate and Investment Banking (1) |
Wealth and Investment Management (1) |
Corporate Other (2) |
||||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||||
Net interest income (fully taxable-equivalent basis) |
$ | 968 | $ | 1,053 | $ | 752 | $ | 468 | $ | 163 | $ | 151 | ||||||||||||
Noninterest income |
1,096 | 1,011 | 821 | 491 | 85 | 23 | ||||||||||||||||||
Total revenue |
2,064 | 2,064 | 1,573 | 959 | 248 | 174 | ||||||||||||||||||
Provision for credit losses |
(155 | ) | 50 | (17 | ) | (1 | ) | (114 | ) | 71 | ||||||||||||||
Gains on sales of securities |
1 | | | | 614 | 232 | ||||||||||||||||||
Amortization of intangibles |
13 | 6 | 19 | 5 | 5 | 2 | ||||||||||||||||||
Other noninterest expense |
1,490 | 1,368 | 832 | 563 | 508 | 159 | ||||||||||||||||||
Income before income taxes |
717 | 640 | 739 | 392 | 463 | 174 | ||||||||||||||||||
Income tax expense |
242 | 205 | 270 | 136 | 149 | 22 | ||||||||||||||||||
Net income |
$ | 475 | $ | 435 | $ | 469 | $ | 256 | $ | 314 | $ | 152 | ||||||||||||
Net interest yield (fully taxable-equivalent basis) |
1.39 | % | 1.61 | % | 3.32 | % | 3.27 | % | n/m | n/m | ||||||||||||||
Return on average equity |
17.30 | 21.30 | 21.27 | 29.70 | n/m | n/m | ||||||||||||||||||
Efficiency ratio (fully taxable-equivalent basis) |
72.87 | 66.57 | 54.17 | 59.18 | n/m | n/m | ||||||||||||||||||
Average: |
||||||||||||||||||||||||
Total loans and leases |
$ | 35,881 | $ | 33,805 | $ | 45,646 | $ | 37,159 | $ | 131,234 | $ | 100,364 | ||||||||||||
Total assets |
328,373 | 310,976 | 97,078 | 60,027 | 131,219 | 46,585 | ||||||||||||||||||
Total deposits |
74,345 | 67,367 | 87,904 | 55,503 | 27,889 | 14,146 | ||||||||||||||||||
Common equity/Allocated equity |
10,908 | 8,097 | 8,779 | 3,417 | 15,134 | 18,191 |
27
Business Segment Summary (continued)
For the nine months ended September 30 | ||||||||||||||||||||||||
Total Corporation |
Commercial and Small Business Banking(1) |
Commercial Banking (1) |
||||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||||
Net interest income (fully taxable-equivalent basis) |
$ | 21,557 | $ | 16,362 | $ | 12,615 | $ | 8,835 | $ | 3,307 | $ | 2,302 | ||||||||||||
Noninterest income |
14,052 | 12,401 | 6,653 | 6,752 | 1,464 | 1,014 | ||||||||||||||||||
Total revenue |
35,609 | 28,763 | 19,268 | 15,587 | 4,771 | 3,316 | ||||||||||||||||||
Provision for credit losses |
2,063 | 2,256 | 2,097 | 1,230 | (30 | ) | 360 | |||||||||||||||||
Gains on sales of securities |
2,022 | 802 | 116 | 12 | | | ||||||||||||||||||
Amortization of intangibles |
455 | 163 | 314 | 110 | 57 | 16 | ||||||||||||||||||
Other noninterest expense |
19,157 | 14,705 | 9,425 | 7,523 | 1,747 | 1,299 | ||||||||||||||||||
Income before income taxes |
15,956 | 12,441 | 7,548 | 6,736 | 2,997 | 1,641 | ||||||||||||||||||
Income tax expense |
5,662 | 4,357 | 2,764 | 2,462 | 1,069 | 580 | ||||||||||||||||||
Net income |
$ | 10,294 | $ | 8,084 | $ | 4,784 | $ | 4,274 | $ | 1,928 | $ | 1,061 | ||||||||||||
Net interest yield (fully taxable-equivalent basis) |
3.26 | % | 3.35 | % | 5.35 | % | 4.93 | % | 3.39 | % | 3.16 | % | ||||||||||||
Return on average equity |
17.32 | 21.85 | 20.97 | 44.12 | 15.15 | 24.12 | ||||||||||||||||||
Efficiency ratio (fully taxable-equivalent basis) |
55.07 | 51.69 | 50.54 | 48.96 | 37.83 | 39.63 | ||||||||||||||||||
Average: |
||||||||||||||||||||||||
Total loans and leases |
$ | 458,268 | $ | 351,119 | $ | 131,599 | $ | 91,889 | $ | 125,245 | $ | 92,832 | ||||||||||||
Total assets |
1,023,005 | 758,605 | 342,788 | 254,997 | 148,195 | 102,990 | ||||||||||||||||||
Total deposits |
531,958 | 401,985 | 307,285 | 237,748 | 50,919 | 30,588 | ||||||||||||||||||
Common equity/Allocated equity |
79,293 | 49,455 | 30,478 | 12,952 | 17,000 | 5,884 | ||||||||||||||||||
For the nine months ended September 30 | ||||||||||||||||||||||||
Global Corporate and Investment Banking (1) |
Wealth and Investment Management (1) |
Corporate Other (2) |
||||||||||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
2004 |
2003 |
||||||||||||||||||
Net interest income (fully taxable-equivalent basis) |
$ | 3,146 | $ | 3,289 | $ | 2,023 | $ | 1,406 | $ | 466 | $ | 530 | ||||||||||||
Noninterest income |
3,705 | 3,110 | 2,151 | 1,421 | 79 | 104 | ||||||||||||||||||
Total revenue |
6,851 | 6,399 | 4,174 | 2,827 | 545 | 634 | ||||||||||||||||||
Provision for credit losses |
(275 | ) | 387 | (16 | ) | 4 | 287 | 275 | ||||||||||||||||
Gains (losses) on sales of securities |
(11 | ) | (17 | ) | | | 1,917 | 807 | ||||||||||||||||
Amortization of intangibles |
31 | 18 | 43 | 15 | 10 | 4 | ||||||||||||||||||
Other noninterest expense |
4,996 | 4,039 | 2,404 | 1,546 | 585 | 298 | ||||||||||||||||||
Income before income taxes |
2,088 | 1,938 | 1,743 | 1,262 | 1,580 | 864 | ||||||||||||||||||
Income tax expense |
717 | 656 | 636 | 456 | 476 | 203 | ||||||||||||||||||
Net income |
$ | 1,371 | $ | 1,282 | $ | 1,107 | $ | 806 | $ | 1,104 | $ | 661 | ||||||||||||
Net interest yield (fully taxable-equivalent basis) |
1.53 | % | 1.87 | % | 3.43 | % | 3.54 | % | n/m | n/m | ||||||||||||||
Return on average equity |
18.78 | 19.83 | 20.07 | 31.74 | n/m | n/m | ||||||||||||||||||
Efficiency ratio (fully taxable-equivalent basis) |
73.38 | 63.40 | 58.64 | 55.19 | n/m | n/m | ||||||||||||||||||
Average: |
||||||||||||||||||||||||
Total loans and leases |
$ | 34,314 | $ | 38,529 | $ | 42,740 | $ | 37,681 | $ | 124,370 | $ | 90,188 | ||||||||||||
Total assets |
327,100 | 284,587 | 84,517 | 56,341 | 120,405 | 59,690 | ||||||||||||||||||
Total deposits |
74,711 | 67,139 | 76,522 | 52,045 | 22,521 | 14,465 | ||||||||||||||||||
Common equity/Allocated equity |
9,750 | 8,640 | 7,365 | 3,397 | 14,700 | 18,582 |
n/m | = not meaningful |
(1) | There were no material intersegment revenues among the segments. |
(2) | Equity in Corporate Other represents equity of the Corporation not allocated to the business segments. |
28
The following table presents reconciliations of the four business segments Total Revenue and Net Income to consolidated totals. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
Segments revenue |
$ | 12,483 | $ | 9,749 | $ | 35,064 | $ | 28,129 | ||||||||
Adjustments: |
||||||||||||||||
Revenue associated with unassigned capital |
63 | 170 | 268 | 546 | ||||||||||||
ALM activities (1) |
(21 | ) | 118 | (62 | ) | 513 | ||||||||||
Latin America |
264 | 6 | 541 | 28 | ||||||||||||
Equity investments |
114 | (80 | ) | 101 | (200 | ) | ||||||||||
Liquidating businesses |
64 | 86 | 224 | 246 | ||||||||||||
Fully taxable-equivalent basis adjustment |
(171 | ) | (173 | ) | (510 | ) | (484 | ) | ||||||||
Other |
(236 | ) | (126 | ) | (527 | ) | (499 | ) | ||||||||
Consolidated revenue |
$ | 12,560 | $ | 9,750 | $ | 35,099 | $ | 28,279 | ||||||||
Segments net income |
$ | 3,450 | $ | 2,770 | $ | 9,190 | $ | 7,423 | ||||||||
Adjustments, net of taxes: |
||||||||||||||||
Earnings associated with unassigned capital |
42 | 117 | 179 | 369 | ||||||||||||
ALM activities (1, 2) |
386 | 238 | 1,220 | 880 | ||||||||||||
Latin America |
151 | (7 | ) | 184 | (32 | ) | ||||||||||
Equity investments |
47 | (69 | ) | 3 | (183 | ) | ||||||||||
Liquidating businesses |
29 | 5 | 55 | (20 | ) | |||||||||||
Other |
(341 | ) | (132 | ) | (537 | ) | (353 | ) | ||||||||
Consolidated net income |
$ | 3,764 | $ | 2,922 | $ | 10,294 | $ | 8,084 | ||||||||
(1) | Includes whole mortgage loan sale gains for the three and nine months ended September 30, 2003. |
(2) | Includes pre-tax Gains on Sales of Securities of $614 and $232 for the three months ended September 30, 2004 and 2003, respectively, and $1,917 and $807 for the nine months ended September 30, 2004 and 2003, respectively. |
29
Item 2. MANAGEMENTS 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 and other similar expressions or future or conditional verbs such as will, should, would and could are intended to identify such forward-looking statements. Readers of the 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 Corporations 2003 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 Corporations businesses and economic conditions as a whole; liabilities resulting from litigation and regulatory investigations, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as Internal Revenue Service (IRS) or other governmental agencies interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System (FRB), 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 managements ability to manage these and other risks.
30
The Corporation, headquartered in Charlotte, North Carolina, operates in 29 states and the District of Columbia and has offices located in 36 foreign 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 Small Business Banking, Commercial Banking, Global Corporate and Investment Banking, and Wealth and Investment Management. At September 30, 2004, the Corporation had $1.1 trillion in assets and approximately 176,000 full-time equivalent employees. Notes to the Consolidated Financial Statements referred to in Managements Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Managements Discussion and Analysis of Results of Operations and Financial Condition.
On April 1, 2004, we completed our merger with FleetBoston Financial Corporation (FleetBoston) (the Merger) after obtaining final shareholder and regulatory approvals. The Merger created a banking institution with leading market shares throughout the Northeast, Southeast, Southwest and West regions of the United States. The Merger is being accounted for under the purchase method of accounting. Accordingly, results for the three months ended September 30, 2004 included three months of combined company results, while the results for the nine months ended September 30, 2004 included six months of combined company results. Results for the three months and nine months ended September 30, 2003 and at December 31, 2003 excluded FleetBoston. For more information on the Merger, see Note 2 of the Consolidated Financial Statements. For informational and comparative purposes, certain tables have been expanded to include a column entitled FleetBoston, April 1, 2004. This represents balances acquired from FleetBoston as of April 1, 2004, including purchase accounting adjustments.
During the second quarter of 2004, our Board of Directors (the Board) approved a 2-for-1 stock split in the form of a common stock dividend and increased the quarterly cash dividends 12.5 percent from $0.40 to $0.45 per post-split share. The common stock dividend was effective August 27, 2004 to common shareholders of record on August 6, 2004 and the cash dividend was effective September 24, 2004 to common shareholders of record on September 3, 2004. All prior period common share and related per common share information has been restated to reflect the 2-for-1 stock split.
On July 12, 2004, we entered into an agreement to acquire all outstanding shares of National Processing, Inc. for $1.4 billion in cash. The resulting combination of National Processing, Inc. with Bank of America Merchant Services will create the second largest merchant acquirer in the United States. The transaction closed on October 15, 2004.
Performance overview for the nine months ended September 30, 2004 compared to the same period in 2003:
Net Income totaled $10.3 billion, or $2.76 per diluted common share, 27 percent and four percent increases, respectively, from $8.1 billion, or $2.65 per diluted common share. The return on average common shareholders equity was 17 percent compared to 22 percent.
Net Income for Consumer and Small Business Banking increased $510 million to $4.8 billion. Driving this increase was the $3.8 billion increase in Net Interest Income and a $971 million increase in Card Income. Offsetting this was the $2.1 billion increase in Noninterest Expense and a $1.4 billion decrease in Mortgage Banking Income, including writedowns of Mortgage Servicing Rights (MSRs) for prepayment adjustments and changes to valuation assumptions of $190 million. See page 45 for discussion of Mortgage Banking Income. Also offsetting the increase was a $867 million increase in Provision for Credit Losses compared to a year ago. Included in the results above was $1.0 billion of Net Income attributed to the addition of FleetBoston.
Within Consumer and Small Business Banking, we continue to attract and retain customers. During the nine months ended September 30, 2004, we opened approximately 1.5 million net new checking accounts and 1.9 million net new savings accounts. Our active online banking customers reached 11.8 million, a 78 percent increase. Forty-eight percent of the increase related to the addition of FleetBoston active online banking customers. Forty-eight percent of consumer households that hold checking accounts use online banking. Active bill pay customers increased 72 percent to 4.8 million. Active bill pay users paid $61.0 billion of bills during the nine months ended September 30, 2004 compared to $33.5 billion in the same period a year ago.
Debit card purchase volumes grew 22 percent while consumer credit card purchases increased 18 percent. Total managed card revenue, including interest income, increased 60 percent. Average managed consumer credit card receivables grew $17.5 billion, or 57 percent, due to new account growth and $9.8 billion from the addition of the FleetBoston consumer credit card portfolio.
31
Commercial Banking Net Income increased 82 percent to $1.9 billion for the nine months ended September 30, 2004 as compared to the prior year including the $722 million impact of the addition of FleetBoston. Both average loans and leases, and deposits grew significantly from the prior year, with increases of $32.4 billion, or 35 percent, and $20.3 billion, or 66 percent, respectively. Impacting these increases were the $26.3 billion effect on average loans and the $15.8 billion effect on average deposits related to the addition of FleetBoston. Also driving the improved results was the $390 million decrease in Provision for Credit Losses during the period, driven by lower net charge-offs and the continued improvement in the commercial credit portfolio.
Net Income within Global Corporate and Investment Banking increased $89 million, or seven percent, to $1.4 billion compared to a year ago. Contributing to the increase in Net Income was a reduction of $662 million in Provision for Credit Losses and an increase in Trading Account Profits of $235 million. Partially offsetting these increases were the $422 million impact of charges taken for litigation matters, an increase of $183 million of incentive compensation for market-based activities and the $143 million impact of the charges taken for the mutual fund matter. Included in the results above was $292 million of Net Income related to the addition of FleetBoston.
Global Corporate and Investment Banking gained market share, as compared to a year ago, in areas such as mergers and acquisitions, high-yield/leveraged debt, mortgage-backed securities, and syndicated loans. Notable improvements in credit quality in the large corporate portfolio and a 59 percent reduction in net charge-offs drove the $662 million, or 171 percent, decrease in Provision for Credit Losses.
Within Wealth and Investment Management, Net Income increased $301 million to $1.1 billion. The impact attributable to FleetBoston to Net Income during the period was $191 million. Total assets under management increased $148.3 billion, or 53 percent, to $429.5 billion at September 30, 2004, due to $146.5 billion of FleetBoston assets under management, growth in Marsico Capital Management LLCs (Marsico) assets under management and market appreciation offset by fund outflows, primarily in money markets products caused by rising interest rates.
Financial highlights for the nine months ended September 30, 2004 compared to the same period in 2003:
Net Interest Income on a fully taxable-equivalent basis increased $5.2 billion to $21.6 billion. This increase was driven by the impact of the Merger, higher asset and liability management (ALM) portfolio levels (consisting of Securities and whole loan mortgages) and rates, growth in consumer loan levels, primarily credit card and home equity, and higher core deposit funding levels. Partially offsetting these increases were reductions in the large corporate and foreign loan balances, the continued runoff of previously exited consumer businesses, lower mortgage warehouse levels and lower trading-related contributions. The net interest yield on a fully taxable-equivalent basis declined nine basis points (bps) to 3.26 percent due to the negative impact of increases in lower-yielding trading-related assets partially offset by higher levels of higher-yielding consumer loans, primarily credit card.
Noninterest Income increased $1.7 billion to $14.1 billion, due primarily to the addition of FleetBoston. Card Income increased $971 million due to increased fees and interchange income, including the $557 million impact of the addition of the FleetBoston card portfolio. Service Charges grew by $916 million caused by account growth, of which approximately $631 million was attributable to the addition of FleetBoston customers. Investment and Brokerage Services increased $787 million due to approximately $698 million related to the addition of the FleetBoston business, growth in Marsico and market appreciation. Equity Investment Gains increased $437 million due to an increase in Principal Investing cash gains related to the legacy Bank of America portfolio of $262 million and the addition of $142 million of cash gains related to the FleetBoston portfolio. Trading Account Profits increased $218 million due to increased customer activity, including the $151 million impact of the addition of FleetBoston. Investment Banking Income increased $111 million on increased market share in a variety of products.
Offsetting these increases was a decrease in Mortgage Banking Income of $1.4 billion caused by lower production levels, a decrease in the gains on sales of loans to the secondary market and writedowns of the value of MSRs. Also offsetting the increase in Noninterest Income was the decrease in gains on whole loan mortgage sales to zero in the first nine months of 2004 from $723 million in the first nine months of 2003.
32
Gains on Sales of Securities were $2.0 billion compared to $802 million, as we continued to reposition the ALM portfolio in response to interest rate fluctuations, and to manage mortgage prepayment risk.
The Provision for Credit Losses decreased $193 million to $2.1 billion driven by the continued improvements in credit quality in both the large corporate and commercial loan portfolios. Partially offsetting these decreases were increases in the Provision for Credit Losses in our consumer credit card portfolio. The increases were driven by the addition of the FleetBoston credit card portfolio, the return of securitized loans to the balance sheet, organic growth in the portfolio and overall seasoning of the portfolio.
Despite the addition of FleetBoston criticized commercial exposure of $7.1 billion on April 1, 2004, criticized commercial exposure decreased by $625 million from December 31, 2003 driven by overall improvement in the large corporate and commercial loan portfolios including paydowns and payoffs, loans sales, net charge-offs, and returns to performing status. Total commercial net charge-offs decreased $614 million for the nine months ended September 30, 2004 compared to a year ago.
Nonperforming assets decreased $185 million to $2.8 billion, or 0.55 percent of loans, leases and foreclosed properties at September 30, 2004 compared to 0.81 percent at December 31, 2003. This decrease was driven by the continued reductions in the nonperforming asset levels of the large corporate and commercial portfolios, partially offset by the addition of $1.2 billion of FleetBoston nonperforming assets on April 1, 2004.
Noninterest Expense increased $4.7 billion, driven by higher Personnel Expenses of $2.2 billion and increased Other General Operating Expenses of $1.1 billion. Higher Personnel Expenses resulted from the $1.6 billion impact to salaries, benefits costs and revenue-related incentives of the addition of associates from FleetBoston. The increase in Other General Operating Expenses was related to the $425 million impact of the addition of FleetBoston, $300 million of legal expenses incurred during the second quarter of 2004 related to previously disclosed matters, and the $375 million mutual fund settlement entered into during the period. This settlement amount was offset by a $90 million reserve established in 2003 to produce a net settlement expense of $285 million recorded in the first quarter of 2004. This net settlement expense was divided equally between Global Corporate and Investment Banking and Wealth and Investment Management for business segment reporting purposes. Also impacting Noninterest Expense during the period was the $346 million Merger and Restructuring Charges in connection with the integration of FleetBostons operations. For more information on Merger and Restructuring Charges, see Note 2 of the Consolidated Financial Statements.
Income Tax Expense was $5.2 billion reflecting an estimated effective tax rate of 33.4 percent compared to $3.9 billion and 32.4 percent, respectively, a year ago. The increase in the effective tax rate was generally due to the impact of the higher FleetBoston effective tax rate and purchase accounting adjustments related to the Merger.
33
Table 1
Selected Quarterly Financial Data (1)
2004 Quarters |
2003 Quarters |
|||||||||||||||||||
(Dollars in millions, except per share information) |
Third |
Second |
First |
Fourth |
Third |
|||||||||||||||
Income statement |
||||||||||||||||||||
Net interest income |
$ | 7,665 | $ | 7,581 | $ | 5,801 | $ | 5,586 | $ | 5,304 | ||||||||||
Noninterest income |
4,895 | 5,440 | 3,717 | 4,049 | 4,446 | |||||||||||||||
Total revenue |
12,560 | 13,021 | 9,518 | 9,635 | 9,750 | |||||||||||||||
Provision for credit losses |
650 | 789 | 624 | 583 | 651 | |||||||||||||||
Gains on sales of securities |
732 | 795 | 495 | 139 | 233 | |||||||||||||||
Noninterest expense |
6,994 | 7,201 | 5,417 | 5,288 | 5,077 | |||||||||||||||
Income before income taxes |
5,648 | 5,826 | 3,972 | 3,903 | 4,255 | |||||||||||||||
Income tax expense |
1,884 | 1,977 | 1,291 | 1,177 | 1,333 | |||||||||||||||
Net income |
3,764 | 3,849 | 2,681 | 2,726 | 2,922 | |||||||||||||||
Average common shares issued and outstanding (in thousands) |
4,052,304 | 4,062,384 | 2,880,306 | 2,926,494 | 2,980,206 | |||||||||||||||
Average diluted common shares issued and outstanding (in thousands) |
4,121,375 | 4,131,290 | 2,933,402 | 2,978,962 | 3,039,282 | |||||||||||||||
Performance ratios |
||||||||||||||||||||
Return on average assets |
1.35 | % | 1.40 | % | 1.27 | % | 1.39 | % | 1.48 | % | ||||||||||
Return on average common shareholders equity |
15.56 | 16.63 | 22.16 | 22.42 | 23.74 | |||||||||||||||
Total equity to total assets (period end) |
9.00 | 9.24 | 5.98 | 6.52 | 6.84 | |||||||||||||||
Total average equity to total average assets |
8.68 | 8.42 | 5.73 | 6.19 | 6.22 | |||||||||||||||
Dividend payout |
48.75 | 42.60 | 43.21 | 42.70 | 40.85 | |||||||||||||||
Per common share data |
||||||||||||||||||||
Earnings |
$ | 0.93 | $ | 0.95 | $ | 0.93 | $ | 0.93 | $ | 0.98 | ||||||||||
Diluted earnings |
0.91 | 0.93 | 0.91 | 0.92 | 0.96 | |||||||||||||||
Dividends paid |
0.45 | 0.40 | 0.40 | 0.40 | 0.40 | |||||||||||||||
Book value |
24.14 | 23.51 | 16.85 | 16.63 | 16.92 | |||||||||||||||
Average balance sheet |
||||||||||||||||||||
Total loans and leases |
$ | 503,078 | $ | 497,158 | $ | 374,077 | $ | 371,071 | $ | 357,288 | ||||||||||
Total assets |
1,110,124 | 1,108,307 | 849,627 | 780,536 | 786,155 | |||||||||||||||
Total deposits |
587,878 | 582,305 | 425,075 | 418,840 | 414,569 | |||||||||||||||
Long-term debt |
98,361 | 96,395 | 78,852 | 70,596 | 66,788 | |||||||||||||||
Common shareholders equity |
96,120 | 92,943 | 48,632 | 48,238 | 48,816 | |||||||||||||||
Total shareholders equity |
96,392 | 93,266 | 48,686 | 48,293 | 48,871 | |||||||||||||||
Capital ratios (period end) |
||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||
Tier 1 |
8.08 | % | 8.20 | % | 7.73 | % | 7.85 | % | 8.25 | % | ||||||||||
Total |
11.71 | 11.97 | 11.46 | 11.87 | 12.17 | |||||||||||||||
Leverage |
5.92 | 5.83 | 5.43 | 5.73 | 5.95 | |||||||||||||||
Market price per share of common stock |
||||||||||||||||||||
Closing |
$ | 43.33 | $ | 42.31 | $ | 40.49 | $ | 40.22 | $ | 39.02 | ||||||||||
High closing |
44.98 | 42.72 | 41.38 | 41.25 | 41.77 | |||||||||||||||
Low closing |
41.81 | 38.96 | 39.15 | 36.43 | 37.44 | |||||||||||||||
(1) | Certain prior period amounts have been reclassified to conform to current period presentation. |
34
Table 2
Selected Year-to-Date Financial Data (1)
Nine Months Ended September 30 |
||||||||
(Dollars in millions, except per share information) |
2004 |
2003 |
||||||
Income statement |
||||||||
Net interest income |
$ | 21,047 | $ | 15,878 | ||||
Noninterest income |
14,052 | 12,401 | ||||||
Total revenue |
35,099 | 28,279 | ||||||
Provision for credit losses |
2,063 | 2,256 | ||||||
Gains on sales of securities |
2,022 | 802 | ||||||
Noninterest expense |
19,612 | 14,867 | ||||||
Income before income taxes |
15,446 | 11,958 | ||||||
Income tax expense |
5,152 | 3,874 | ||||||
Net income |
10,294 | 8,084 | ||||||
Average common shares issued and outstanding (in thousands) |
3,666,298 | 2,988,739 | ||||||
Average diluted common shares issued and outstanding (in thousands) |
3,729,120 | 3,047,046 | ||||||
Performance ratios |
||||||||
Return on average assets |
1.34 | % | 1.42 | % | ||||
Return on average common shareholders equity |
17.32 | 21.85 | ||||||
Total equity to total assets (period end) |
9.00 | 6.84 | ||||||
Total average equity to total average assets |
7.77 | 6.53 | ||||||
Dividend payout |
45.01 | 38.53 | ||||||
Per common share data |
||||||||
Earnings |
$ | 2.80 | $ | 2.70 | ||||
Diluted earnings |
2.76 | 2.65 | ||||||
Dividends paid |
1.25 | 1.04 | ||||||
Book value |
24.14 | 16.92 | ||||||
Average balance sheet |
||||||||
Total loans and leases |
$ | 458,268 | $ | 351,119 | ||||
Total assets |
1,023,005 | 758,605 | ||||||
Total deposits |
531,958 | 401,985 | ||||||
Long-term debt |
91,229 | 67,702 | ||||||
Common shareholders equity |
79,293 | 49,455 | ||||||
Total shareholders equity |
79,510 | 49,512 | ||||||
Capital ratios (period end) |
||||||||
Risk-based capital: |
||||||||
Tier 1 |
8.08 | % | 8.25 | % | ||||
Total |
11.71 | 12.17 | ||||||
Leverage |
5.92 | 5.95 | ||||||
Market price per share of common stock |
||||||||
Closing |
$ | 43.33 | $ | 39.02 | ||||
High closing |
44.98 | 41.77 | ||||||
Low closing |
38.96 | 32.82 | ||||||
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