UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
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) 386-5681
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 ü No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ü No
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No ü
On October 31, 2005, there were 4,016,080,679 shares of Bank of America Corporation Common Stock outstanding.
September 30, 2005 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) |
2005 |
2004 |
2005 |
2004 | |||||||||
Interest income |
|||||||||||||
Interest and fees on loans and leases |
$ | 8,956 | $ | 7,508 | $ | 25,375 | $ | 20,294 | |||||
Interest and dividends on securities |
2,797 | 2,078 | 8,130 | 5,197 | |||||||||
Federal funds sold and securities purchased under agreements to resell |
1,359 | 484 | 3,504 | 1,331 | |||||||||
Trading account assets |
1,550 | 960 | 4,158 | 2,981 | |||||||||
Other interest income |
547 | 457 | 1,486 | 1,226 | |||||||||
Total interest income |
15,209 | 11,487 | 42,653 | 31,029 | |||||||||
Interest expense |
|||||||||||||
Deposits |
2,409 | 1,711 | 6,831 | 4,446 | |||||||||
Short-term borrowings |
3,325 | 1,152 | 7,971 | 2,891 | |||||||||
Trading account liabilities |
707 | 333 | 1,745 | 965 | |||||||||
Long-term debt |
995 | 626 | 2,810 | 1,680 | |||||||||
Total interest expense |
7,436 | 3,822 | 19,357 | 9,982 | |||||||||
Net interest income |
7,773 | 7,665 | 23,296 | 21,047 | |||||||||
Noninterest income |
|||||||||||||
Service charges |
2,080 | 1,899 | 5,777 | 5,098 | |||||||||
Investment and brokerage services |
1,060 | 972 | 3,122 | 2,606 | |||||||||
Mortgage banking income (loss) |
180 | (250 | ) | 590 | 258 | ||||||||
Investment banking income |
522 | 438 | 1,319 | 1,389 | |||||||||
Equity investment gains |
668 | 220 | 1,559 | 437 | |||||||||
Card income |
1,520 | 1,258 | 4,246 | 3,212 | |||||||||
Trading account profits |
514 | 184 | 1,559 | 600 | |||||||||
Other income |
290 | 201 | 1,176 | 519 | |||||||||
Total noninterest income |
6,834 | 4,922 | 19,348 | 14,119 | |||||||||
Total revenue |
14,607 | 12,587 | 42,644 | 35,166 | |||||||||
Provision for credit losses |
1,159 | 650 | 2,614 | 2,063 | |||||||||
Gains on sales of debt securities |
29 | 732 | 1,013 | 2,022 | |||||||||
Noninterest expense |
|||||||||||||
Personnel |
3,837 | 3,534 | 11,209 | 9,915 | |||||||||
Occupancy |
638 | 622 | 1,889 | 1,731 | |||||||||
Equipment |
300 | 309 | 894 | 888 | |||||||||
Marketing |
307 | 364 | 990 | 1,012 | |||||||||
Professional fees |
254 | 207 | 647 | 561 | |||||||||
Amortization of intangibles |
201 | 200 | 613 | 455 | |||||||||
Data processing |
361 | 341 | 1,093 | 958 | |||||||||
Telecommunications |
206 | 180 | 608 | 514 | |||||||||
Other general operating |
1,061 | 1,043 | 3,065 | 3,299 | |||||||||
Merger and restructuring charges |
120 | 221 | 353 | 346 | |||||||||
Total noninterest expense |
7,285 | 7,021 | 21,361 | 19,679 | |||||||||
Income before income taxes |
6,192 | 5,648 | 19,682 | 15,446 | |||||||||
Income tax expense |
2,065 | 1,884 | 6,564 | 5,152 | |||||||||
Net income |
$ | 4,127 | $ | 3,764 | $ | 13,118 | $ | 10,294 | |||||
Net income available to common shareholders |
$ | 4,122 | $ | 3,759 | $ | 13,104 | $ | 10,283 | |||||
Per common share information |
|||||||||||||
Earnings |
$ | 1.03 | $ | 0.93 | $ | 3.27 | $ | 2.80 | |||||
Diluted earnings |
$ | 1.02 | $ | 0.91 | $ | 3.22 | $ | 2.76 | |||||
Dividends paid |
$ | 0.50 | $ | 0.45 | $ | 1.40 | $ | 1.25 | |||||
Average common shares issued and outstanding (in thousands) |
4,000,573 | 4,052,304 | 4,012,924 | 3,666,298 | |||||||||
Average diluted common shares issued and outstanding (in thousands) |
4,054,659 | 4,121,375 | 4,072,991 | 3,729,120 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
2
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in millions) |
September 30 2005 |
December 31 2004 |
||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 32,771 | $ | 28,936 | ||||
Time deposits placed and other short-term investments |
11,236 | 12,361 | ||||||
Federal funds sold and securities purchased under agreements to resell (includes $135,313 and $91,243 pledged as collateral) |
135,409 | 91,360 | ||||||
Trading account assets (includes $46,028 and $38,929 pledged as collateral) |
121,256 | 93,587 | ||||||
Derivative assets |
26,005 | 30,235 | ||||||
Securities: |
||||||||
Available-for-sale (includes $118,944 and $45,127 pledged as collateral) |
227,349 | 194,743 | ||||||
Held-to-maturity, at cost (market value - $136 and $329) |
136 | 330 | ||||||
Total securities |
227,485 | 195,073 | ||||||
Loans and leases |
554,603 | 521,837 | ||||||
Allowance for loan and lease losses |
(8,326 | ) | (8,626 | ) | ||||
Loans and leases, net of allowance |
546,277 | 513,211 | ||||||
Premises and equipment, net |
7,659 | 7,517 | ||||||
Mortgage servicing rights |
2,764 | 2,482 | ||||||
Goodwill |
45,298 | 45,262 | ||||||
Core deposit intangibles and other intangibles |
3,356 | 3,887 | ||||||
Other assets |
92,743 | 86,546 | ||||||
Total assets |
$ | 1,252,259 | $ | 1,110,457 | ||||
Liabilities |
||||||||
Deposits in domestic offices: |
||||||||
Noninterest-bearing |
$ | 174,990 | $ | 163,833 | ||||
Interest-bearing |
390,973 | 396,645 | ||||||
Deposits in foreign offices: |
||||||||
Noninterest-bearing |
6,750 | 6,066 | ||||||
Interest-bearing |
53,764 | 52,026 | ||||||
Total deposits |
626,477 | 618,570 | ||||||
Federal funds purchased and securities sold under agreements to repurchase |
217,053 | 119,741 | ||||||
Trading account liabilities |
51,244 | 36,654 | ||||||
Derivative liabilities |
15,711 | 17,928 | ||||||
Commercial paper and other short-term borrowings |
107,655 | 78,598 | ||||||
Accrued expenses and other liabilities (includes $390 and $402 of reserve for unfunded |
||||||||
lending commitments) |
32,976 | 41,243 | ||||||
Long-term debt |
99,885 | 98,078 | ||||||
Total liabilities |
1,151,001 | 1,010,812 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Shareholders equity |
||||||||
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,090,189 |
271 | 271 | ||||||
Common stock and additional paid-in capital, $0.01 par value; authorized - 7,500,000,000 shares; issued and outstanding - 4,013,063,444 and 4,046,546,212 shares |
42,548 | 44,236 | ||||||
Retained earnings |
65,439 | 58,006 | ||||||
Accumulated other comprehensive income (loss) |
(6,509 | ) | (2,587 | ) | ||||
Other |
(491 | ) | (281 | ) | ||||
Total shareholders equity |
101,258 | 99,645 | ||||||
Total liabilities and shareholders equity |
$ | 1,252,259 | $ | 1,110,457 | ||||
See accompanying Notes to Consolidated Financial Statements.
3
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders Equity
Preferred |
Common Stock and Additional Paid-in Capital |
Retained |
Accumulated |
Other |
Total |
Comprehensive |
|||||||||||||||||||||||||
Shares |
Amount |
||||||||||||||||||||||||||||||
(Dollars in millions, shares in thousands) |
|||||||||||||||||||||||||||||||
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 debt 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(3) |
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 | 54 | | ||||||||||||||||||||||||||
Other |
(7 | ) | 39 | (1 | ) | 31 | |||||||||||||||||||||||||
Balance, September 30, 2004 |
$ | 271 | 4,049,063 | $ | 44,756 | $ | 55,979 | $ | (2,669 | ) | $ | (326 | ) | $ | 98,011 | $ | 9,773 | ||||||||||||||
Balance, December 31, 2004 |
$ | 271 | 4,046,546 | $ | 44,236 | $ | 58,006 | $ | (2,587 | ) | $ | (281 | ) | $ | 99,645 | ||||||||||||||||
Net income |
13,118 | 13,118 | $ | 13,118 | |||||||||||||||||||||||||||
Net unrealized losses on available-for-sale debt and marketable equity securities |
(1,711 | ) | (1,711 | ) | (1,711 | ) | |||||||||||||||||||||||||
Net unrealized gains on foreign currency translation adjustments |
26 | 26 | 26 | ||||||||||||||||||||||||||||
Net unrealized losses on derivatives |
(2,237 | ) | (2,237 | ) | (2,237 | ) | |||||||||||||||||||||||||
Cash dividends paid: |
|||||||||||||||||||||||||||||||
Common |
(5,658 | ) | (5,658 | ) | |||||||||||||||||||||||||||
Preferred |
(14 | ) | (14 | ) | |||||||||||||||||||||||||||
Common stock issued under employee plans and related tax benefits |
60,704 | 2,593 | (211 | ) | 2,382 | ||||||||||||||||||||||||||
Common stock repurchased |
(94,187 | ) | (4,281 | ) | (4,281 | ) | |||||||||||||||||||||||||
Other |
(13 | ) | 1 | (12 | ) | ||||||||||||||||||||||||||
Balance, September 30, 2005 |
$ | 271 | 4,013,063 | $ | 42,548 | $ | 65,439 | $ | (6,509 | ) | $ | (491 | ) | $ | 101,258 | $ | 9,196 | ||||||||||||||
(1) | At September 30, 2005 and December 31, 2004, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on Available-for-sale (AFS) Debt and Marketable Equity Securities of $(1,908) million and $(196) million; Net Unrealized Gains (Losses) on Foreign Currency Translation Adjustments of $(129) million and $(153) million; Net Unrealized Gains (Losses) on Derivatives of $(4,338) million and $(2,102) million; and Other of $(134) million and $(136) million. |
(2) | For the three months ended September 30, 2005 and September 30, 2004, Comprehensive Income of $2,610 million and $4,957 million includes Net Income of $4,127 million and $3,764 million, Net Unrealized Gains (Losses) on AFS Debt and Marketable Equity Securities of $(2,295) million and $1,635 million, Net Unrealized Gains (Losses) on Foreign Currency Translation Adjustments of $(4) million and $9 million, and Net Unrealized Gains (Losses) on Derivatives of $782 million and $(451) million. |
(3) | Includes adjustment for the fair value of outstanding FleetBoston Financial Corporation (FleetBoston) stock options of $862 million. |
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) |
2005 |
2004 |
||||||
Operating activities |
||||||||
Net income |
$ | 13,118 | $ | 10,294 | ||||
Reconciliation of net income to net cash provided by (used in) operating activities: |
||||||||
Provision for credit losses |
2,614 | 2,063 | ||||||
Gains on sales of debt securities |
(1,013 | ) | (2,022 | ) | ||||
Depreciation and premises improvements amortization |
716 | 723 | ||||||
Amortization of intangibles |
613 | 455 | ||||||
Deferred income tax expense (benefit) |
262 | (402 | ) | |||||
Net increase in trading and hedging instruments |
(10,305 | ) | (21,396 | ) | ||||
Net increase in other assets |
(3,330 | ) | (590 | ) | ||||
Net decrease in accrued expenses and other liabilities |
(6,015 | ) | (7,919 | ) | ||||
Other operating activities, net |
(6,994 | ) | (1,043 | ) | ||||
Net cash used in operating activities |
(10,334 | ) | (19,837 | ) | ||||
Investing activities |
||||||||
Net decrease in time deposits placed and other short-term investments |
1,125 | 193 | ||||||
Net increase in federal funds sold and securities purchased under agreements to resell |
(44,049 | ) | (17,090 | ) | ||||
Proceeds from sales of available-for-sale securities |
143,079 | 77,860 | ||||||
Proceeds from maturities of available-for-sale securities |
24,378 | 19,710 | ||||||
Purchases of available-for-sale securities |
(202,053 | ) | (165,359 | ) | ||||
Proceeds from maturities of held-to-maturity securities |
194 | 63 | ||||||
Proceeds from sales of loans and leases |
13,059 | 3,192 | ||||||
Other changes in loans and leases, net |
(48,730 | ) | (18,938 | ) | ||||
Origination of mortgage servicing rights |
(663 | ) | (841 | ) | ||||
Net purchases of premises and equipment |
(858 | ) | (970 | ) | ||||
Proceeds from sales of foreclosed properties |
101 | 145 | ||||||
Investment in China Construction Bank |
(2,500 | ) | | |||||
Cash equivalents acquired net of purchase acquisitions |
(118 | ) | 5,593 | |||||
Other investing activities, net |
83 | 788 | ||||||
Net cash used in investing activities |
(116,952 | ) | (95,654 | ) | ||||
Financing activities |
||||||||
Net increase in deposits |
7,907 | 37,111 | ||||||
Net increase in federal funds purchased and securities sold under agreements to repurchase |
97,312 | 59,003 | ||||||
Net increase in commercial paper and other short-term borrowings |
29,057 | 20,424 | ||||||
Proceeds from issuance of long-term debt |
17,813 | 19,080 | ||||||
Retirement of long-term debt |
(13,076 | ) | (11,286 | ) | ||||
Proceeds from issuance of common stock |
2,215 | 2,729 | ||||||
Common stock repurchased |
(4,281 | ) | (4,749 | ) | ||||
Cash dividends paid |
(5,672 | ) | (4,640 | ) | ||||
Other financing activities, net |
(104 | ) | (41 | ) | ||||
Net cash provided by financing activities |
131,171 | 117,631 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(50 | ) | 28 | |||||
Net increase in cash and cash equivalents |
3,835 | 2,168 | ||||||
Cash and cash equivalents at January 1 |
28,936 | 27,084 | ||||||
Cash and cash equivalents at September 30 |
$ | 32,771 | $ | 29,252 | ||||
Net transfers of Loans and Leases from the loan portfolio to loans held-for-sale (included in Other Assets) amounted to $129 million for the nine months ended September 30, 2005. Net transfers of Loans and Leases from loans held-for-sale to the loan portfolio amounted to $73 million for the nine months ended September 30, 2004.
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 U.S. and in selected international markets. At September 30, 2005, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA). On June 13, 2005, Fleet National Bank merged with and into Bank of America, N.A., with Bank of America, N.A. as the surviving entity. This merger had no impact on the Consolidated Financial Statements of the Corporation. On June 30, 2005, the Corporation announced a definitive agreement to acquire all outstanding shares of MBNA Corporation (MBNA) (the MBNA Merger). The transaction is expected to be effective January 1, 2006, subject to certain regulatory approval. On April 1, 2004, the Corporation acquired all of the outstanding stock of FleetBoston Financial Corporation (FleetBoston) (the Merger).
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. Results of operations of companies purchased are included from the date of acquisition. Certain prior period amounts were reclassified to conform to current period presentation.
Recently Issued or Proposed Accounting Pronouncements
On August 11, 2005, the Financial Accounting Standards Board (FASB) issued three exposure drafts which would amend FASB Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The exposure draft, Accounting for Transfers of Financial Assets, would revise and clarify the criteria for derecognition of transferred financial assets. It would also place restrictions on the ability of a qualifying special purpose entity to roll over beneficial interests such as short-term commercial paper. The exposure draft, Accounting for Servicing of Financial Assets, would permit, but not require, an entity to account for one or more classes of servicing rights (e.g. mortgage servicing rights, or MSRs) at fair value, with changes in fair value recorded in income. The exposure draft, Accounting for Certain Hybrid Financial Instruments, would permit, but not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation. It would also subject beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The provisions of the exposure drafts would be effective at various dates beginning in 2006. Management is currently evaluating the effect of the provisions of the exposure drafts.
On July 14, 2005, the FASB issued an exposure draft, FASB Staff Position (FSP) No. FSP 13-a, Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (FSP 13-a). FSP 13-a requires a lessor to reevaluate the classification of a leveraged lease and to recalculate the recognition of the lease income when there is a change in the estimated timing of the cash flows relating to income taxes generated by the lease. The proposed interpretation is expected to be effective as of December 31, 2005.
Management is considering the potential impact of the Internal Revenue Services (IRS) stated position on certain leveraged leases and the impact of such position on the Corporation and its predecessors federal income tax returns. Depending on the final provisions of FSP 13-a and the final resolution with the IRS, adoption of FSP 13-a may have a material impact on the Corporations current accounting treatment for leveraged leases. This change in accounting that would be required under the proposed FSP would be reflected as both an adjustment to Goodwill for leveraged leases acquired as part of the Merger and a one-time cumulative effect of a change in accounting principle below net income from operations as of the end of the year of adoption.
6
On July 14, 2005, the FASB issued an exposure draft, Accounting for Uncertain Tax Positions, a proposed interpretation of SFAS No. 109, Accounting for Income Taxes (the proposed Interpretation). The proposed Interpretation requires recognition of a tax benefit to the extent of managements best estimate of the impact of a tax position, provided it is probable that the tax position would be sustained based on its technical merits. The proposed Interpretation is expected to be effective during 2006. Management is currently evaluating the effect of the proposed Interpretation.
On December 21, 2004, the FASB issued FSP No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP No. 109-2). FSP No. 109-2 provides accounting and disclosure guidance for the foreign earnings repatriation provision within the American Jobs Creation Act of 2004 (the Act). The Act provides U.S. companies with the ability to elect to apply a special one-time tax deduction equal to 85 percent of certain earnings remitted from foreign subsidiaries, provided certain criteria are met. Subsequent to September 30, 2005, Management completed the evaluation of the Corporations opportunity, and decided to make this election for 2005. A tax benefit in the range of $70 million to $90 million is expected to be recognized, resulting in a decrease in the effective tax rate to approximately 33 percent for the year ending December 31, 2005.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) Share-based Payment (SFAS 123R) which eliminates the ability to account for share-based compensation transactions, including grants of employee stock options, using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires that such transactions be accounted for using a fair value-based method with the resulting compensation cost recognized over the period that the employee is required to provide service in order to receive their compensation. SFAS 123R also amends SFAS No. 95, Statement of Cash Flows, requiring the benefits of tax deductions in excess of recognized compensation costs to be reported as financing cash flows, rather than as operating cash flows as currently required. The Corporation adopted the fair value-based method of accounting for stock-based employee compensation prospectively as of January 1, 2003. The Corporation will be adopting SFAS 123R effective January 1, 2006 under the modified-prospective application. 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
SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123, (SFAS 148) was adopted prospectively by the Corporation on January 1, 2003. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. 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, 2005 and 2004. 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, 2005 and 2004.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions, except per share data) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Net income (as reported) |
$ | 4,127 | $ | 3,764 | $ | 13,118 | $ | 10,294 | ||||||||
Stock-based employee compensation expense recognized during the period, net of related tax effects |
49 | 40 | 152 | 118 | ||||||||||||
Stock-based employee compensation expense determined under fair value-based method, net of related tax effects (1) |
(49 | ) | (52 | ) | (152 | ) | (161 | ) | ||||||||
Pro forma net income |
$ | 4,127 | $ | 3,752 | $ | 13,118 | $ | 10,251 | ||||||||
As reported |
||||||||||||||||
Earnings per common share |
$ | 1.03 | $ | 0.93 | $ | 3.27 | $ | 2.80 | ||||||||
Diluted earnings per common share |
1.02 | 0.91 | 3.22 | 2.76 | ||||||||||||
Pro forma |
||||||||||||||||
Earnings per common share |
1.03 | 0.93 | 3.27 | 2.80 | ||||||||||||
Diluted earnings per common share |
1.02 | 0.91 | 3.22 | 2.75 | ||||||||||||
(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, 2005 and 2004, was $127 million and $93 million pre-tax, and for the nine months ended September 30, 2005 and 2004 was $369 million and $262 million pre-tax. |
Under certain equity plans, upon adoption of FAS 123R, the Corporation will be required to change its approach for recognizing stock compensation cost for employees who meet certain age and service criteria and thus, are retirement eligible as described in the plan. For any new awards granted, which retain the retirement eligibility feature after the adoption of FAS 123R, the Corporation will recognize stock compensation cost immediately for awards granted to retirement eligible employees or over the period from the grant date to the date retirement eligibility is achieved. Had the Corporation been recording stock compensation cost under this approach, the estimated cost, net of taxes, recognized would have been reduced by $23 million and $10 million for the three months ended September 30, 2005 and 2004. The estimated stock compensation cost, net of taxes, recognized would have increased by $129 million and $43 million for the nine months ended September 30, 2005 and 2004.
For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
Note 2 - Merger and Restructuring Activity
MBNA
On June 30, 2005, the Corporation announced a definitive agreement to acquire all outstanding shares of MBNA, a leading provider of credit card and payment products, for approximately $35 billion in stock (85 percent) and cash (15 percent). Under the terms of the agreement, MBNA stockholders will receive 0.5009 of a share of the Corporations common stock plus $4.125 for each MBNA share of common stock. The transaction will be accounted for under the purchase method of accounting. Under the purchase method of accounting, the assets and liabilities of MBNA will be recorded at their respective fair values and added to those of the Corporation. The
8
transaction is expected to be effective January 1, 2006, subject to certain regulatory approval. On November 3, 2005, MBNA shareholders voted for approval of the merger of the Corporation and MBNA.
FleetBoston
On April 1, 2004, the Corporation acquired all of the outstanding stock of FleetBoston. FleetBostons results of operations were included in the Corporations results beginning on April 1, 2004. The Merger was accounted for under the purchase method of accounting.
Merger and Restructuring Charges
Merger and Restructuring Charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate the Corporations 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 following table, are expensed as incurred.
In addition, Merger and Restructuring Charges include costs related to an infrastructure initiative that was initiated in the third quarter of 2004 to simplify the Corporations business model. These costs were solely severance related. The Corporation does not expect to incur additional severance costs related to this initiative.
Three Months Ended September 30 |
Nine Months Ended September 30 | |||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 | ||||||||
Severance and employee-related charges: |
||||||||||||
Merger-related |
$ | 15 | $ | 33 | $ | 37 | $ | 97 | ||||
Infrastructure initiative |
| 65 | 1 | 65 | ||||||||
Systems integrations and related charges |
41 | 86 | 189 | 115 | ||||||||
Other |
64 | 37 | 126 | 69 | ||||||||
Total merger and restructuring charges |
$ | 120 | $ | 221 | $ | 353 | $ | 346 | ||||
Exit Costs and Restructuring Reserves
As of December 31, 2004, there were $382 million of exit costs reserves remaining, which included $291 million for severance, relocation and other employee-related costs, $87 million for contract terminations, and $4 million for other charges. During the three months ended September 30, 2005, there were no changes to the exit costs reserves as a result of revised estimates. During the nine months ended September 30, 2005, $17 million of reductions to the exit costs reserves were recorded as a result of revised estimates. Cash payments of $57 million and $253 million were charged against this liability during the three and nine months ended September 30, 2005, including $52 million and $202 million of severance, relocation and other employee-related costs, and $5 million and $51 million of contract terminations reducing the balance in the liability to $112 million at September 30, 2005.
As of December 31, 2004, there were $166 million of restructuring reserves remaining related to severance and other employee-related charges. Restructuring reserves for the three and nine months ended September 30, 2005 included an additional charge for the legacy Bank of America associate severance and other employee-related charges of $35 million and $57 million. These charges included $20 million as a result of revised estimates to complete relocations to the Northeast. During the three and nine months ended September 30, 2005, cash payments of $31 million and $127 million for severance and other employee-related costs have been charged against this liability reducing the balance to $97 million as of September 30, 2005.
9
Payments under these reserves are expected to be substantially complete by the end of 2005.
Exit Costs and Restructuring Reserves | ||||||||||||||||||||||||||||||||
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||||||||||||||||||
Exit Costs Reserves (1) |
Restructuring Reserves (2) |
Exit Costs Reserves (1) |
Restructuring Reserves (2) |
|||||||||||||||||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
||||||||||||||||||||||||
Balance, beginning of period |
$ | 169 | $ | 618 | $ | 93 | $ | 54 | $ | 382 | $ | | $ | 166 | $ | | ||||||||||||||||
FleetBoston exit costs |
| 28 | | | (17 | ) | 708 | | | |||||||||||||||||||||||
Restructuring charges |
| | 35 | 33 | | | 57 | 97 | ||||||||||||||||||||||||
Infrastructure initiative |
| | | 65 | | | 1 | 65 | ||||||||||||||||||||||||
Cash payments |
(57 | ) | (87 | ) | (31 | ) | (19 | ) | (253 | ) | (149 | ) | (127 | ) | (29 | ) | ||||||||||||||||
Balance, September 30 |
$ | 112 | $ | 559 | $ | 97 | $ | 133 | $ | 112 | $ | 559 | $ | 97 | $ | 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. |
Note 3 - Trading Account Assets and Liabilities
The Corporation engages in a variety of trading-related activities that are either for clients or its own account.
The following table presents the fair values of the components of Trading Account Assets and Liabilities at September 30, 2005 and December 31, 2004.
September 30 2005 |
December 31 2004 | |||||
(Dollars in millions) |
||||||
Trading account assets |
||||||
U.S. government and agency securities (1) |
$ | 29,335 | $ | 20,462 | ||
Corporate securities, trading loans and other |
43,088 | 35,227 | ||||
Equity securities |
25,680 | 19,504 | ||||
Mortgage trading loans and asset-backed securities |
11,996 | 9,625 | ||||
Foreign sovereign debt |
11,157 | 8,769 | ||||
Total |
$ | 121,256 | $ | 93,587 | ||
Trading account liabilities |
||||||
U.S. government and agency securities (2) |
$ | 25,535 | $ | 14,332 | ||
Equity securities |
9,817 | 8,952 | ||||
Foreign sovereign debt |
8,088 | 4,793 | ||||
Corporate securities and other |
7,714 | 8,538 | ||||
Mortgage trading loans and asset-backed securities |
90 | 39 | ||||
Total |
$ | 51,244 | $ | 36,654 | ||
(1) | Includes $20.7 billion and $17.3 billion at September 30, 2005 and December 31, 2004 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government. |
(2) | Includes $917 million and $1.2 billion at September 30, 2005 and December 31, 2004 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government. |
10
Note 4 - Derivatives
All derivatives are recognized on the Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions and offset cash collateral held with the same counterparty on a net basis. For exchange-traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for SFAS 133 accounting purposes. Non-hedging derivatives held for trading purposes, including credit default swaps used in the management of risk in the loan portfolio, are recorded as Derivative Assets or Derivative Liabilities with changes in fair value reflected in Trading Account Profits. Other non-hedging derivatives that are considered economic hedges are also recorded as Derivative Assets or Derivative Liabilities with changes in fair value generally recorded in the same Consolidated Statement of Income caption as the related economically hedged item. A detailed discussion of derivative trading activities and the asset/liability management (ALM) process is presented in Note 4 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
The following table presents the contract/notional and credit risk amounts at September 30, 2005 and December 31, 2004 of all the Corporations derivative positions. These derivative positions are primarily executed in the over-the-counter market. Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements, and on an aggregate basis have been reduced by the cash collateral applied against Derivative Assets. At September 30, 2005 and December 31, 2004, the cash collateral applied against Derivative Assets on the Consolidated Balance Sheet was $9.8 billion and $9.4 billion. In addition, at September 30, 2005 and December 31, 2004, the cash collateral placed against Derivative Liabilities was $7.5 billion and $6.0 billion.
Derivatives(1) |
||||||||||||
September 30, 2005 |
December 31, 2004 | |||||||||||
Contract/ Notional |
Credit Risk |
Contract/ Notional |
Credit Risk | |||||||||
(Dollars in millions) |
||||||||||||
Interest rate contracts |
||||||||||||
Swaps |
$ | 13,665,314 | $ | 12,361 | $ | 11,597,813 | $ | 12,705 | ||||
Futures and forwards |
2,106,656 | | 1,833,216 | 332 | ||||||||
Written options |
1,053,219 | | 988,253 | | ||||||||
Purchased options |
1,084,774 | 3,177 | 1,243,809 | 4,840 | ||||||||
Foreign exchange contracts |
||||||||||||
Swaps |
321,112 | 4,357 | 305,999 | 7,859 | ||||||||
Spot, futures and forwards |
1,069,420 | 2,648 | 956,995 | 3,593 | ||||||||
Written options |
243,096 | | 167,225 | | ||||||||
Purchased options |
261,480 | 1,331 | 163,243 | 679 | ||||||||
Equity contracts |
||||||||||||
Swaps |
29,265 | 414 | 34,130 | 1,039 | ||||||||
Futures and forwards |
10,942 | | 4,078 | | ||||||||
Written options |
62,772 | | 37,080 | | ||||||||
Purchased options |
60,411 | 6,083 | 32,893 | 5,741 | ||||||||
Commodity contracts |
||||||||||||
Swaps |
13,331 | 3,781 | 10,480 | 2,099 | ||||||||
Futures and forwards |
6,664 | | 6,307 | 6 | ||||||||
Written options |
9,581 | | 9,270 | | ||||||||
Purchased options |
5,413 | 889 | 5,535 | 301 | ||||||||
Credit derivatives |
1,603,676 | 750 | 499,741 | 430 | ||||||||
Credit risk before cash collateral |
35,791 | 39,624 | ||||||||||
Less: Cash collateral applied |
9,786 | 9,389 | ||||||||||
Total derivative assets |
$ | 26,005 | $ | 30,235 | ||||||||
(1) | Includes both long and short derivative positions. |
11
The average fair value of Derivative Assets for the three months ended September 30, 2005 and December 31, 2004 was $25.6 billion and $28.0 billion. The average fair value of Derivative Liabilities for the three months ended September 30, 2005 and December 31, 2004 was $16.1 billion and $15.9 billion.
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 (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and other forecasted transactions (cash flow hedges).
For cash flow hedges, gains and losses on derivative contracts reclassified from Accumulated Other Comprehensive Income (OCI) to current period earnings are included in the line item in the Consolidated Statement of Income in which the hedged item is recorded and in the same period the hedged item affects earnings. During the next 12 months, net losses on derivative instruments included in Accumulated OCI of approximately $646 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items.
The following table summarizes certain information related to the Corporations hedging activities for the three and nine months ended September 30, 2005 and 2004:
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Fair value hedges |
||||||||||||||||
Hedge ineffectiveness recognized in earnings(1) |
$ | 54 | $ | 7 | $ | 57 | $ | 12 | ||||||||
Net gain (loss) excluded from assessment of effectiveness(2) |
| 4 | 2 | (4 | ) | |||||||||||
Cash flow hedges |
||||||||||||||||
Hedge ineffectiveness recognized in earnings(3), (4) |
| (8 | ) | (15 | ) | (11 | ) | |||||||||
Net investment hedges |
||||||||||||||||
Gains (losses) included in foreign currency translation adjustments within accumulated other comprehensive income |
(30 | ) | (53 | ) | 49 | 13 | ||||||||||
(1) | Included $14 million and $(6) million recorded in Net Interest Income, $41 million and $13 million recorded in Mortgage Banking Income, $1 million and $0 recorded in Investment Banking Income, and $(2) million and $0 recorded in Trading Account Profits in the Consolidated Statement of Income for the three months ended September 30, 2005 and 2004. Included $(28) million and $(8) million recorded in Net Interest Income, $92 million and $20 million recorded in Mortgage Banking Income, $(5) million and $0 recorded in Investment Banking Income, and $(2) million and $0 recorded in Trading Account Profits in the Consolidated Statement of Income for the nine months ended September 30, 2005 and 2004. |
(2) | Included $(2) million and $4 million recorded in Mortgage Banking Income, and $2 million and $0 recorded in Investment Banking Income in the Consolidated Statement of Income for the three months ended September 30, 2005 and 2004, which relate to the excluded time value of certain hedges. Included $0 and $(5) million recorded in Net Interest Income, $0 and $1 million recorded in Mortgage Banking Income, and $2 million and $0 recorded in Investment Banking Income in the Consolidated Statement of Income for the nine months ended September 30, 2005 and 2004, which relate to the excluded time value of certain hedges. |
(3) | Included $0 and $(3) million recorded in Net Interest Income and $0 and $(5) million recorded in Mortgage Banking Income from other various cash flow hedges in the Consolidated Statement of Income for the three months ended September 30, 2005 and 2004. Included $(1) million and $(3) million recorded in Net Interest Income, and $(14) million and $(8) million recorded in Mortgage Banking Income from other various cash flow hedges in the Consolidated Statement of Income for the nine months ended September 30, 2005 and 2004. |
(4) | The maximum length of time over which forecasted transactions are hedged is 20 years. |
12
Note 5 - Outstanding Loans and Leases
Outstanding loans and leases at September 30, 2005 and December 31, 2004 were:
(Dollars in millions) |
September 30 2005 |
December 31 2004 | ||||
Consumer |
||||||
Residential mortgage |
$ | 177,317 | $ | 178,103 | ||
Credit card |
56,079 | 51,726 | ||||
Home equity lines |
59,337 | 50,126 | ||||
Direct/Indirect consumer |
49,585 | 40,513 | ||||
Other consumer (1) |
6,639 | 7,439 | ||||
Total consumer |
348,957 | 327,907 | ||||
Commercial |
||||||
Commercialdomestic |
130,730 | 122,095 | ||||
Commercial real estate (2) |
35,794 | 32,319 | ||||
Commercial lease financing |
20,284 | 21,115 | ||||
Commercialforeign |
18,838 | 18,401 | ||||
Total commercial |
205,646 | 193,930 | ||||
Total |
$ | 554,603 | $ | 521,837 | ||
(1) | Includes consumer finance of $2,988 million and $3,395 million; foreign consumer of $3,575 million and $3,563 million; and consumer lease financing of $76 million and $481 million at September 30, 2005 and December 31, 2004. |
(2) | Includes domestic commercial real estate loans of $35,116 million and $31,879 million; and foreign commercial real estate loans of $678 million and $440 million at September 30, 2005 and December 31, 2004. |
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, 2005 and December 31, 2004. SFAS 114 impairment includes performing troubled debt restructurings, and excludes all commercial leases.
(Dollars in millions) |
September 30 2005 |
December 31 2004 | ||||
Commercialdomestic |
$ | 671 | $ | 868 | ||
Commercial real estate |
44 | 87 | ||||
Commercialforeign |
64 | 273 | ||||
Total impaired loans |
$ | 779 | $ | 1,228 | ||
At September 30, 2005 and December 31, 2004, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $1.5 billion and $2.2 billion. There were no nonperforming securities at September 30, 2005 compared to $140 million at December 31, 2004. In addition, included in Other Assets were nonperforming loans held-for-sale and leveraged lease partnership interests of $93 million and $151 million at September 30, 2005 and December 31, 2004.
13
Note 6 - Allowance for Credit Losses
The following table summarizes the changes in the allowance for credit losses for the three and nine months ended September 30, 2005 and 2004:
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
| ||||
Allowance for loan and lease losses, beginning of period |
$ | 8,319 | $ | 8,767 | $ | 8,626 | $ | 6,163 | ||||||||
Addition of FleetBoston allowance, April 1, 2004 |
| | | 2,763 | ||||||||||||
Loans and leases charged off |
(1,439 | ) | (982 | ) | (3,819 | ) | (2,968 | ) | ||||||||
Recoveries of loans and leases previously charged off |
294 | 263 | 905 | 700 | ||||||||||||
Net charge-offs |
(1,145 | ) | (719 | ) | (2,914 | ) | (2,268 | ) | ||||||||
Provision for loan and lease losses |
1,152 | 690 | 2,626 | 2,118 | ||||||||||||
Transfers (1) |
| (15 | ) | (12 | ) | (53 | ) | |||||||||
Allowance for loan and lease losses, September 30 |
8,326 | 8,723 | 8,326 | 8,723 | ||||||||||||
Reserve for unfunded lending commitments, beginning of period |
383 | 486 | 402 | 416 | ||||||||||||
Addition of FleetBoston reserve, April 1, 2004 |
| | | 85 | ||||||||||||
Provision for unfunded lending commitments |
7 | (40 | ) | (12 | ) | (55 | ) | |||||||||
Reserve for unfunded lending commitments, September 30 |
390 | 446 | 390 | 446 | ||||||||||||
Total |
$ | 8,716 | $ | 9,169 | $ | 8,716 | $ | 9,169 | ||||||||
(1) | Primarily includes transfers to loans held-for-sale. |
Note 7 - Mortgage Servicing Rights
The Corporation has retained MSRs from the sale or securitization of mortgage loans. The following table presents activity in MSRs for the three and nine months ended September 30, 2005 and 2004. Effective June 1, 2004, Excess Spread Certificates (the Certificates) were converted to MSRs. For more information on the conversion of the Certificates to MSRs, see Note 1 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
| ||||
Balance, beginning of period |
$ | 2,366 | $ | 3,005 | $ | 2,482 | $ | 479 | ||||||||
Additions |
256 | 179 | 663 | 2,806 | (1) | |||||||||||
Amortization |
(168 | ) | (136 | ) | (473 | ) | (220 | ) | ||||||||
Valuation adjustment of MSRs (2) |
310 | (595 | ) | 92 | (612 | ) | ||||||||||
Balance, September 30 (3) |
$ | 2,764 | $ | 2,453 | $ | 2,764 | $ | 2,453 | ||||||||
(1) | Includes $2.2 billion of Certificates converted to MSRs on June 1, 2004. |
(2) | For the three months ended September 30, 2005 and 2004, includes $325 million and $(208) million related to change in value attributed to SFAS 133 hedged MSRs and $15 million and $387 million of impairment. For the nine months ended September 30, 2005 and 2004, includes $121 million and $(193) million related to change in value attributed to SFAS 133 hedged MSRs and $29 million and $419 million of impairment. |
(3) | Net of impairment allowance of $273 million and $361 million at September 30, 2005 and 2004. |
The estimated fair value of MSRs was $2.8 billion and $2.5 billion at September 30, 2005 and December 31, 2004.
14
Note 8 - Special Purpose Financing Entities
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. The Corporation also uses other special purpose financing entities to access the commercial paper market and for other lending, leasing and real estate activities. See Notes 1 and 8 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005, for additional discussion of securitizations and other special purpose financing entities.
Variable Interest Entities
At September 30, 2005, the assets and liabilities of the Corporations multi-seller asset-backed commercial paper conduits that have been consolidated in accordance with FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 were reflected in Available-for-sale (AFS) Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Capital Markets and Investment Banking. As of September 30, 2005 and December 31, 2004, the Corporation held $7.0 billion and $7.7 billion of assets in these entities while the Corporations maximum loss exposure associated with these entities including unfunded lending commitments was approximately $8.6 billion and $9.4 billion. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of September 30, 2005 and December 31, 2004, the amount of assets of these entities was $853 million and $560 million, and the Corporations maximum possible loss exposure was $215 million and $132 million.
Additionally, the Corporation had significant variable interests in 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. These entities typically support the financing needs of the Corporations customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator 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 that engage in lending, investing, or real estate activities. Total assets of these entities at September 30, 2005 and December 31, 2004 were approximately $27.2 billion and $32.9 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $21 million and $33 million, and $92 million and $113 million for the three and nine months ended September 30, 2005 and 2004. At September 30, 2005 and December 31, 2004, the Corporations maximum loss exposure associated with these VIEs was approximately $24.1 billion and $25.0 billion, which is net of amounts syndicated.
Management does not believe losses resulting from its involvement with the entities discussed above will be material. See Notes 1 and 8 of the Corporations Current Report on Form 8-K filed on July 12, 2005, for additional discussion of special purpose financing entities.
Note 9 - Goodwill and Other Intangibles
The following table presents allocated Goodwill at September 30, 2005 and December 31, 2004 for each business segment and All Other. The increase from December 31, 2004 was primarily due to the increase in goodwill related to the October 15, 2004 acquisition of National Processing, Inc. (NPC).
(Dollars in millions) |
September 30 2005 |
December 31 2004 | ||||
Global Consumer and Small Business Banking |
$ | 18,513 | $ | 18,453 | ||
Global Business and Financial Services |
16,708 | 16,707 | ||||
Global Capital Markets and Investment Banking |
4,500 | 4,500 | ||||
Global Wealth and Investment Management |
5,338 | 5,338 | ||||
All Other |
239 | 264 | ||||
Total |
$ | 45,298 | $ | 45,262 | ||
15
The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at September 30, 2005 and December 31, 2004 are presented below:
September 30, 2005 |
December 31, 2004 | |||||||||||
(Dollars in millions) |
Gross Carrying Value |
Accumulated Amortization |
Gross Carrying Value |
Accumulated Amortization | ||||||||
Core deposit intangibles |
$ | 3,661 | $ | 1,752 | $ | 3,668 | $ | 1,354 | ||||
Other intangibles |
2,319 | 872 | 2,256 | 683 | ||||||||
Total |
$ | 5,980 | $ | 2,624 | $ | 5,924 | $ | 2,037 | ||||
As a result of the Merger, the Corporation recorded $2.2 billion of core deposit intangibles, $660 million of purchased credit card relationship intangibles and $409 million of other customer relationship intangibles. As of September 30, 2005, the weighted average amortization period for core deposit intangibles as well as other intangibles was approximately nine years. As a result of the acquisition of NPC, the Corporation allocated $479 million to other intangibles with a weighted average amortization period of approximately 10 years as of September 30, 2005.
Amortization expense on core deposit intangibles and other intangibles was $201 million and $200 million for the three months ended September 30, 2005 and 2004, and $613 and $455 million for the nine months ended September 30, 2005 and 2004. The increase for the nine months ended September 30, 2005 was primarily due to the Merger. The Corporation estimates that aggregate amortization expense will be approximately $195 million for the fourth quarter of 2005. In addition, the Corporation estimates that aggregate amortization expense will be $740 million, $593 million, $480 million, $379 million and $305 million for 2006, 2007, 2008, 2009 and 2010, respectively.
Note 10 - Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those recorded on the Corporations Consolidated Balance Sheet. For additional information on commitments and contingencies, see Note 12 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
Credit Extension Commitments
The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit 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 $25.2 billion and $23.4 billion at September 30, 2005 and December 31, 2004. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at September 30, 2005 and December 31, 2004 was $447 million and $520 million. At September 30, 2005, the carrying amount included deferred revenue of $57 million and a reserve for unfunded lending commitments of $390 million. At December 31, 2004, the carrying amount included deferred revenue of $118 million and a reserve for unfunded lending commitments of $402 million.
16
Credit card lines acquired from FleetBoston were moved to a common reporting platform in the first quarter of 2005. The unfunded lending commitments for credit card lines for prior periods have been revised to conform to current period presentation.
(Dollars in millions) |
September 30 2005 |
December 31 2004 | ||||
Loan commitments (1) |
$ | 277,601 | $ | 245,042 | ||
Home equity lines of credit |
73,291 | 60,128 | ||||
Standby letters of credit and financial guarantees |
42,253 | 42,850 | ||||
Commercial letters of credit |
5,847 | 5,653 | ||||
Legally binding commitments |
398,992 | 353,673 | ||||
Credit card lines |
184,572 | 165,694 | ||||
Total |
$ | 583,564 | $ | 519,367 | ||
(1) | At September 30, 2005 and December 31, 2004, there were equity commitments of $1.6 billion and $2.0 billion, related to obligations to further fund Principal Investing equity investments. |
Other Commitments
At September 30, 2005 and December 31, 2004, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $13.9 billion and $10.9 billion were not included in credit card line commitments in the previous table. The outstanding balances related to these charge cards were $276 million and $205 million.
Pursuant to an agreement dated June 17, 2005, the Corporation committed to purchase approximately nine percent of the stock of China Construction Bank (CCB) for $3.0 billion. Under this agreement, the Corporation made an initial purchase of CCB shares for $2.5 billion in August 2005 and during CCBs initial public offering in October 2005, made an additional purchase of $500 million. These shares are non-transferable until the third anniversary of the initial public offering. The Corporation also holds an option to increase its ownership interest in CCB to 19.9 percent over the next five years.
At September 30, 2005, the Corporation had whole mortgage loan purchase commitments of $3.0 billion, all of which will settle in the fourth quarter of 2005. At December 31, 2004, the Corporation had whole mortgage loan purchase commitments of $3.3 billion, all of which settled in the first quarter of 2005. At September 30, 2005 and December 31, 2004, the Corporation had no forward whole mortgage loan sale commitments.
In July 2005, the Corporation entered into an agreement for the committed purchase of retail automotive contracts over a five-year period, ending June 30, 2010. On July 27, 2005, the Corporation purchased $5 billion of such contracts and at September 30, 2005, the remaining commitment amount was $47 billion. Under the agreement the Corporation is committed to purchase up to $7 billion of such contracts for the period October 1, 2005 through June 30, 2006 and up to $10 billion in each of the agreements next four fiscal years.
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, 2005 and December 31, 2004, the notional amount of these guarantees totaled $33.4 billion and $26.3 billion with estimated maturity dates between 2005 and 2035. As of September 30, 2005 and December 31, 2004, 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. These guarantees have various maturities ranging from 2005 to 2016. At September 30, 2005 and December 31, 2004, the notional amount of these guarantees totaled $6.5 billion and $8.1 billion. At September 30, 2005 and December 31, 2004, the Corporation had not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.
17
The Corporation also has written put options on highly rated fixed income securities. Its obligation under these agreements is to buy back the assets at predetermined contractual yields in the event of a severe market disruption in the short-term funding market. These agreements have various maturities ranging from two to seven years, and the pre-determined yields are based on the quality of the assets and the structural elements pertaining to the market disruption. The notional amount of these put options was $2.5 billion at September 30, 2005 and $653 million at December 31, 2004. Due to the high quality of the assets and various structural protections, management believes that the probability of incurring a loss under these agreements is remote.
The Corporation has entered into additional guarantee agreements, including lease end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $2.1 billion at both September 30, 2005 and December 31, 2004. The estimated maturity dates of these obligations are between 2005 and 2033. The Corporation has made no material payments under these guarantees.
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, 2005 and the year ended December 31, 2004, the Corporation processed $251.3 billion and $143.1 billion of transactions and recorded losses as a result of these chargebacks of $9 million and $6 million.
At September 30, 2005 and December 31, 2004, the Corporation held as collateral approximately $251 million and $203 million 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. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of September 30, 2005 and December 31, 2004, the maximum potential exposure totaled approximately $111.4 billion and $93.4 billion.
Within the Corporations brokerage business, the Corporation has contracted with a third party to provide clearing services that include underwriting margin loans to the Corporations clients. This contract stipulates that the Corporation will indemnify the third party for any margin loan losses that occur in their issuing margin to the Corporations clients. The maximum potential future payment under this indemnification was $1.1 billion and $1.2 billion at September 30, 2005 and December 31, 2004. Historically, any payments made under this indemnification have been immaterial. As these margin loans are highly collateralized by the securities held by the brokerage clients, the Corporation has assessed the probability of making such payments in the future as remote. This indemnification would end with the termination of the clearing contract.
For additional information on recourse obligations related to residential mortgage loans sold and other guarantees related to securitizations, see Note 8 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
Litigation and Regulatory Matters
The following disclosure supplements the disclosure in the Corporations Current Report on Form 8-K filed on July 12, 2005, the quarterly reports on Form 10-Q for the quarters ended June 30, 2005 and March 31, 2005, and the Current Reports on Form 8-K filed since December 31, 2004.
18
Adelphia
On August 29 and September 1, 2005, the U.S. District Court for the Southern District of New York denied defendants motions to dismiss for lack of standing individual actions brought by W.R. Huff Asset Management and the Division of Investment of the New Jersey Department of the Treasury.
On September 26, 2005, Leonard Tow, Citizens Communications Company and other plaintiffs brought separate actions in the U.S. District Court for the District of Connecticut against Bank of America, N.A. (BANA) and Banc of America Securities LLC (BAS). Plaintiffs allegedly acquired shares of common stock of Adelphia in October 1999 when Adelphia merged with Century Communications Corporation. The complaints purport to assert claims under common law for fraud and other claims, as well as statutory violations based on certain of the defendants lending and securities underwriting activities involving Adelphia.
On August 30, 2005, the U.S. Bankruptcy Court for the Southern District of New York granted the motions of the Adelphia Official Committee of Unsecured Creditors to join Adelphia as a co-plaintiff in complaints against approximately 400 financial institutions (including BANA, BAS, Fleet National Bank and Fleet Securities, Inc.). On the same date, that court granted the motion of the Adelphia Official Committee of Equity Security Holders to intervene in the action on behalf of Adelphias equity holders and pursue specified causes of action. The defendants motion to dismiss the complaints remains pending.
Data Treasury
The Corporation and BANA have been named as defendants in an action filed by Data Treasury Corporation in the U.S. District Court for the Eastern District of Texas. Plaintiff alleges that defendants have provided, sold, installed, utilized, and assisted others to use and utilize image-based banking and archival solutions in a manner that infringes plaintiffs patents. Plaintiff seeks unspecified damages and injunctive relief against the alleged infringement.
Enron
On September 15, 2005, plaintiffs Public Employees Retirement System of Ohio and other Ohio retirement systems (collectively referred to as Ohio Retirement Systems) filed a motion in the U.S. District Court for the Southern District of Texas for leave to file an amended complaint against several parties, including the Corporation and BAS. The proposed amended complaint seeks recovery of losses in an unspecified amount resulting from Ohio Retirement Systems purchase of securities issued by Enron and Enron-affiliated companies.
On October 14, 2005, a law firm filed a motion with the U.S. District Court for the Southern District of Texas for leave to file 35 separate actions on behalf of more than 1,000 individual plaintiffs in Harris County (Texas) District Court. The proposed actions name several defendants, including the Corporation, BAS and BANA, and seek recovery of losses in an unspecified amount resulting from plaintiffs purchases of Enron common stock.
On October 18, 2005, the U.S. District Court for the Southern District of Texas issued an order granting final approval to the Bank of America settlement in the Newby class action.
Interchange Litigation
The Corporation and certain of its subsidiaries are defendants in putative class actions that the Judicial Panel on Multidistrict Litigation has recently transferred for coordinated or consolidated pre-trial proceedings to the U.S. District Court for the Eastern District of New York, under the caption In Re Payment Card Interchange Fee and Merchant Discount Anti-Trust Litigation. Other defendants include other financial institutions and, among others, Visa U.S.A., Inc. and MasterCard, Inc. Plaintiffs seek certification of a class of retail merchants and allege, among other claims, that defendants conspired to fix the level of interchange and merchant discount fees and that certain practices that prohibit merchants from charging cardholders for fees the merchant pays to the credit card companies violate the federal antitrust laws. Plaintiffs seek unspecified damages.
19
IPO Securities Litigation
On June 30, 2005, the Court of Appeals for the Second Circuit granted the underwriter defendants petition for permission to appeal the district courts October 13, 2004 order granting plaintiffs motion for class certification.
In a separate class action in which Robertson Stephens is named as a defendant entitled In re Initial Public Offering Antitrust Litigation, plaintiffs assert that the same allegations that have been made in the In re Initial Public Offering Securities Litigation also give rise to violations of the federal antitrust laws, as well as various state antitrust provisions. On September 28, 2005, the Court of Appeals for the Second Circuit reversed the district courts November 2003 dismissal of the antitrust class action, remanding the case to the district court for further proceedings.
Mutual Fund Operations
On August 25, 2005, the U.S. District Court for the District of Maryland dismissed the state law claims and derivative claims filed by Janus shareholders against the Corporation and certain of its subsidiaries. The claims under Section 10(b) of the Securities Exchange Act of 1934 were not dismissed.
The Corporation and its named subsidiaries have agreed in principle to settle the direct and derivative claims brought on behalf of the Nations Funds shareholders and the ERISA claims brought on behalf of Bank of America Corporations 401(k) plan participants. Among other contingencies, the settlement contemplated by this agreement in principle is contingent upon a minimum threshold amount being received by the Nations Fund shareholders and/or the Nations Funds mutual funds from the previously established regulatory settlement fund. The settlement is subject to court approval. If the settlement is approved, the Corporation and its named subsidiaries would pay settlement administration costs and fees to plaintiffs counsel as approved by the court.
Parmalat Finanziaria S.p.A.
On September 28, 2005, the Court of Milan, Italy began the trial in the market manipulation charges against the Corporations three former employees, Antonio Luzi, Luis Moncada, and Luca Sala. That court set a next hearing date for December 2, 2005. BANA has received filings from numerous potential parties claiming damages as a result of the alleged criminal violations.
On August 22, 2005, the plaintiffs in the Southern Alaska Carpenters Fund case filed their second amended complaint. The Corporation, BANA and Banc of America Securities Limited (BASL) filed their motion to dismiss the second amended complaint on September 23, 2005. That motion remains pending.
On August 5, 2005, the U.S. District Court for the Southern District of New York granted the Corporations motion to dismiss the Bondi complaint in part, dismissing ten of the twelve counts. That court granted the plaintiff the right to amend its complaint on two of the dismissed counts. Plaintiff filed its first amended complaint on September 9, 2005 and the Corporation, BANA, BASL, BAS and Bank of America International Limited (collectively, the Defendants) filed their motion to dismiss the first amended complaint on September 23, 2005. That motion remains pending.
Pension Plan Matters
On August 3, 2005, plaintiffs in the Pothier case filed a motion for partial summary judgment of the second amended complaint. The court has denied plaintiffs motion without prejudice to plaintiffs refiling it at the close of discovery. On September 7, 2005, plaintiffs filed a third amended complaint that changed the name of the case to William L. Pender, et al. v. Bank of America Corporation, et al. The third amended complaint voluntarily dismissed five of the seven named plaintiffs, certain defendants and various claims asserted in the prior complaints, including all claims involving pension plans other than the Bank of America Pension Plan (formerly known as the NationsBank Cash Balance Plan) and the Bank of America 401(k) Plan (formerly known as the NationsBank 401(k) Plan). On September 26, 2005, defendants moved to dismiss the third amended complaint. That motion is pending. The court entered a pretrial order and case management plan on August 31, 2005, which set the case for trial in September 2006.
20
In the Richards case, defendants motion to dismiss and plaintiffs motion for class certification are pending before the court.
Refco
In October 2005, BAS was named as a defendant in several federal class action and derivative lawsuits filed in the U.S. District Court for the Southern District of New York relating to Refco Inc. The lawsuits variously name as other defendants Refcos outside auditors, certain officers and directors of Refco, other financial services companies, and other individuals and companies. The actions allege that BAS (and other underwriters) violated federal securities laws and state laws in connection with the sale of Refco securities, including in the Refco initial public offering in August 2005. The complaints seek unspecified damages.
WorldCom
On August 5, 2005, the Corporation and BAS agreed to pay approximately $7.7 million to settle an individual action brought by, among others, the New York City Employees Retirement System (NYCERS) seeking recovery of losses allegedly resulting from NYCERS purchase of WorldCom securities. The settlement was funded August 16, 2005.
On September 21, 2005, the U.S. District Court for the Southern District of New York granted final approval to the class settlement between the lead plaintiff and defendants BAS and Fleet Securities, Inc. in the action entitled In re WorldCom, Inc. Securities Litigation. The settlement was funded on September 28, 2005.
On October 25, 2005, the Corporation and BAS agreed to pay approximately $78 million to settle individual actions brought by 68 plaintiffs seeking recovery of losses allegedly resulting from plaintiffs purchase of WorldCom securities. The settlement was funded on October 27, 2005.
21
Note 11 - Shareholders Equity and Earnings Per Common Share
The following table presents share repurchase activity for the three and nine months ended September 30, 2005 and 2004, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs.
(Dollars in millions, except per share information; shares in thousands) |
Number of Common Shares Repurchased under Announced Programs (1) |
Weighted Per Share Price |
Remaining Buyback Authority under Announced Programs (2) | |||||||
Dollars |
Shares | |||||||||
Three months ended March 31, 2005 |
43,214 | $ | 46.05 | $ | 14,688 | 237,411 | ||||
Three months ended June 30, 2005 |
40,300 | 45.38 | 12,859 | 197,111 | ||||||
July 1-31 |
750 | 44.75 | 11,832 | 196,361 | ||||||
August 1-31 |
4,900 | 43.45 | 11,619 | 191,461 | ||||||
September 1-30 |
5,023 | 42.98 | 11,403 | 186,438 | ||||||
Three months ended September 30, 2005 |
10,673 | 43.32 | ||||||||
Nine months ended September 30, 2005 |
94,187 | 45.45 | ||||||||
(Dollars in millions, except per share information; shares in thousands) |
Number of Common under Announced |
Weighted Average Per Share Price |
Remaining Buyback Authority under Announced Programs (4) | |||||||
Dollars |
Shares | |||||||||
Three months ended March 31, 2004 |
24,306 | $ | 40.03 | $ | 12,378 | 204,178 | ||||
Three months ended June 30, 2004 |
49,060 | 41.07 | 7,978 | 155,118 | ||||||
July 1-31 |
5,810 | 42.39 | 7,732 | 149,308 | ||||||
August 1-31 |
14,720 | 43.12 | 7,097 | 134,588 | ||||||
September 1-30 |
19,900 | 44.23 | 6,217 | 114,688 | ||||||
Three months ended September 30, 2004 |
40,430 | 43.56 | ||||||||
Nine months ended September 30, 2004 |
113,796 | 41.74 | ||||||||
(1) | Reduced Shareholders' Equity by $4.3 billion, and increased diluted earnings per common share by $0.04 for the nine months ended September 30, 2005. These repurchases were partially offset by the issuance of approximately 61 million shares of common stock under employee plans, which increased Shareholders' Equity by $2.4 billion, net of $211 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.03 for the nine months ended September 30, 2005. |
(2) | On January 28, 2004, the Board authorized a stock repurchase program of up to 180 million shares of the Corporation's common stock at an aggregate cost not to exceed $9.0 billion and to be completed within a period of 18 months. This repurchase plan was completed during the third quarter of 2005. On March 22, 2005, the Board authorized an additional stock repurchase program of up to 200 million shares of the Corporation's common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 18 months. |
(3) | Reduced Shareholders' Equity by $4.7 billion and increased diluted earnings per common share by $0.03 for the nine months ended September 30, 2004. These repurchases were partially offset by the issuance of approximately 90 million shares of common stock under employee plans, which increased Shareholders' Equity by $2.9 billion, net of $172 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.03 for the nine months ended September 30, 2004. |
(4) | On January 22, 2003, the Board authorized a stock repurchase program of up to 260 million shares of the Corporation's common stock at an aggregate cost of $12.5 billion. This repurchase plan was completed during the second quarter of 2004. Also refer to the Board authorized stock repurchase program dated January 28, 2004, as discussed in footnote (2) above. |
The Corporation will continue to repurchase shares, from time to time, in the open market or in private transactions through the Corporations approved repurchase programs. In light of the Corporations announced merger with MBNA, the Corporations ability to repurchase shares of common stock is limited by SEC rules and regulations. The Corporation expects to continue to repurchase a number of shares of common stock at least equal to any shares issued under the Corporations employee stock plans.
22
The following table presents the changes in Accumulated OCI for the nine months ended September 30, 2005 and 2004.
Nine Months Ended September 30 |
||||||||||||||||||||||||
2005 |
2004 |
|||||||||||||||||||||||
(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 |
$ | (4,064 | ) | $ | (1,477 | ) | $ | (2,587 | ) | $ | (3,242 | ) | $ | (1,094 | ) | $ | (2,148 | ) | ||||||
Net unrealized gains (losses)(1) |
(5,195 | ) | (1,958 | ) | (3,237 | ) | 1,417 | 622 | 795 | |||||||||||||||
Less: Net realized gains and amortization recorded to net income |
1,072 | 387 | 685 | 2,346 | 1,030 | 1,316 | ||||||||||||||||||
Balance, September 30 |
$ | (10,331 | ) | $ | (3,822 | ) | $ | (6,509 | ) | $ | (4,171 | ) | $ | (1,502 | ) | $ | (2,669 | ) | ||||||
(1) | Net unrealized gains (losses) include the valuation changes of AFS debt 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, 2005 and 2004 is presented below.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
(Dollars in millions, except per share information; shares in thousands) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Earnings per common share |
||||||||||||||||
Net income |
$ | 4,127 | $ | 3,764 | $ | 13,118 | $ | 10,294 | ||||||||
Preferred stock dividends |
(5 | ) | (5 | ) | (14 | ) | (11 | ) | ||||||||
Net income available to common shareholders |
$ | 4,122 | $ | 3,759 | $ | 13,104 | $ | 10,283 | ||||||||
Average common shares issued and outstanding |
4,000,573 | 4,052,304 | 4,012,924 | 3,666,298 | ||||||||||||
Earnings per common share |
$ | 1.03 | $ | 0.93 | $ | 3.27 | $ | 2.80 | ||||||||
Diluted earnings per common share |
||||||||||||||||
Net income available to common shareholders |
$ | 4,122 | $ | 3,759 | $ | 13,104 | $ | 10,283 | ||||||||
Convertible preferred stock dividends |
| | | 2 | ||||||||||||
Net income available to common shareholders and assumed conversions |
$ | 4,122 | $ | 3,759 | $ | 13,104 | $ | 10,285 | ||||||||
Average common shares issued and outstanding |
4,000,573 | 4,052,304 | 4,012,924 | 3,666,298 | ||||||||||||
Dilutive potential common shares(1, 2) |
54,086 | 69,071 | 60,067 | 62,822 | ||||||||||||
Total diluted average common shares issued and outstanding |
4,054,659 | 4,121,375 | 4,072,991 | 3,729,120 | ||||||||||||
Diluted earnings per common share |
$ | 1.02 | $ | 0.91 | $ | 3.22 | $ | 2.76 | ||||||||
(1) | For the three and nine months ended September 30, 2005, average options to purchase 45 million and 38 million shares 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, 2004, average options to purchase 72 million and 60 million shares 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. |
Effective for the third quarter dividend, the Board increased the quarterly cash dividend 11 percent from $0.45 to $0.50 per common share. The cash dividend was paid on September 23, 2005 to common shareholders of record on September 2, 2005. In October 2005, the Board declared a fourth quarter dividend which will be payable December 23, 2005 to common shareholders of record on December 2, 2005.
23
Note 12 - 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. The Bank of America Pension Plan (the Pension Plan) allows participants to select from various earnings measures, which are based on the returns of certain funds or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. A detailed discussion of these plans is provided in Note 15 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005.
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 in Note 15 of the Consolidated Financial Statements of the Corporations Current Report on Form 8-K filed on July 12, 2005. However, the FleetBoston Financial Pension Plan does not allow participants to select various earnings measures; rather the earnings rate is based on a benchmark rate. The tables within this Note include the information related to these plans beginning on April 1, 2004.
Net periodic benefit cost of the Corporations plans for the three months ended September 30, 2005 and 2004 included the following components:
Three Months Ended September 30 |
|||||||||||||||||||||||
Qualified Pension Plans |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
|||||||||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
|||||||||||||||||
Components of net periodic benefit cost |
|||||||||||||||||||||||
Service cost |
$ | 42 | $ | 68 | $ | 1 | $ | 7 | $ | 3 | $ | 2 | |||||||||||
Interest cost |
154 | 164 | 14 | 16 | 21 | 19 | |||||||||||||||||
Expected return on plan assets |
(241 | ) | (241 | ) | | | (4 | ) | (4 | ) | |||||||||||||
Amortization of transition obligation |
| | | | 8 | 8 | |||||||||||||||||
Amortization of prior service cost |
11 | 14 | (2 | ) | 1 | | | ||||||||||||||||
Recognized net actuarial loss |
60 | 23 | 9 | 4 | 26 | 12 | |||||||||||||||||
Net periodic benefit cost |
$ | 26 | $ | 28 | $ | 22 | $ | 28 | $ | 54 | $ | 37 | |||||||||||
Net periodic benefit cost of the Corporations plans for the nine months ended September 30, 2005 and 2004 included the following components:
Nine Months Ended September 30 |
|||||||||||||||||||||||
Qualified Pension Plans |
Nonqualified Pension Plans |
Postretirement Health and Life Plans |
|||||||||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
|||||||||||||||||
Components of net periodic benefit cost |
|||||||||||||||||||||||
Service cost |
$ | 196 | $ | 189 | $ | 8 | $ | 20 | $ | 8 | $ | 7 | |||||||||||
Interest cost |
482 | 460 | 45 | 45 | 59 | 57 | |||||||||||||||||
Expected return on plan assets |
(737 | ) | (675 | ) | | | (11 | ) | (12 | ) | |||||||||||||
Amortization of transition obligation |
| | | | 24 | 24 | |||||||||||||||||
Amortization of prior service cost |
34 | 41 | (5 | ) | 2 | | | ||||||||||||||||
Recognized net actuarial loss |
135 | 69 | 18 | 11 | 60 | 55 | |||||||||||||||||
Recognized loss due to settlements and curtailments |
| | 9 | | | | |||||||||||||||||
Net periodic benefit cost |
$ | 110 | $ | 84 | $ | 75 | $ | 78 | $ | 140 | $ | 131 | |||||||||||
24
The Corporation previously disclosed that its best estimate of its contributions to be made to the Qualified Pension Plans, Nonqualified Pension Plans, and the Postretirement Health and Life Plans in 2005 is $0, $114 million and $37 million, respectively. For the nine months ended September 30, 2005, the Corporation had contributed $0, $102 million and $28 million, respectively, to these plans.
Note 13 - Business Segment Information
The Corporation reports the results of its operations through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global 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 methodologies and changes in organizational alignment.
Global Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. Global Business and Financial Services serves domestic and international business clients providing financial services, specialized industry expertise and local delivery through a global team of client managers and a variety of businesses. During the third quarter of 2005, our operations in Mexico were realigned and are now included in the results of Global Business and Financial Services, rather than Global Capital Markets and Investment Banking. Global Capital Markets and Investment Banking provides capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for the Corporations clients as well as traditional bank deposit and loan products, treasury management and payment services to large corporations and institutional clients. Global Wealth and Investment Management offers investment services, estate management, financial planning services, fiduciary management, credit and banking expertise, and diversified asset management products to institutional clients as well as affluent and high-net-worth individuals.
All Other consists primarily of Equity Investments, Noninterest Income and Expense amounts associated with the ALM process (including Gains on Sales of Debt Securities), the residual impact of the allowance for credit losses processes and funds transfer pricing allocation methodologies, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated.
Total Revenue includes Net Interest Income on a fully taxable-equivalent (FTE) basis and Noninterest Income. The adjustment of Net Interest Income to a FTE 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 of the business segments also includes an allocation of Net Interest Income generated by the Corporations ALM process.
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 costs, item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The cost of certain centralized or shared functions are allocated based on methodologies which reflect utilization.
25
The following tables present Total Revenue on a FTE basis and Net Income for the three and nine months ended September 30, 2005 and 2004 for each business segment, as well as All Other.
Business Segments | |||||||||||||||
For the three months ended September 30 | |||||||||||||||
Total Corporation |
Global Consumer and Small Business Banking (1) |
||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
|||||||||||
Net interest income (FTE basis) |
$ | 7,973 | $ | 7,836 | $ | 4,270 | $ | 4,346 | |||||||
Noninterest income |
6,834 | 4,922 | 3,132 | 2,232 | |||||||||||
Total revenue |
14,807 | 12,758 | 7,402 | 6,578 | |||||||||||
Provision for credit losses |
1,159 | 650 | 1,107 | 1,012 | |||||||||||
Gains on sales of debt securities |
29 | 732 | | 117 | |||||||||||
Amortization of intangibles |
201 | 200 | 137 | 131 | |||||||||||
Other noninterest expense |
7,084 | 6,821 | 3,191 | 3,186 | |||||||||||
Income before income taxes |
6,392 | 5,819 | 2,967 | 2,366 | |||||||||||
Income tax expense |
2,265 | 2,055 | 1,083 | 863 | |||||||||||
Net income |
$ | 4,127 | $ | 3,764 | $ | 1,884 | $ | 1,503 | |||||||
Average total assets |
$ | 1,294,745 | $ | 1,096,683 | $ | 330,807 | $ | 344,311 | |||||||
Global Business and Financial Services (1) |
Global Capital Markets and Investment Banking (1) |
||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
|||||||||||
Net interest income (FTE basis) |
$ | 1,959 | $ | 1,780 | $ | 772 | $ | 952 | |||||||
Noninterest income |
895 | 739 | 1,551 | 1,114 | |||||||||||
Total revenue |
2,854 | 2,519 | 2,323 | 2,066 | |||||||||||
Provision for credit losses |
79 | (236 | ) | (69 | ) | (152 | ) | ||||||||
Gains on sales of debt securities |
12 | | 4 | 1 | |||||||||||
Amortization of intangibles |
32 | 35 | 12 | 13 | |||||||||||
Other noninterest expense |
1,019 | 887 | 1,702 | 1,495 | |||||||||||
Income before income taxes |
1,736 | 1,833 | 682 | 711 | |||||||||||
Income tax expense |
634 | 643 | 248 | 240 | |||||||||||
Net income |
$ | 1,102 | $ | 1,190 | $ | 434 | $ | 471 | |||||||
Average total assets |
$ | 225,796 | $ | 204,304 | $ | 422,920 | $ | 313,473 | |||||||
Global Wealth and Investment Management (1) |
All Other |
||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
|||||||||||
Net interest income (FTE basis) |
$ | 926 | $ | 757 | $ | 46 | $ | 1 | |||||||
Noninterest income |
909 | 848 | 347 | (11 | ) | ||||||||||
Total revenue |
1,835 | 1,605 | 393 | (10 | ) | ||||||||||
Provision for credit losses |
1 | (18 | ) | 41 | 44 | ||||||||||
Gains on sales of debt securities |
| | 13 | 614 | |||||||||||
Amortization of intangibles |
19 | 19 | 1 | 2 | |||||||||||
Other noninterest expense |
896 | 854 | 276 | 399 | |||||||||||
Income before income taxes |
919 | 750 | 88 | 159 | |||||||||||
Income tax expense (benefit) |
336 | 274 | (36 | ) | 35 | ||||||||||
Net income |
$ | 583 | $ | 476 | $ | 124 | $ | 124 | |||||||
Average total assets |
$ | 125,687 | $ | 97,677 | $ | 189,535 | $ | 136,918 | |||||||
26
Business Segments
For the nine months ended September 30 | ||||||||||||||||
Total Corporation |
Global Consumer and Small Business Banking (1) |
|||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Net interest income (FTE basis) |
$ | 23,886 | $ | 21,557 | $ | 12,679 | $ | 11,610 | ||||||||
Noninterest income |
19,348 | 14,119 | 8,768 | 6,425 | ||||||||||||
Total revenue |
43,234 | 35,676 | 21,447 | 18,035 | ||||||||||||
Provision for credit losses |
2,614 | 2,063 | 2,972 | 2,088 | ||||||||||||
Gains (losses) on sales of debt securities |
1,013 | 2,022 | (1 | ) | 116 | |||||||||||
Amortization of intangibles |
613 | 455 | 419 | 298 | ||||||||||||
Other noninterest expense |
20,748 | 19,224 | 9,630 | 8,884 | ||||||||||||
Income before income taxes |
20,272 | 15,956 | 8,425 | 6,881 | ||||||||||||
Income tax expense |
7,154 | 5,662 | 3,031 | 2,520 | ||||||||||||
Net income |
$ | 13,118 | $ | 10,294 | $ | 5,394 | $ | 4,361 | ||||||||
Average total assets |
$ | 1,258,050 | $ | 1,008,434 | $ | 330,492 | $ | 307,821 | ||||||||
Global Business and Financial Services (1) |
Global Capital Markets and Investment Banking (1) |
|||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Net interest income (FTE basis) |
$ | 5,761 | $ | 4,673 | $ | 2,571 | $ | 3,101 | ||||||||
Noninterest income |
2,499 | 1,860 | 4,492 | 3,751 | ||||||||||||
Total revenue |
8,260 | 6,533 | 7,063 | 6,852 | ||||||||||||
Provision for credit losses |
(154 | ) | (156 | ) | (236 | ) | (247 | ) | ||||||||
Gains (losses) on sales of debt securities |
83 | | 85 | (11 | ) | |||||||||||
Amortization of intangibles |
99 | 78 | 35 | 31 | ||||||||||||
Other noninterest expense |
2,973 | 2,503 | 4,840 | 5,026 | ||||||||||||
Income before income taxes |
5,425 | 4,108 | 2,509 | 2,031 | ||||||||||||
Income tax expense |
1,998 | 1,479 | 896 | 696 | ||||||||||||
Net income |
$ | 3,427 | $ | 2,629 | $ | 1,613 | $ | 1,335 | ||||||||
Average total assets |
$ | 218,799 | $ | 176,866 | $ | 407,569 | $ | 310,989 | ||||||||
Global Wealth and Investment Management (1) |
All Other |
|||||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Net interest income (FTE basis) |
$ | 2,777 | $ | 2,034 | $ | 98 | $ | 139 | ||||||||
Noninterest income |
2,688 | 2,218 | 901 | (135 | ) | |||||||||||
Total revenue |
5,465 | 4,252 | 999 | 4 | ||||||||||||
Provision for credit losses |
(6 | ) | (16 | ) | 38 | 394 | ||||||||||
Gains on sales of debt securities |
| | 846 | 1,917 | ||||||||||||
Amortization of intangibles |
56 | 43 | 4 | 5 | ||||||||||||
Other noninterest expense |
2,678 | 2,459 | 627 | 352 | ||||||||||||
Income before income taxes |
2,737 | 1,766 | 1,176 | 1,170 | ||||||||||||
Income tax expense |
985 | 644 | 244 | 323 | ||||||||||||
Net income |
$ | 1,752 | $ | 1,122 | $ | 932 | $ | 847 | ||||||||
Average total assets |
$ | 125,992 | $ | 84,907 | $ | 175,198 | $ | 127,851 | ||||||||
(1) | There were no material intersegment revenues among the segments. |
27
The following table presents reconciliations of the four business segments Total Revenue on a FTE basis and Net Income to Consolidated Statement of Income 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) |
2005 |
2004 |
2005 |
2004 |
||||||||||||
Segments revenue |
$ | 14,414 | $ | 12,768 | $ | 42,235 | $ | 35,672 | ||||||||
Adjustments: |
||||||||||||||||
Revenue associated with unassigned capital |
116 | 62 | 286 | 265 | ||||||||||||
ALM activities |
(51 | ) | (30 | ) | 208 | (52 | ) | |||||||||
Equity investments |
516 | 118 | 996 | 105 | ||||||||||||
Liquidating businesses |
48 | 64 | 151 | 224 | ||||||||||||
FTE basis adjustment |
(200 | ) | (171 | ) | (590 | ) | (510 | ) | ||||||||
Other |
(236 | ) | (224 | ) | (642 | ) | (538 | ) | ||||||||
Consolidated revenue |
$ | 14,607 | $ | 12,587 | $ | 42,644 | $ | 35,166 | ||||||||
Segments net income |
$ | 4,003 | $ | 3,640 | $ | 12,186 | $ | 9,447 | ||||||||
Adjustments, net of taxes: |
||||||||||||||||
Earnings associated with unassigned capital |
77 | 41 | 191 | 177 | ||||||||||||
ALM activities (1) |
(68 | ) | 304 | 553 | 1,050 | |||||||||||
Equity investments |
309 | 50 | 574 | 8 | ||||||||||||
Liquidating businesses |
27 | 29 | 69 | 54 | ||||||||||||
Merger and restructuring charges |
(80 | ) | (147 | ) | (235 | ) | (230 | ) | ||||||||
Other |
(141 | ) | (153 | ) | (220 | ) | (212 | ) | ||||||||
Consolidated net income |
$ | 4,127 | $ | 3,764 | $ | 13,118 | $ | 10,294 | ||||||||
(1) | Includes pre-tax Gains on Sales of Debt Securities of $12 million and $614 million for the three months ended September 30, 2005 and 2004, and $845 million and $1,911 million for the nine months ended September 30, 2005 and 2004. |
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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 Form 10-Q of Bank of America Corporation and its subsidiaries (the Corporation) 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 Current Report on Form 8-K filed on July 12, 2005. 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 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 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.
29
The Corporation, headquartered in Charlotte, North Carolina, operates in 29 states, the District of Columbia and 43 foreign countries. The Corporation provides a diversified range of banking and nonbanking financial services and products both domestically and internationally through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management.
At September 30, 2005, we had $1.3 trillion in assets and approximately 177,000 full-time equivalent employees. Notes to 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. Certain prior period amounts have been reclassified to conform to current period presentation.
Recent Events
On June 30, 2005, we announced a definitive agreement to acquire all outstanding shares of MBNA Corporation (MBNA), a leading provider of credit card and payment products, for approximately $35.0 billion in stock (85 percent) and cash (15 percent). Under the terms of the agreement, MBNA stockholders will receive 0.5009 of a share of our common stock plus $4.125 for each MBNA share of common stock. The transaction is expected to be effective January 1, 2006, subject to certain regulatory approval. On November 3, 2005, MBNA shareholders voted for approval of the merger of the Corporation and MBNA (the MBNA Merger).
On June 17, 2005, we announced a definitive agreement to purchase approximately nine percent of the stock of China Construction Bank (CCB) for $3.0 billion. Under this agreement, we made an initial purchase of CCB shares for $2.5 billion in August 2005 and an additional purchase of $500 million in October 2005, during CCBs initial public offering. These shares are non-transferable until the third anniversary of the initial public offering. We also hold an option that allows us to increase our interest in CCB to 19.9 percent over the next five years. CCB is the second largest commercial bank in China based on total assets.
Effective for the third quarter dividend, our Board of Directors (the Board) increased the quarterly cash dividend 11 percent from $0.45 to $0.50 per common share. The cash dividend was paid on September 23, 2005 to common shareholders of record on September 2, 2005. In October 2005, the Board declared a fourth quarter dividend which will be payable on December 23, 2005 to common shareholders of record on December 2, 2005.
On October 15, 2004, we acquired 100 percent of National Processing, Inc. (NPC), for $1.4 billion in cash, creating the second largest merchant processor in the United States.
On April 1, 2004, we completed our merger with FleetBoston Financial Corporation (FleetBoston) (the Merger). The Merger was accounted for under the purchase method of accounting. Accordingly, results for the three months and nine months ended September 30, 2004 include three and six months of combined company results.
Performance Overview
Net Income totaled $4.1 billion, or $1.02 per diluted common share and $13.1 billion, or $3.22 per diluted common share, for the three and nine months ended September 30, 2005, increases of 10 percent and 12 percent, and 27 percent and 17 percent, respectively, from $3.8 billion, or $0.91 per diluted common share and $10.3 billion, or $2.76 per diluted common share, for the three and nine months ended September 30, 2004.
30
Business Segment Total Revenue and Net Income
Three Months Ended September 30 |
Nine Months Ended September 30 | |||||||||||||||||||||||||||
2005 |
2004 |
2005 |
2004 |
2005 |
2004 |
2005 |
2004 | |||||||||||||||||||||
(Dollars in millions) |
Total Revenue |
Net Income |
Total Revenue |
Net Income | ||||||||||||||||||||||||
Global Consumer and Small Business Banking |
$ | 7,402 | $ | 6,578 | $ | 1,884 | $ | 1,503 | $ | 21,447 | $ | 18,035 | $ | 5,394 | $ | 4,361 | ||||||||||||
Global Business and Financial Services |
2,854 | 2,519 | 1,102 | 1,190 | 8,260 | 6,533 | 3,427 | 2,629 | ||||||||||||||||||||
Global Capital Markets and Investment Banking |
2,323 | 2,066 | 434 | 471 | 7,063 | 6,852 | 1,613 | 1,335 | ||||||||||||||||||||
Global Wealth and Investment Management |
1,835 | 1,605 | 583 | 476 | 5,465 | 4,252 | 1,752 | 1,122 | ||||||||||||||||||||
All Other |
393 | (10 | ) | 124 | 124 | 999 | 4 | 932 | 847 | |||||||||||||||||||
Total FTE basis (1) |
14,807 | 12,758 | 4,127 | 3,764 | 43,234 | 35,676 | 13,118 | 10,294 | ||||||||||||||||||||
FTE adjustment (1) |
(200 | ) | (171 | ) | | | (590 | ) | (510 | ) | | | ||||||||||||||||
Total |
$ | 14,607 | $ | 12,587 | $ | 4,127 | $ | 3,764 | $ | 42,644 | $ | 35,166 | $ | 13,118 | $ | 10,294 | ||||||||||||
(1) | Total revenue for the segments and All Other is on a fully taxable-equivalent (FTE) basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 38. |
Global Consumer and Small Business Banking
Net Income increased $381 million, or 25 percent, to $1.9 billion for the three months ended September 30, 2005, compared to the same period in 2004. Driving the increase was higher Noninterest Income resulting from increases in Mortgage Banking Income, Card Income and Service Charges, partially offset by an increase in Provision for Credit Losses and a decrease in Net Interest Income.
Net Income increased $1.0 billion, or 24 percent, to $5.4 billion for the nine months ended September 30, 2005, compared to the same period in 2004. Driving the increase was the addition of the FleetBoston portfolio, which contributed to increases in Net Interest Income, Card Income, Service Charges and Mortgage Banking Income. Partially offsetting these increases was higher Noninterest Expense and Provision for Credit Losses. For more information on Global Consumer and Small Business Banking, see page 44.
Global Business and Financial Services
Net Income decreased $88 million, or seven percent, to $1.1 billion for the three months ended September 30, 2005, compared to the same period in 2004. Net Interest Income increased as Average Loans and Leases and Average Deposits increased which was more than offset by higher Provision for Credit Losses and Noninterest Expense.
Net Income increased $798 million, or 30 percent, to $3.4 billion for the nine months ended September 30, 2005, compared to the same period in 2004. The increase was primarily due to higher Net Interest Income as Average Loans and Leases and Average Deposits increased. Also impacting the nine-month period was the addition of FleetBoston earning assets. Offsetting the increase in Net Interest Income was an increase in Noninterest Expense. For more information on Global Business and Financial Services, see page 52.
Global Capital Markets and Investment Banking
Net Income decreased $37 million, or eight percent, to $434 million for the three months ended September 30, 2005, compared to the same period in 2004. Increases in trading-related revenues and Investment Banking Income were more than offset by higher Noninterest Expense and Provision for Credit Losses.
Net Income increased $278 million, or 21 percent, to $1.6 billion for the nine months ended September 30, 2005, compared to the same period in 2004. The increase was driven by lower Noninterest Expense, higher trading-related revenues and increased Equity Investment Gains. The increase was offset by decreases in Service Charges and Investment Banking Income. For more information on Global Capital Markets and Investment Banking, see page 55.
31
Global Wealth and Investment Management
Net Income increased $107 million, or 22 percent, to $583 million for the three months ended September 30, 2005, compared to the same period in 2004. Driving the increase was higher Net Interest Income due to increases in loans and deposits. Also contributing to the increase in Net Income was higher Equity Investment Gains and Investment and Brokerage Services. Partially offsetting these increases was an increase in Noninterest Expense.
Net Income increased $630 million, or 56 percent, to $1.8 billion for the nine months ended September 30, 2005, compared to the same period in 2004. The increase was due to higher Net Interest Income as we experienced increases in loans and deposits, the addition of FleetBoston earning assets to the portfolio, and higher Investment and Brokerage Services Income. Partially offsetting these increases were higher Personnel expenses related primarily to the addition of FleetBoston. Total assets under management increased slightly at September 30, 2005 compared to December 31, 2004. For more information on Global Wealth and Investment Management, see page 58.
All Other
Net Income was flat at $124 million, and increased $85 million, or 10 percent, to $932 million for the three and nine months ended September 30, 2005, compared to the same periods in 2004. Equity Investment Gains were $564 million and $182 million for the three months ended September 30, 2005 and 2004, and $1.2 billion and $348 million for the nine months ended September 30, 2005 and 2004. For the three and nine months ended September 30, 2005, Gains on Sales of Debt Securities were $13 million and $614 million compared to $846 million and $1.9 billion for the same periods in 2004. For more information on All Other, see page 60.
Financial Highlights
Net Interest Income
Net Interest Income on a FTE basis increased $137 million to $8.0 billion and $2.3 billion to $23.9 billion for the three and nine months ended September 30, 2005 compared to the same periods in 2004. The primary driver of the nine month increase was the Merger. In addition, these increases were driven by organic growth in consumer (primarily credit card and home equity) and commercial loan levels, higher domestic deposit levels and a larger asset-liability management (ALM) portfolio (primarily securities). Partially offsetting these increases were the negative impact of spread compression due to the flattening of the yield curve, a lower trading-related contribution and reductions in loan balances from corporate, foreign and exited businesses. The net interest yield on a FTE basis declined 50 basis points (bps) to 2.80 percent and 39 bps to 2.90 percent for the three and nine months ended September 30, 2005. This was primarily due to the negative impact of an increase in lower-yielding trading-related balances and spread compression as a result of flattening of the yield curve, which was partially offset by growth in core deposit and consumer loan levels. For more information on Net Interest Income on a FTE basis, see Tables 5 and 6 on pages 41 through 43.
32
Noninterest Income
Noninterest Income
Three Months Ended September 30 |
Nine Months Ended September 30 | ||||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 | |||||||||
Service charges |
$ | 2,080 | $ | 1,899 | $ | 5,777 | $ | 5,098 | |||||
Investment and brokerage services |
1,060 | 972 | 3,122 | 2,606 | |||||||||
Mortgage banking income (loss) |
180 | (250 | ) | 590 | 258 | ||||||||
Investment banking income |
522 | 438 | 1,319 | 1,389 | |||||||||
Equity investment gains |
668 | 220 | 1,559 | 437 | |||||||||
Card income |
1,520 | 1,258 | 4,246 | 3,212 | |||||||||
Trading account profits |
514 | 184 | 1,559 | 600 | |||||||||
Other income |
290 | 201 | 1,176 | 519 | |||||||||
Total noninterest income |
$ | 6,834 | $ | 4,922 | $ | 19,348 | $ | 14,119 | |||||
Noninterest Income increased $1.9 billion to $6.8 billion for the three months ended September 30, 2005 compared to the same period in 2004, due primarily to the following:
| Service Charges grew $181 million driven by a growing number of new consumer and commercial accounts. |
| Mortgage Banking Income increased $430 million primarily due to lower Mortgage Servicing Rights (MSRs) impairment charges of $372 million. |
| Equity Investment Gains increased $448 million due to a $379 million increase in Principal Investing, which was a result of increasing liquidity in the private equity markets. |
| Card Income increased $262 million due to higher merchant discount fees, cash advance fees, late fees and overlimit fees driven by the impact of the NPC acquisition, debit and credit card purchase volumes, and increases in average managed credit card outstandings. |
| Trading Account Profits increased $330 million due to strengthening of the credit markets and increased trading volumes. |
Noninterest Income increased $5.2 billion to $19.3 billion for the nine months ended September 30, 2005 compared to the same period in 2004, due primarily to the following:
| Service Charges grew $679 million driven by the addition of FleetBoston customers and organic account growth. |
| Investment and Brokerage Services increased $516 million due to the addition of the FleetBoston business. |
| Mortgage Banking Income increased $332 million due to lower MSR impairment charges of $390 million partially offset by lower production income. |
| Equity Investment Gains increased $1.1 billion due to a $876 million increase in Principal Investing, which was a result of increasing liquidity in the private equity markets. |
| Card Income increased $1.0 billion due to the addition of FleetBoston customers, increased merchant discount fees and interchange income driven by the acquisition of NPC, as well as growth in debit and credit card purchase volumes. |
| Trading Account Profits increased $959 million due to increased customer activity driven largely from our strategic initiative to expand business capabilities and opportunities, and the absence of a writedown of the Excess Spread Certificates (the Certificates) that occurred in the prior year. |
| Other Income increased $657 million driven primarily by the addition of FleetBoston and $279 million in whole mortgage loan sale gains. |
Provision for Credit Losses
The Provision for Credit Losses increased $509 million to $1.2 billion and $551 million to $2.6 billion for the three and nine months ended September 30, 2005 compared to the same periods in 2004.
The consumer provision increased $215 million to $1.1 billion, and $914 million to $3.1 billion for the three and nine months ended September 30, 2005, compared to the same periods in 2004. These increases were primarily
33
driven by higher net charge-offs of $206 million and $700 million for the three and nine months ended September 30, 2005, of which $186 million and $672 million of the respective increases were credit card net charge-offs. The establishment in the second quarter of a $210 million Allowance for Loan and Lease Losses related to estimated 2006 net charge-offs from additional changes that will be made to credit card minimum payment requirements later this year also drove the provision increase for the nine-month period.
The commercial provision increased $197 million from negative $223 million to negative $26 million during the third quarter of 2005 compared to the same quarter of 2004, as the rate of improvement in commercial credit quality slowed. Commercial net charge-offs increased $220 million from the third quarter of 2004, of which $209 million related to the domestic airline industry which had been provided for previously. For the nine months ended September 30, 2005, commercial Provision for Credit Losses decreased $125 million to negative $248 million compared to negative $123 million in the same period of 2004 as a result of continued improvement in credit quality driven by reduced exposures and an improved risk profile in Latin America as well as a decrease in commercial net charge-offs.
The Provision for Credit Losses for the three and nine months ended September 30, 2005, also included a $50 million addition to the general portion of the Allowance for Loan and Lease Losses for estimated losses related to Hurricane Katrina. The nine month period ended September 30, 2005 included a $250 million reduction in the general portion of the Allowance for Loan and Lease Losses due to reduced uncertainties resulting from the completion of FleetBoston credit-related integration activities. For more information on credit quality, see Credit Risk Management beginning on page 67.
Gains on Sales of Debt Securities
Gains on Sales of Debt Securities for the three and nine months ended September 30, 2005 were $29 million and $1.0 billion compared to $732 million and $2.0 billion for the same periods in 2004, primarily as a result of ALM activity to manage mortgage prepayment and interest rate risk. For more information on Gains on Sales of Debt Securities, see Market Risk Management beginning on page 85.
Noninterest Expense
Noninterest Expense
Three Months Ended September 30 |
Nine Months Ended September 30 | |||||||||||
(Dollars in millions) |
2005 |
2004 |
2005 |
2004 | ||||||||
Personnel |
$ | 3,837 | $ | 3,534 | $ | 11,209 | $ | 9,915 | ||||
Occupancy |
638 | 622 | 1,889 | 1,731 | ||||||||
Equipment |
300 | 309 | 894 | 888 | ||||||||
Marketing |
307 | 364 | 990 | 1,012 | ||||||||
Professional fees |
254 | 207 | 647 | 561 | ||||||||
Amortization of intangibles |
201 | 200 | 613 | 455 | ||||||||
Data processing |
361 | 341 | 1,093 | 958 | ||||||||
Telecommunications |
206 | 180 | 608 | 514 | ||||||||
Other general operating |
1,061 | 1,043 | 3,065 | 3,299 | ||||||||
Merger and restructuring charges |
120 | 221 | 353 | 346 | ||||||||
Total noninterest expense |
$ | 7,285 | $ | 7,021 | $ | 21,361 | $ | 19,679 | ||||
Noninterest Expense increased $264 million to $7.3 billion for the three months ended September 30, 2005 compared to the same period in 2004, primarily due to increases in incentive compensation.
Noninterest Expense increased $1.7 billion to $21.4 billion for the nine months ended September 30, 2005 compared to the same period in 2004, primarily due to the addition of FleetBoston and the item noted for the three month period above.
34
Income Tax Expense
For the three months ended September 30, 2005, Income Tax Expense was $2.1 billion, reflecting an effective tax rate of 33.4 percent, compared to $1.9 billion and 33.4 percent during the same period in 2004. Income Tax Expense was $6.6 billion, reflecting an effective tax rate of 33.4 percent, for the nine months ended September 30, 2005 compared to $5.2 billion and 33.4 percent for the nine months ended September 30, 2004. Due to a tax benefit in the range of $70 million to $90 million related to the special one-time deduction associated with the repatriation of certain foreign earnings under the American Jobs Creation Act of 2004, we expect the effective tax rate to be approximately 33 percent for the full year ending December 31, 2005.
Assets
Average Loans and Leases primarily reflected organic growth for the three and nine months ended September 30, 2005 with an increase of $36.4 billion, or seven percent, and $70.1 billion, or 15 percent, from the same periods in 2004. Average Securities increased $56.4 billion, or 33 percent, and $76.2 billion, or 53 percent, from the three and nine months ended September 30, 2004, as a result of repositioning our ALM portfolio and investing excess cash from deposit growth. Additionally, for the three and nine months ended September 30, 2005 compared to the same periods in 2004, average trading-related assets increased $43.8 billion, or 45 percent, and $28.9 billion, or 28 percent, as we expanded our trading book to accommodate the needs of our clients. For the nine months ended September 30, 2005, the increase was also due to the addition of FleetBoston. For more information, see Tables 5 and 6 on pages 41 through 43.
Liabilities and Shareholders Equity
Average core deposits increased $39.5 billion, or seven percent, and $89.1 billion, or 19 percent, for the three and nine months ended September 30, 2005 compared to the same periods in 2004. For the three months ended September 30, 2005, the primary increase was attributable to organic growth which resulted from our continued improvements in customer satisfaction, new product offerings and our account growth efforts. For the nine months ended September 30, 2005, the increase was due to organic growth and also the addition of FleetBoston. At September 30, 2005, our Tier 1 Capital ratio was 8.21 percent, compared to 8.10 percent at December 31, 2004. For more information, see Tables 5 and 6 on pages 41 through 43, and Capital Management beginning on page 66.
35
Table 1
Selected Quarterly Financial Data
(Dollars in millions, except per share information) |
2005 Quarters |
2004 Quarters |
||||||||||||||||||
Third |
Second |
First |
Fourth |
Third |
||||||||||||||||
Income statement |
||||||||||||||||||||
Net interest income |
$ | 7,773 | $ | 7,650 | $ | 7,873 | $ | 7,747 | $ | 7,665 | ||||||||||
Noninterest income |
6,834 | 6,365 | 6,149 | 5,966 | 4,922 | |||||||||||||||
Total revenue |
14,607 | 14,015 | 14,022 | 13,713 | 12,587 | |||||||||||||||
Provision for credit losses |
1,159 | 875 | 580 | 706 | 650 | |||||||||||||||
Gains on sales of debt securities |
29 | 325 | 659 | 101 | 732 | |||||||||||||||
Noninterest expense |
7,285 | 7,019 | 7,057 | 7,333 | 7,021 | |||||||||||||||
Income before income taxes |
6,192 | 6,446 | 7,044 | 5,775 | 5,648 | |||||||||||||||
Income tax expense |
2,065 | 2,150 | 2,349 | 1,926 | 1,884 | |||||||||||||||
Net income |
4,127 | 4,296 | 4,695 | 3,849 | 3,764 | |||||||||||||||
Average common shares issued and outstanding (in thousands) |
4,000,573 | 4,005,356 | 4,032,550 | 4,032,979 | 4,052,304 | |||||||||||||||
Average diluted common shares issued and outstanding (in thousands) |
4,054,659 | 4,065,355 | 4,099,062 | 4,106,040 | 4,121,375 | |||||||||||||||
Performance ratios |
||||||||||||||||||||
Return on average assets |
1.26 | % | 1.35 | % | 1.59 | % | 1.33 | % | 1.37 | % | ||||||||||
Return on average common shareholders equity |
16.33 | 17.54 | 19.30 | 15.63 | 15.56 | |||||||||||||||
Tangible equity ratio (1) |
4.37 | 4.32 | 4.25 | 4.76 | 4.84 | |||||||||||||||
Total equity to total assets (period end) |
8.09 | 8.07 | 8.13 | 8.97 | 9.14 | |||||||||||||||
Total average equity to total average assets |
7.76 | 7.70 | 8.23 | 8.51 | 8.79 | |||||||||||||||
Dividend payout |
48.96 | 42.17 | 39.02 | 47.45 | 48.75 | |||||||||||||||
Per common share data |
||||||||||||||||||||
Earnings |
$ | 1.03 | $ | 1.07 | $ | 1.16 | $ | 0.95 | $ | 0.93 | ||||||||||
Diluted earnings |
1.02 | 1.06 | 1.14 | 0.94 | 0.91 | |||||||||||||||
Dividends paid |
0.50 | 0.45 | 0.45 | 0.45 | 0.45 | |||||||||||||||
Book value |
25.16 | 24.96 | 24.35 | 24.56 | 24.14 | |||||||||||||||
Average balance sheet |
||||||||||||||||||||
Total loans and leases |
$ | 539,487 | $ | 520,424 | $ | 524,944 | $ | 515,463 | $ | 503,078 | ||||||||||
Total assets |
1,294,745 | 1,277,489 | 1,200,883 | 1,152,551 | 1,096,683 | |||||||||||||||
Total deposits |
632,771 | 640,593 | 627,419 | 609,936 | 587,878 | |||||||||||||||
Long-term debt |
99,576 | 97,360 | 97,126 | 99,588 | 98,361 | |||||||||||||||
Common shareholders equity |
100,183 | 98,145 | 98,542 | 97,828 | 96,120 | |||||||||||||||
Total shareholders equity |
100,454 | 98,417 | 98,814 | 98,100 | 96,392 | |||||||||||||||
Capital ratios |
||||||||||||||||||||
Risk-based capital: |
||||||||||||||||||||
Tier 1 |
8.21 | % | 8.06 | % | 8.20 | % | 8.10 | % | 8.08 | % | ||||||||||
Total |
11.12 | 11.12 | 11.46 | 11.63 | 11.71 | |||||||||||||||
Leverage |
5.85 | 5.59 | 5.82 | 5.82 | 5.92 | |||||||||||||||
Market price per share of common stock |
||||||||||||||||||||
Closing |
$ | 42.10 | $ | 45.61 | $ | 44.10 | $ | 46.99 | $ | 43.33 | ||||||||||
High closing |
45.98 | 47.08 | 47.08 | 47.44 | 44.98 | |||||||||||||||
Low closing |
41.60 | 44.01 | 43.66 | 43.62 | 41.81 | |||||||||||||||
(1) | Tangible equity ratio equals shareholders' equity less goodwill, core deposit intangibles and other intangibles divided by total assets less goodwill, core deposit intangibles and other intangibles. |
36
Table 2 Selected Year-to-Date Financial Data
|
||||||||
Nine Months Ended September 30 |
||||||||
(Dollars in millions, except per share information) |
2005 |
2004 |
||||||
Income statement |
||||||||
Net interest income |
$ | 23,296 | $ | 21,047 | ||||
Noninterest income |
19,348 | 14,119 | ||||||
Total revenue |
42,644 | 35,166 | ||||||
Provision for credit losses |
2,614 | 2,063 | ||||||
Gains on sales of debt securities |
1,013 | 2,022 | ||||||
Noninterest expense |
21,361 | 19,679 | ||||||
Income before income taxes |
19,682 | 15,446 | ||||||
Income tax expense |
6,564 | 5,152 | ||||||
Net income |
13,118 | 10,294 | ||||||
Average common shares issued and outstanding (in thousands) |
4,012,924 | 3,666,298 | ||||||
Average diluted common shares issued and outstanding (in thousands) |
4,072,991 | 3,729,120 | ||||||
Performance ratios |
||||||||
Return on average assets |
1.39 | % | 1.36 | % | ||||
Return on average common shareholders equity |
17.70 | 17.32 | ||||||
Tangible equity ratio (1) |
4.37 | 4.84 | ||||||
Total equity to total assets (period end) |
8.09 | 9.14 | ||||||
Total average equity to total average assets |
7.89 | 7.88 | ||||||
Dividend payout |