Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2005

 

OR

 

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

 

For the transition period from                  to                 

 

Commission file number 1-6523

 

Bank of America Corporation

(Exact name of registrant as specified in its charter)


 

Delaware   56-0906609

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

Bank of America Corporate Center

100 N. Tryon Street

Charlotte, North Carolina

 

 

28255

(Address of Principal Executive Offices)   (Zip Code)
Registrant’s telephone number, including area code   (704) 386-5681

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class

   Name of each exchange on which registered

Common Stock

   New York Stock Exchange
     London Stock Exchange
     Pacific Stock Exchange
     Tokyo Stock Exchange

Depositary Shares each representing a one-fifth interest in a share of:

    

    6.75% Perpetual Preferred Stock

   New York Stock Exchange

    Fixed/Adjustable Cumulative Preferred Stock

   New York Stock Exchange

S&P 500® Index Return Linked Notes, due July 2, 2007

   American Stock Exchange

Minimum Return Index EAGLESSM, due June 1, 2010, Linked to the Nasdaq-100 Index®

   American Stock Exchange

Minimum Return Index EAGLES®, due June 28, 2010, Linked to the S&P 500® Index

   American Stock Exchange

Minimum Return—Return Linked Notes, due June 24, 2010, Linked to the Nikkei 225 Index

   American Stock Exchange

Minimum Return Basket EAGLESSM, due August 2, 2010, Linked to a Basket of Energy Stocks

   American Stock Exchange

Minimum Return Index EAGLES®, due August 28, 2009, Linked to the Russell 2000® Index

   American Stock Exchange

Minimum Return Index EAGLES®, due September 25, 2009, Linked to the Dow Jones Industrial AverageSM

   American Stock Exchange

Minimum Return Index EAGLES®, due October 29, 2010, Linked to the Nasdaq-100 Index®

   American Stock Exchange

1.50% Index CYCLESTM, due November 26, 2010, Linked to the S&P 500® Index

   American Stock Exchange

1.00% Index CYCLESTM, due December 28, 2010, Linked to the S&P MidCap 400 Index

   American Stock Exchange

Return Linked Notes due June 28, 2010, Linked to the Nikkei 225 Index

   American Stock Exchange

1.00% Index CYCLESTM, due January 28, 2011, Linked to a Basket of Health Care Stocks

   American Stock Exchange

Minimum Return Index EAGLES®, due January 28, 2011, Linked to the Russell 2000® Index

   American Stock Exchange

0.25% Cash-Settled Exchangeable Notes, due January 26, 2010, Linked to the Nasdaq-100 Index®

   American Stock Exchange

1.25% Index CYCLESTM, due February 24, 2010, Linked to the S&P 500® Index

   American Stock Exchange

Minimum Return Index EAGLES®, due March 27, 2009, Linked to the Nasdaq-100 Index®

   American Stock Exchange

1.75% Basket CYCLESTM, due April 30, 2009, Linked to a Basket of Three Indices

   American Stock Exchange


Table of Contents

Title of each class

   Name of each exchange on which registered

1.00% Basket CYCLESTM, due May 27, 2010, Linked to a "70/30" Basket of Four Indices and an Exchange Traded Fund

   American Stock Exchange

Minimum Return Index EAGLES®, due June 25, 2010, Linked to the Dow Jones Industrial AverageSM

   American Stock Exchange

1.50% Basket CYCLESTM, due July 29, 2011, Linked to an "80/20" Basket of Four Indices and an Exchange Traded Fund

   American Stock Exchange

Minimum Return Index EAGLES®, due August 28, 2009, Linked to the AMEX Biotechnology IndexSM

   American Stock Exchange

1.25% Index CYCLESTM, due August 25, 2010, Linked to the Dow Jones Industrial AverageSM

   American Stock Exchange

1.25% Basket CYCLESTM, due September 27, 2011, Linked to a Basket of Four Indices

   American Stock Exchange

Minimum Return Basket EAGLESSM, due September 29, 2010, Linked to a Basket of Energy Stocks

   American Stock Exchange

Minimum Return Index EAGLES®, due October 29, 2010, Linked to the S&P 500® Index

   American Stock Exchange

Minimum Return Index EAGLES®, due November 23, 2010, Linked to the Nasdaq-100 Index®

   American Stock Exchange

Minimum Return Index EAGLES®, due November 24, 2010, Linked to the CBOE China Index

   American Stock Exchange

1.25% Basket CYCLESTM, due December 27, 2010, Linked to a "70/30" Basket of Four Indices and an Exchange Traded Fund

   American Stock Exchange

1.50% Index CYCLESTM, due December 28, 2011, Linked to a Basket of Health Care Stocks

   American Stock Exchange

6 1/2% Subordinated InterNotesSM, due 2032

   New York Stock Exchange

5 1/2% Subordinated InterNotesSM, due 2033

   New York Stock Exchange

5 7/8% Subordinated InterNotesSM, due 2033

   New York Stock Exchange

6% Subordinated InterNotesSM, due 2034

   New York Stock Exchange

8 1/2% Subordinated Notes, due 2007

   New York Stock Exchange

NASDAQ® 100 EAGLESSM, due 2010

   American Stock Exchange

S&P 500® EAGLESSM, due 2010

   American Stock Exchange

Nikkei 225 Return Linked Note, due 2010

   American Stock Exchange

Basket of Energy Stocks EAGLESSM, due 2010

   American Stock Exchange

Russell 2000® EAGLES®, due 2009

   American Stock Exchange

DJIA® EAGLES®, due 2009

   American Stock Exchange

Nasdaq 100® EAGLES®, due 2010

   American Stock Exchange

S&P 500® Index CYCLES, due 2010

   American Stock Exchange

S&P 400 MidCap Index CYCLES, due 2010

   American Stock Exchange

Nikkei 225 Return Linked Note, due 2010

   American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  x  No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ¨  No  x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x  No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

x  Large accelerated filer   ¨  Accelerated filer   ¨  Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x

The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates is approximately $210,310,308,584 (based on the June 30, 2005 closing price of Common Stock of $45.61 per share as reported on the New York Stock Exchange). As of March 13, 2006, there were 4,648,802,068 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Document of the Registrant    Form 10-K Reference Locations

Portions of the 2006 Proxy Statement

   PART III


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Restatement

 

Overview

 

Bank of America Corporation (the “Corporation”) is restating its historical financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, the year ended December 31, 2004, including the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, the year ended December 31, 2003, and other selected financial data for the years ended December 31, 2002 and 2001. These restatements and revisions relate to the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133). The Corporation is presenting this restatement in its 2005 Annual Report on Form 10-K.

 

The restatement has the following impact on Net Income and Diluted Earnings Per Common Share (EPS) by period:

 

Impact by Periods(1)

 

(Dollars in millions, except per share information)


   Net Income
Adjustment


    Diluted EPS
Adjustment


 

Beginning Balance Adjustment

   $ 1,011     Not Applicable  

2003

     (49 )   (0.02 )

2004

              

1Q04

     (33 )   (0.01 )

2Q04

     (508 )   (0.12 )

3Q04

     339     0.08  

4Q04

     7     —    
    


 

Year

     (196 )   (0.05 )
    


 

2005

              

1Q05

     (302 )   (0.07 )

2Q05

     361     0.09  

3Q05

     (285 )   (0.07 )

4Q05

     (194 )   (0.05 )
    


 

Year

     (421 )   (0.11 )
    


 

Total

   $ 345        
    


     
  (1)   For presentation purposes, certain numbers have been rounded.

 

For additional information relating to the effect of the restatement, see the following items:

 

Part II:

    

Item 6 – Selected Financial Data

    

Item 7 – Management’s Discussion and Analysis of Results of Operations and Financial Condition

    

Item 7A – Quantitative and Qualitative Disclosure about Market Risk

    

Item 8 – Financial Statements and Supplementary Data

    

Item 9A – Controls and Procedures

    
Part IV:     

Item 15 – Exhibits and Financial Statements Schedule

    

 

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PART I

Item 1. BUSINESS

 

General

 

Bank of America Corporation (the “Corporation”) is a Delaware corporation, a bank holding company and a financial holding company under the Gramm-Leach-Bliley Act. The Corporation was incorporated in 1998 as part of the merger of BankAmerica Corporation with NationsBank Corporation. The principal executive offices of the Corporation are located in the Bank of America Corporate Center, Charlotte, North Carolina 28255.

 

Additional information relating to our businesses and our subsidiaries is included in the information set forth in pages 26 through 42 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 20 of the Notes to the Consolidated Financial Statements in Item 8 of this report.

 

Primary Market Areas

 

Through its banking subsidiaries (the “Banks”) and various nonbanking subsidiaries, the Corporation provides a diversified range of banking and nonbanking financial services and products, primarily throughout the Northeast (Connecticut, Maine, Massachusetts, New Hampshire and Rhode Island), the Mid-Atlantic (Maryland, New Jersey, New York, Pennsylvania, Virginia and the District of Columbia), the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast (Florida, Georgia, North Carolina, South Carolina and Tennessee), the Southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas), the Northwest (Oregon, Idaho and Washington) and the West (California, Idaho and Nevada) regions of the United States and in selected international markets. Management believes that these are desirable regions in which to be located. Based on the most recent available data, personal income in the states in these regions as a whole rose 6.6 percent year-to-year through the third quarter of 2005, compared to growth of 3.3 percent in the rest of the United States. In addition, the population in these states as a whole rose an estimated 1.3 percent between 2004 and 2005, compared to growth of 0.4 percent in the rest of the United States. Through December 2005, the average rate of unemployment in these states was 4.8 percent, ranging from 3.3 percent in Florida and Virginia to 7.0 percent in South Carolina, compared to a rate of unemployment of 5.1 percent in the rest of the United States. The number of housing permits authorized in 2005 was nearly 9 percent higher than in 2004 in these states as a whole.

 

The Corporation has the leading bank deposit market share position in California, Connecticut, Florida, Maryland, Massachusetts, Nevada, New Jersey and Washington. In addition, the Corporation ranks second in terms of bank deposit market share in Arizona, Delaware, Kansas, Missouri, New Mexico, North Carolina, Rhode Island, South Carolina and Texas; third in Arkansas, District of Columbia, Georgia and Maine; fourth in Idaho, New Hampshire, Oklahoma, Oregon and Virginia; fifth in Tennessee; sixth in New York; eighth in Iowa; tenth in Pennsylvania; and fourteenth in Illinois.

 

Acquisition and Disposition Activity

 

As part of its operations, the Corporation regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions and other businesses of a type eligible for financial holding company ownership or control. In addition, the Corporation regularly analyzes the values of, and submits bids for, the acquisition of customer-based funds and other liabilities and assets of such financial institutions and other businesses. The Corporation also regularly considers the potential disposition of certain of its assets, branches, subsidiaries or lines of businesses. As a general rule, the Corporation publicly announces any material acquisitions or dispositions when a definitive agreement has been reached.

 

On April 1, 2004, the Corporation completed its merger with FleetBoston Financial Corporation, and, on June 13, 2005, Bank of America, N.A. completed its merger with Fleet National Bank. On January 1, 2006, the Corporation completed its merger with MBNA Corporation. Additional information on these mergers and the Corporation’s other acquisition activity is included under Notes 2 and 3 of the Notes to the Consolidated Financial Statements in Item 8 which are incorporated herein by reference.

 

Government Supervision and Regulation

 

The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and banks and specific information about the Corporation and its subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Bank Insurance Fund rather than for the protection of stockholders and creditors.

 

General

 

As a registered bank holding company and financial holding company, the Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The

 

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Banks are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “Comptroller” or “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Reserve Board and other federal and state regulatory agencies. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions to stockholders.

 

A financial holding company, and the companies under its control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations (including, without limitation, insurance and securities activities), and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries. A financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the Federal Reserve Board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as the Banks, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the Comptroller.

 

Bank holding companies (including bank holding companies that also are financial holding companies) also are required to obtain the prior approval of the Federal Reserve Board before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines to create interstate banks. The Interstate Banking and Branching Act also permits a bank to open new branches in a state in which it does not already have banking operations if such state enacts a law permitting de novo branching.

 

Changes in Regulations

 

Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they might have on the Corporation and its subsidiaries cannot be determined at this time.

 

Capital and Operational Requirements

 

The Federal Reserve Board, the Comptroller and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. Tier 1 capital includes common shareholders’ equity, trust preferred securities, minority interests and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjustments. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents the Corporation’s qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. The Corporation’s Tier 1 and total risk-based capital ratios under these guidelines at December 31, 2005 were 8.25 percent and 11.08 percent, respectively. At December 31, 2005, the Corporation had no subordinated debt that qualified as Tier 3 capital.

 

The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 100 to 200 basis points above three percent, banking organizations are required to maintain a ratio of at least five percent to be classified as well capitalized. The Corporation’s leverage ratio at December 31, 2005 was 5.91 percent. The Corporation meets its leverage ratio requirement.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized,

 

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significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.

 

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 risk-based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order. Under these guidelines, each of the Banks was considered well capitalized as of December 31, 2005.

 

Regulators also must take into consideration: (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (c) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. In addition, the Corporation, and any Bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations.

 

Distributions

 

The Corporation’s funds for cash distributions to its stockholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, and funds used to pay principal and interest on its indebtedness, is dividends received from the Banks. Each of the Banks is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.

 

In addition, the ability of the Corporation and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries.

 

Source of Strength

 

According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC – either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default – the other Banks may be assessed for the FDIC’s loss, subject to certain exceptions.

 

Competition

 

In 2005, the Corporation had 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. The activities in which the Corporation and its business segments engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies. The Corporation also competes against banks and thrifts owned by nonregulated diversified corporations and other entities which offer financial services, located both domestically and internationally and through alternative delivery channels such as the Internet. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and customer convenience, such as location of offices.

 

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The commercial banking business in the various local markets served by the Corporation’s business segments is highly competitive. The four business segments compete with other banks, thrifts, finance companies and other businesses which provide similar services. The business segments actively compete in commercial lending activities with local, regional and international banks and nonbank financial organizations, some of which are larger than certain of the Corporation’s nonbanking subsidiaries and the Banks. In its consumer lending operations, the competitors of the business segments include other banks, thrifts, credit unions, finance companies and other nonbank organizations offering financial services. In the investment banking, investment advisory and brokerage business, the Corporation’s nonbanking subsidiaries compete with other banking and investment banking firms, investment advisory firms, brokerage firms, investment companies, other organizations offering similar services and other investment alternatives available to investors. The Corporation’s mortgage banking units compete with banks, thrifts, government agencies, mortgage brokers and other nonbank organizations offering mortgage banking services. The Corporation’s card business competes with other banks, as well as monoline and retail card product companies. In the trust business, the Banks compete with other banks, investment counselors and insurance companies in national markets for institutional funds and insurance agents, thrifts, financial counselors and other fiduciaries for personal trust business. The Corporation and its four business segments also actively compete for funds. A primary source of funds for the Banks is deposits, and competition for deposits includes other deposit-taking organizations, such as banks, thrifts, and credit unions, as well as money market mutual funds.

 

The Corporation’s ability to expand into additional states remains subject to various federal and state laws. See “Government Supervision and Regulation – General” for a more detailed discussion of interstate banking and branching legislation and certain state legislation.

 

Employees

 

As of December 31, 2005, there were 176,638 full-time equivalent employees within the Corporation and its subsidiaries. Of the foregoing employees, 75,202 were employed within Global Consumer and Small Business Banking, 22,957 were employed within Global Business and Financial Services, 7,765 were employed within Global Capital Markets and Investment Banking and 12,338 were employed within Global Wealth and Investment Management. The remainder were employed elsewhere within the Corporation and its subsidiaries.

 

None of the domestic employees within the Corporation is subject to a collective bargaining agreement. Management considers its employee relations to be good.

 

Additional Information

 

See also the following additional information which is incorporated herein by reference: Business Segment Operations (under the caption “Business Segment Operations” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) and in Note 20 of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data (the “Notes”)); Net Interest Income (under the captions “Financial Highlights—Net Interest Income” and “Supplemental Financial Data” in the MD&A and Tables I and II of the Statistical Financial Information); Securities (under the caption “Interest Rate Risk Management—Securities” in the MD&A and Notes 1 and 6 of the Notes); Outstanding Loans and Leases (under the caption “Credit Risk Management” in the MD&A, Table III of the Statistical Financial Information, and Notes 1 and 7 of the Notes); Deposits (under the caption “Liquidity Risk Management—Deposits and Other Funding Sources” in the MD&A and Note 11 of the Notes); Short-Term Borrowings (under the caption “Liquidity Risk and Capital Management” in the MD&A and Note 12 of the Notes); Trading Account Liabilities (in Note 4 of the Notes); Market Risk Management (under the caption “Market Risk Management” in the MD&A); Liquidity Risk Management (under the caption “Liquidity Risk and Capital Management” in the MD&A); Operational Risk Management (under the caption “Operational Risk Management” in the MD&A); and Performance by Geographic Area (under Note 22 of the Notes).

 

The Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on the Corporation’s website at http://investor.bankofamerica.com under the heading Complete SEC Filings as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to the Securities and Exchange Commission (the “SEC”). In addition, the Corporation makes available on its website at http://investor.bankofamerica.com under the heading Corporate Governance its: (i) Code of Ethics and Insider Trading Policy; (ii) Corporate Governance Guidelines; and (iii) the charters of each of Bank of America’s Board committees, and also intends to disclose any amendments to its Code of Ethics, or waivers of the Code of Ethics on behalf of its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, on its website. These corporate governance materials are also available free of charge in print to stockholders who request them in writing to: Bank of America Corporation, Attention: Shareholder Relations Department, 101 South Tryon Street, NC1-002-29-01, Charlotte, North Carolina 28255.

 

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The Corporation’s Annual Report on Form 10-K is being distributed to stockholders in lieu of a separate annual report containing financial statements of the Corporation and its consolidated subsidiaries.

 

Item 1A. RISK FACTORS

 

This report contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” 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 this annual report of the Corporation (also referred to as we, us or our) should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. As a large, international financial services company, we face risks that are inherent in the businesses and the market places in which we operate. Factors that might cause our future financial performance to vary from that described in our forward-looking statements include the market, credit, operational, regulatory, strategic, liquidity, capital, economic and sovereign risks, among others, as discussed in the MD&A and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that we believe could cause actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in our reports to the SEC also could adversely affect our results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties.

 

General business, economic and political conditions. Our businesses and earnings are affected by general business, economic and political conditions in the United States and abroad. Given the concentration of our business activities in the United States, we are particularly exposed to downturns in the United States economy. For example, in a poor economic environment there is a greater likelihood that more of our customers or counterparties could become delinquent on their loans or other obligations to us, which, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which would adversely affect our earnings. General business and economic conditions that could affect us include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the Unites States economy and the local economies in which we operate. Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, could affect business and economic conditions in the United States and abroad.

 

Access to funds from subsidiaries. The Corporation is a separate and distinct legal entity from our banking and nonbanking subsidiaries. We therefore depend on dividends, distributions and other payments from our banking and nonbanking subsidiaries to fund dividend payments on the common stock and to fund all payments on our other obligations, including debt obligations. Many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the Corporation. Regulatory action of that kind could impede access to funds we need to make payments on our obligations or dividend payments. In addition, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

 

Changes in accounting standards. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements.

 

Competition. We operate in a highly competitive environment that could experience intensified competition as continued merger activity in the financial services industry produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services, and at more competitive prices. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and Internet-based financial solutions. Many of our competitors have fewer regulatory constraints and some have lower cost structures.

 

Credit Risk. When we loan money, commit to loan money or enter into a contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contract. A number of our products expose us to credit risk, including loans, leases and lending

 

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commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest lenders, the credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify.

 

For a further discussion of credit risk and our credit risk management policies and procedures, see “Credit Risk Management” in the MD&A.

 

Federal and state regulation. The Corporation, the Banks and many of our nonbank subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. The Corporation and its nonbanking subsidiaries are also heavily regulated by securities regulators, domestically and internationally. This regulation is designed to protect investors in securities we sell or underwrite. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and increasing the ability of nonbanks to offer competing financial services and products.

 

Governmental fiscal and monetary policy. Our businesses and earnings are affected by domestic and international monetary policy. For example, the Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States, non-U.S. governments and international agencies. Changes in domestic and international monetary policy are beyond our control and hard to predict.

 

Liquidity. Liquidity is essential to our businesses. Our liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.

 

For a further discussion of our liquidity picture and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk and Capital Management” in the MD&A.

 

Litigation risks. We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against the Corporation could have material adverse financial effects or cause significant reputational harm to the Corporation, which in turn could seriously harm our business prospects.

 

For a further discussion of litigation risks, see “Litigation and Regulatory Matters” in Note 13 of the Notes.

 

Market risk. We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest margin—the difference between the yield we earn on our assets and the interest rate we pay for deposits and other sources of funding—which could in turn affect our net interest income and earnings. Market risk is inherent in the financial instruments associated with many of our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rates, foreign exchange rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of either the issuer or its country of origin. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse affects on our results from operations and our overall financial condition.

 

For a further discussion of market risk and our market risk management policies and procedures, see “Market Risk Management” in the MD&A.

 

Merger risks. There are significant risks and uncertainties associated with mergers, such as our merger with MBNA. For example, we may fail to realize the growth opportunities and cost savings anticipated to be derived from the merger. In addition, it is possible that the integration process could result in the loss of key employees, or that the disruption of ongoing business from the merger could adversely affect our ability to maintain relationships with clients

 

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or suppliers. We have an active acquisition program and there is a risk that integration difficulties may cause us not to realize expected benefits from the transactions We will be subject to similar risks and difficulties in connection with future acquisitions, as well as decisions to downsize, sell or close units or otherwise change the business mix of the Corporation.

 

Non-U.S. operations; trading in non-U.S. securities. We do business throughout the world, including in developing regions of the world commonly known as emerging markets. Our businesses and revenues derived from non-U.S. operations are subject to risk of loss from currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, unfavorable political and diplomatic developments and changes in legislation relating to non-U.S. ownership. We also invest in the securities of corporations located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated, because generally, non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.

 

Operational risks. The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the vast array of associates and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key individuals or failure on the part of the key individuals to perform properly.

 

For further discussion of operating risks, see “Operational Risk Management” in the MD&A.

 

Our reputation is important. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our failure to address, or to appear to fail to address various issues that could give rise to reputational risk could cause harm to the Corporation and its business prospects. These issues include, but are not limited to, appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; money-laundering; privacy; properly maintaining customer and associate personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.

 

Products and services. Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not be successful in introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or developing and maintaining loyal customers.

 

Risk management processes and strategies. We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. For a further discussion of our risk management policies and procedures, see “Managing Risk” in the MD&A.

 

We operate many different businesses. We are a diversified financial services company. In addition to banking, we provide investment, mortgage, investment banking, credit card and consumer finance services. Although we believe our diversity helps lessen the effect when downturns affect any one segment of our industry, it also means our earnings could be subject to different risks and uncertainties than the ones discussed in herein. If any of the risks that we face actually occur, irrespective of whether those risks are described in this section or elsewhere in this report, our business, financial condition and operating results could be materially adversely affected.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

There are no material unresolved written comments that were received from the Securities and Exchange Commission’s staff 180 days or more before the end of the Corporation’s fiscal year relating to the Corporation’s periodic or current reports filed under the Securities Exchange Act of 1934.

 

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Item 2. PROPERTIES

 

As of December 31, 2005, the principal offices of the Corporation and primarily all of its business segments were located in the 60-story Bank of America Corporate Center in Charlotte, North Carolina, which is owned by a subsidiary of the Corporation. The Corporation occupies approximately 612,000 square feet and leases approximately 588,000 square feet to third parties at market rates, which represents substantially all of the space in this facility. The Corporation occupies approximately 822,000 square feet of space at 100 Federal Street in Boston, which is the headquarters for one of the Corporation’s primary business segments, the Global Wealth and Investment Management Group. The 37-story building is owned by a subsidiary of the Corporation which also leases approximately 388,000 square feet to third parties. The Corporation also leases or owns a significant amount of space worldwide. As of December 31, 2005, the Corporation and its subsidiaries owned or leased approximately 24,000 locations in all 50 states, the District of Columbia and 34 foreign countries.

 

Item 3. LEGAL PROCEEDINGS

 

See “Litigation and Regulatory Matters” in Note 13 of the Consolidated Financial Statements beginning on page 127 for the Corporation’s litigation disclosure which is incorporated herein by reference.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to a vote of stockholders during the quarter ended December 31, 2005.

 

Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

 

Pursuant to the Instructions to Form 10-K and Item 401(b) of Regulation S-K, the name, age and position of each current executive officer of the Corporation are listed below along with such officer’s business experience during the past five years. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of stockholders.

 

Amy Woods Brinkley, age 50, Global Risk Executive. Ms. Brinkley was named to her present position in April 2002. From July 2001 to April 2002, she served as Chairman, Credit Policy and Deputy Corporate Risk Management Executive; and from August 1999 to July 2001, she served as President, Consumer Products. She first became an officer in 1979. She also serves as Global Risk Executive and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

Alvaro G. de Molina, age 48, Chief Financial Officer. Mr. de Molina was named to his present position in September 2005. From April 2004 to September 2005, he served as President, Global Capital Markets and Investment Banking; from 2000 to April 2004, he served as Treasurer; and from 1998 to 2000, he served as Deputy Treasurer. He first became an officer in 1989. He also serves as Chief Financial Officer and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

Barbara J. Desoer, age 53, Global Technology, Service and Fulfillment Executive. Ms Desoer was named to her present position in August 2004. From July 2001 to August 2004, she served as President, Consumer Products; and from September 1999 to July 2001, she served as Director of Marketing. She first became an officer in 1977. She also serves as Global Technology, Service and Fulfillment Executive and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

Kenneth D. Lewis, age 58, Chairman, Chief Executive Officer and President. Mr. Lewis was named Chief Executive Officer in April 2001, President in July 2004 and Chairman in February 2005. From April 2001 to April 2004, he served as Chairman; from January 1999 to April 2004, he served as President; and from October 1999 to April 2001, he served as Chief Operating Officer. He first became an officer in 1971. Mr. Lewis also serves as a director of the Corporation and as Chairman, Chief Executive Officer, President and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

Liam E. McGee, age 51, President, Global Consumer and Small Business Banking. Mr. McGee was named to his present position in August 2004. From August 2001 to August 2004, he served as President, Global Consumer Banking; from August 2000 to August 2001, he served as President, California; and from August 1998 to August 2000, he served as President, Southern California. He first became an officer in 1990. He also serves as President, Global Consumer and Small Business Banking and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

Brian T. Moynihan, age 46, President, Global Wealth and Investment Management. Mr. Moynihan was named to his present position in April 2004. Previously he held the following positions at FleetBoston Financial Corporation: from

 

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1999 to April 2004, he served as Executive Vice President with responsibility for Brokerage and Wealth Management from 2000, and Regional Commercial Financial Services and Investment Management from May 2003. He first became an officer in 1993. He also serves as President, Global Wealth and Investment Management and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

R. Eugene Taylor, age 58, Vice Chairman and President, Global Corporate and Investment Banking. Mr. Taylor was named to his present position in July, 2005. From February 2005 to July 2005, he served as President, Global Business and Financial Services; from August 2004 to February 2005, he served as President, Commercial Banking; from June 2000 to August 2004, he served as President, Consumer and Commercial Banking; from February 2000 to June 2000, he served as President, Central Region; and from October 1998 to June 2000, he served as President, West Region. He first became an officer in 1970. He also serves as Vice-Chairman and President, Global Corporate and Investment Banking and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA).

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS

 

The principal market on which the Common Stock is traded is the New York Stock Exchange. The Common Stock is also listed on the London Stock Exchange and the Pacific Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. The following table sets forth the high and low closing sales prices of the Common Stock on the New York Stock Exchange for the periods indicated:

 

         Quarter      High      Low
        
    

    

Bank of America Corporation

                      
    2004    first      $ 41.38      $ 39.15
         second        42.72        38.96
         third        44.98        41.81
         fourth        47.44        43.62
    2005    first        47.08        43.66
         second        47.08        44.01
         third        45.98        41.60
         fourth        46.99        41.57

 

The above table has been adjusted to reflect the August 27, 2004 2-for-1 stock split.

 

As of March 13, 2006, there were 279,463 record holders of Common Stock. During 2004 and 2005, the Corporation paid dividends on the Common Stock on a quarterly basis. The following table sets forth dividends paid per share of Common Stock for the periods indicated:

 

       Quarter

     Dividend

2004

     first      $.40
       second      .40
       third      .45
       fourth      .45

2005

     first      .45
       second      .45
       third      .50
       fourth      .50

 

The above table has been adjusted to reflect the August 27, 2004 2-for-1 stock split.

 

For additional information regarding the Corporation’s ability to pay dividends, see “Government Supervision and Regulation – Distributions” and Note 15 of the Consolidated Financial Statements on page 136 which is incorporated herein by reference.

 

For information on the Corporation’s equity compensation plans, see Note 17 of the Consolidated Financial Statements on page 144 which is incorporated herein by reference.

 

See Note 14 of the Consolidated Financial Statements on page 134 for information on the monthly share repurchases activity for the three and twelve months ended December 31, 2005, 2004 and 2003, including total common shares repurchased and announced programs, weighted average per share price and the remaining buy back authority under announced programs which is incorporated herein by reference.

 

The Corporation did not have any unregistered sales of its equity securities in fiscal year 2005.

 

Item 6. SELECTED FINANCIAL DATA

 

See Table 2 in the MD&A on page 23 and Table VII of the Statistical Financial Information on page 84 which are incorporated herein by reference.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. In light of the risks, uncertainties and assumptions discussed under Item 1A. “Risk Factors” of this Annual Report on Form 10-K and other factors discussed in this section, there are risks that our actual experience will differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report. For more information regarding what constitutes a forward-looking statement, please refer to Item 1A. “Risk Factors.”

 

The Corporation, headquartered in Charlotte, North Carolina, operates in 29 states, the District of Columbia and 44 foreign countries. The Corporation provides a diversified range of banking and nonbanking financial services and products 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 December 31, 2005, we had $1.3 trillion in assets and approximately 177,000 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition. Certain prior period amounts have been reclassified to conform to current period presentation.

 

Restatement

 

As discussed in Notes 1 and 23 of the Consolidated Financial Statements, we are restating our historical financial statements for the years 2004 and 2003, for the quarters in 2005 and 2004, and other selected financial data for the years 2002 and 2001 (see Tables 2 and 3 on pages 23 and 25 for the restatements of Five-Year Summary of Selected Financial Data, and Supplemental Financial Data and Reconciliations to GAAP Financial Measures). These restatements and resulting revisions relate to the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). The Corporation is presenting this restatement in its 2005 Annual Report on Form 10-K.

 

The Corporation uses interest rate contracts and foreign exchange contracts in its Asset and Liability Management (ALM) process. Use of such derivatives enables us to minimize significant fluctuations in earnings caused by interest rate and currency rate volatility. The Corporation had applied hedge accounting for certain derivative transactions that we believe met the requirements of SFAS 133. The application of hedge accounting produced financial statement results that were consistent with the economics of these transactions and our risk management activities. Hedge accounting reduces volatility in earnings by counterbalancing the changes in the hedged item and the derivative. As a result of a recent interpretation on the “shortcut” method for derivative instruments under SFAS 133, the Corporation undertook a review of all hedge accounting transactions, which was completed in the first quarter of 2006. Based on the review, we determined that certain hedges did not meet the requirements of SFAS 133. Since we could not apply hedge accounting for those transactions, the derivative transactions have been marked to market through our Consolidated Statement of Income with no related offset for hedge accounting. Accordingly, changes in interest rates and currency rates which impact the fair value of derivative instruments have had a direct impact on our Net Income.

 

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The following tables set forth the effect of the adjustments described above on Net Income for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 and for the quarterly periods in 2005 and 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information.

 

Increase (Decrease) in Net Income(1)

 

     Year Ended December 31

 
(Dollars in millions)    2005(2)

    2004

    2003

    2002

    2001

 

As Previously Reported Net income

   $ 16,886     $ 14,143     $ 10,810     $ 9,249     $ 6,792  

Internal fair value hedges

     (271 )     (190 )     (144 )     406       226  

Internal cash flow hedges

     25       (281 )     104       (176 )     424  

Other, net

     (175 )     275       (9 )     74       57  
    


 


 


 


 


Total adjustment

     (421 )     (196 )     (49 )     304       707  
    


 


 


 


 


Restated Net income

   $ 16,465     $ 13,947     $ 10,762     $ 9,553     $ 7,499  

Percent change

     (2.5 )%     (1.4 )%     (0.5 )%     3.3 %     10.4 %

(1)   For presentation purposes, certain numbers have been rounded.
(2)   The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006.

 

Increase (Decrease) in Quarterly Net Income(1, 2)

 

     2005

    2004

 
(Dollars in millions)    Fourth(3)

    Third

    Second

    First

    Fourth

    Third

    Second

    First

 

As Previously Reported Net income

   $ 3,768     $ 4,127     $ 4,296     $ 4,695     $ 3,849     $ 3,764     $ 3,849     $ 2,681  

Internal fair value hedges

     (74 )     (148 )     130       (179 )     (76 )     157       (435 )     164  

Internal cash flow hedges

     (43 )     (29 )     125       (28 )     18       (111 )     146       (334 )

Other, net

     (77 )     (108 )     106       (95 )     65       293       (219 )     137  
    


 


 


 


 


 


 


 


Total adjustment

     (194 )     (285 )     361       (302 )     7       339       (508 )     (33 )
    


 


 


 


 


 


 


 


Restated Net income

   $ 3,574     $ 3,841     $ 4,657     $ 4,393     $ 3,855     $ 4,103     $ 3,341     $ 2,648  

Percent change

     (5.1 )%     (6.9 )%     8.4 %     (6.4 )%     0.2 %     9.0 %     (13.2 )%     (1.2 )%

(1)   See Note 23 of the Consolidated Financial Statements for Restatement of Quarterly Financial Statements (unaudited).
(2)   For presentation purposes, certain numbers have been rounded.
(3)   The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006.

 

During the first quarter of 2006, the Corporation terminated certain derivatives used as economic hedges as part of the ALM process that did not qualify for SFAS 133 hedge accounting and entered into new derivative contracts to hedge certain of its exposures to changes in interest rates and foreign currency rates. These new contracts are designated in hedging relationships and meet the requirement for SFAS 133 hedge accounting. Prior to the termination of the economic hedges noted above, the changes in fair value of such contracts were recorded in Other Income and had a direct impact on Net Income. As a result, we estimate that Net Income will be reduced by approximately $0.03 per share in the first quarter of 2006.

 

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Effects of the Restatement

 

The following tables set forth the effects of the restatement relating to derivative transactions on major caption items within our Consolidated Statement of Income for the years 2004 and 2003, and our Consolidated Balance Sheet as of December 31, 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information.

 

Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Income

 

     Year Ended December 31

     2005

   2004

   2003

(Dollars in millions, except per share
information)
  

As Previously

Reported(1)


   Restated

  

As Previously

Reported


   Restated

  

As Previously

Reported


   Restated

Total interest income

   $ 58,696    $ 58,626    $ 43,224    $ 42,953    $ 31,563    $ 31,172

Total interest expense

     27,540      27,889      14,430      14,993      10,099      10,667

Net interest income

     31,156      30,737      28,794      27,960      21,464      20,505

Total noninterest income

     25,610      25,354      20,085      21,005      16,450      17,329

Total revenue

     56,766      56,091      48,879      48,965      37,914      37,834

Gains on sales of debt securities

     1,084      1,084      2,123      1,724      941      941

Income before income taxes

     25,155      24,480      21,221      20,908      15,861      15,781

Income tax expense

     8,269      8,015      7,078      6,961      5,051      5,019

Net income

   $ 16,886    $ 16,465    $ 14,143    $ 13,947    $ 10,810    $ 10,762

Net income available to common shareholders

   $ 16,868    $ 16,447    $ 14,127    $ 13,931    $ 10,806    $ 10,758

Per common share information

                                         

Earnings

   $ 4.21    $ 4.10    $ 3.76    $ 3.71    $ 3.63    $ 3.62

Diluted earnings

   $ 4.15    $ 4.04    $ 3.69    $ 3.64    $ 3.57    $ 3.55

(1)   The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006.

 

The impact of the restatement on our Consolidated Statement of Income was to reverse previously applied hedge accounting for affected hedging relationships in the relevant periods. For derivative instruments previously accounted for as fair value hedges, the net accruals for the derivatives were recorded to Net Interest Income, and net changes in fair values of the derivative instruments as a result of changes in rates were recorded as basis adjustments to the hedged items, such as Loans and Leases, and Long-term Debt. As a result of the restatement, the previous accounting treatment was reversed (i.e., the net accruals recorded to Net Interest Income were reversed and there was no basis adjustment for the hedged items), and the total changes in the fair values of the derivative instruments including interest accrual settlements were recorded directly to Other Income. In addition, for derivative instruments that were previously accounted for as cash flow hedges, the Corporation recorded accruals from the derivative instruments to Net Interest Income and recorded net changes in the fair values of the derivatives, net-of-tax, to Accumulated Other Comprehensive Income (OCI). As a result of the restatement, the cash flow hedge effects were reversed from Accumulated OCI and Net Interest Income, and recorded in Other Income. Accordingly, Net Interest Income decreased $419 million, $834 million and $959 million for 2005, 2004 and 2003, respectively. Other Income decreased $256 million in 2005, and increased $920 million and $879 million in 2004 and 2003.

 

The change in Other Income (included in Total Noninterest Income) after the restatement adjustments was primarily due to the effects of changes in rates in each respective year on the fair values of derivative instruments used in the ALM process. These derivative instruments were primarily comprised of receive fixed interest rate swaps, long futures and forward contracts, which generally increase in value when interest rates fall, and decrease in value when interest rates rise.

 

Gains on Sales of Debt Securities declined from the previously reported results by $399 million in the third quarter of 2004. The previously reported results did not recognize cash flow hedge losses upon sale of the underlying hedged securities. This cash flow hedge utilized a forward purchase agreement to hedge the variability in cash flows from the anticipated purchase of securities. The Corporation subsequently sold the related securities and did not previously reclassify the loss on the forward purchase agreement from Accumulated OCI into income.

 

14


Table of Contents

Bank of America Corporation and Subsidiaries

 

Consolidated Balance Sheet

 

     December 31

 
     2005

    2004

 
(Dollars in millions)   

As Previously

Reported(1)


    Restated

   

As Previously

Reported


    Restated

 

Loans and leases, net of allowance for loan and lease losses

   $ 565,737     $ 565,746     $ 513,211     $ 513,187  

Total assets

     1,291,795       1,291,803       1,110,457       1,110,432  

Accrued expenses and other liabilities

     31,749       31,938       41,243       41,590  

Long-term debt

     101,338       100,848       98,078       97,116  

Total liabilities

     1,190,571       1,190,270       1,010,812       1,010,197  

Retained earnings

     67,205       67,552       58,006       58,773  

Accumulated other comprehensive income (loss)

     (7,518 )     (7,556 )     (2,587 )     (2,764 )

Total shareholders’ equity

     101,224       101,533       99,645       100,235  

Total liabilities and shareholders’ equity

   $ 1,291,795     $ 1,291,803     $ 1,110,457     $ 1,110,432  

(1)   The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006.

 

The impact of the restatement on our Consolidated Balance Sheet was to reverse fair value basis adjustments to items that previously qualified as fair value hedged items such as Loans and Leases, and Long-term Debt. Additionally, changes in the fair value of derivative instruments that previously qualified for cash flow hedge accounting were reversed from Accumulated OCI and recorded in income. Tax effects of these adjustments impacted Accrued Expenses and Other Liabilities. Accordingly, as of December 31, 2005 and 2004, this resulted in an increase of $9 million and a decrease of $24 million in Loans and Leases, an increase in Accrued Expenses and Other Liabilities of $189 million and $347 million, a decrease in Long-term Debt of $490 million and $962 million, an increase in Retained Earnings of $347 million and $767 million, and a decrease in Accumulated OCI of $38 million and $177 million.

 

The following tables set forth the effects of the restatement relating to derivative transactions on major caption items within our Consolidated Statement of Income and our Consolidated Balance Sheet for the quarters in 2005 and 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information.

 

See Note 23 of the Consolidated Financial Statements for restated quarterly financial statements.

 

Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Income

 

    2005 Quarters

    Fourth

  Third

  Second

  First

(Dollars in millions, except per
share information)
 

As

Previously
Reported(1)


  Restated

 

As

Previously

Reported


  Restated

 

As

Previously

Reported


  Restated

 

As

Previously

Reported


  Restated

Total interest income

  $ 16,030   $ 16,018   $ 15,222   $ 15,205   $ 14,291   $ 14,267   $ 13,153   $ 13,136

Total interest expense

    8,170     8,159     7,449     7,470     6,641     6,630     5,280     5,630

Net interest income

    7,860     7,859     7,773     7,735     7,650     7,637     7,873     7,506

Total noninterest income

    6,262     5,951     6,834     6,416     6,365     6,955     6,149     6,032

Total revenue

    14,122     13,810     14,607     14,151     14,015     14,592     14,022     13,538

Gains on sales of debt securities

    71     71     29     29     325     325     659     659

Income before income taxes

    5,473     5,161     6,192     5,736     6,446     7,023     7,044     6,560

Income tax expense

    1,705     1,587     2,065     1,895     2,150     2,366     2,349     2,167

Net income

  $ 3,768   $ 3,574   $ 4,127   $ 3,841   $ 4,296   $ 4,657   $ 4,695   $ 4,393

Net income available to common shareholders

  $ 3,764   $ 3,570   $ 4,122   $ 3,836   $ 4,292   $ 4,653   $ 4,690   $ 4,388

Per common share information

                                               

Earnings

  $ 0.94   $ 0.89   $ 1.03   $ 0.96   $ 1.07   $ 1.16   $ 1.16   $ 1.09

Diluted earnings

  $ 0.93   $ 0.88   $ 1.02   $ 0.95   $ 1.06   $ 1.14   $ 1.14   $ 1.07

(1)   The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006.

 

15


Table of Contents

Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Income

 

    2004 Quarters

    Fourth

  Third

  Second

  First

(Dollars in millions, except per
share information)
  As
Previously
Reported


  Restated

  As
Previously
Reported


  Restated

  As
Previously
Reported


  Restated

  As
Previously
Reported


  Restated

Total interest income

  $ 12,195   $ 12,138   $ 11,487   $ 11,456   $ 10,990   $ 10,908   $ 8,552   $ 8,451

Total interest expense

    4,448     4,588     3,822     3,941     3,409     3,542     2,751     2,922

Net interest income

    7,747     7,550     7,665     7,515     7,581     7,366     5,801     5,529

Total noninterest income

    5,966     6,174     4,922     6,012     5,467     4,870     3,730     3,949

Total revenue

    13,713     13,724     12,587     13,527     13,048     12,236     9,531     9,478

Gains on sales of debt securities

    101     101     732     333     795     795     495     495

Income before income taxes

    5,775     5,786     5,648     6,189     5,826     5,014     3,972     3,919

Income tax expense

    1,926     1,931     1,884     2,086     1,977     1,673     1,291     1,271

Net income

  $ 3,849   $ 3,855   $ 3,764   $ 4,103   $ 3,849   $ 3,341   $ 2,681   $ 2,648

Net income available to common shareholders

  $ 3,844   $ 3,850   $ 3,759   $ 4,098   $ 3,844   $ 3,336   $ 2,680   $ 2,647

Per common share information

                                               

Earnings

  $ 0.95   $ 0.95   $ 0.93   $ 1.01   $ 0.95   $ 0.82   $ 0.93   $ 0.92

Diluted earnings

  $ 0.94   $ 0.94   $ 0.91   $ 0.99   $ 0.93   $ 0.81   $ 0.91   $ 0.90

 

Net Income volatility from the third quarter of 2004 to the second quarter of 2005 was primarily driven by the impact of changes in interest rates on the fair value of derivative instruments which did not qualify for SFAS 133 hedge accounting treatment. As rates decreased in the third quarter of 2004 and the second quarter of 2005, the Corporation’s Net Income increased driven by increases in the fair value of these derivative instruments. As rates increased in the first quarter of 2005, the Corporation’s Net Income decreased as the rise in rates adversely impacted the fair value of the derivative instruments.

 

Bank of America Corporation and Subsidiaries

 

Consolidated Balance Sheet

 

    2005 Quarters

 
    Fourth

    Third

    Second

    First

 
(Dollars in millions)  

As

Previously
Reported(1)


    Restated

   

As

Previously
Reported


    Restated

   

As

Previously
Reported


    Restated

   

As

Previously
Reported


    Restated

 

Loans and leases, net of allowance for loan and lease losses

  $ 565,737     $ 565,746     $ 546,277     $ 546,286     $ 521,099     $ 521,109     $ 521,153     $ 521,144  

Total assets

    1,291,795       1,291,803       1,252,259       1,252,267       1,246,330       1,246,339       1,212,239       1,212,229  

Accrued expenses and other liabilities

    31,749       31,938       32,976       33,250       34,470       34,940       35,081       35,319  

Long-term debt

    101,338       100,848       99,885       99,149       96,894       95,638       98,763       98,107  

Total liabilities

    1,190,571       1,190,270       1,151,001       1,150,539       1,145,790       1,145,004       1,113,720       1,113,302  

Retained earnings

    67,205       67,552       65,439       65,980       63,328       64,154       60,843       61,309  

Accumulated other comprehensive income (loss)

    (7,518 )     (7,556 )     (6,509 )     (6,580 )     (4,992 )     (5,023 )     (5,559 )     (5,617 )

Total shareholders’ equity

    101,224       101,533       101,258       101,728       100,540       101,335       98,519       98,927  

Total liabilities and shareholders’ equity

  $ 1,291,795     $ 1,291,803     $ 1,252,259     $ 1,252,267     $ 1,246,330     $ 1,246,339     $ 1,212,239     $ 1,212,229  

(1)   The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006.

 

16


Table of Contents

Bank of America Corporation and Subsidiaries

 

Consolidated Balance Sheet

 

    2004 Quarters

 
    Fourth

    Third

    Second

    First

 
(Dollars in millions)  

As

Previously
Reported


    Restated

   

As

Previously
Reported


    Restated

   

As

Previously
Reported


    Restated

   

As

Previously
Reported


    Restated

 

Loans and leases, net of allowance for loan and lease losses

  $ 513,211     $ 513,187     $ 502,916     $ 502,890     $ 489,714     $ 489,685     $ 369,888     $ 369,858  

Total assets

    1,110,457       1,110,432       1,072,829       1,072,802       1,024,731       1,024,701       799,974       799,942  

Accrued expenses and other liabilities

    41,243       41,590       28,851       29,205       28,682       28,747       18,635       19,269  

Long-term debt

    98,078       97,116       100,586       99,582       98,319       98,082       81,231       79,474  

Total liabilities

    1,010,812       1,010,197       974,818       974,168       928,910       928,738       751,198       750,075  

Retained earnings

    58,006       58,773       55,979       56,739       54,030       54,452       51,808       52,738  

Accumulated other comprehensive income (loss)

    (2,587 )     (2,764 )     (2,669 )     (2,806 )     (3,862 )     (4,142 )     (2,743 )     (2,582 )

Total shareholders’ equity

    99,645       100,235       98,011       98,634       95,821       95,963       48,776       49,867  

Total liabilities and shareholders’ equity

  $ 1,110,457     $ 1,110,432     $ 1,072,829     $ 1,072,802     $ 1,024,731     $ 1,024,701     $ 799,974     $ 799,942  

 

 

Recent Events

 

On June 30, 2005, we announced a definitive agreement to acquire all outstanding shares of MBNA Corporation (MBNA Merger), a leading provider of credit card and payment products, for approximately $35.0 billion in stock (85 percent) and cash (15 percent). This transaction closed on January 1, 2006. Under the terms of the agreement, MBNA stockholders received 0.5009 of a share of our common stock plus $4.125 for each MBNA share of common stock.

 

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 CCB’s 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 third 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. In October 2005, the Board declared a fourth quarter cash dividend which was paid on December 23, 2005 to common shareholders of record on December 2, 2005. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share payable on March 24, 2006 to shareholders of record on March 3, 2006.

 

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 closed our merger with FleetBoston Financial Corporation (FleetBoston Merger). The merger was accounted for under the purchase method of accounting. Accordingly, results for 2004 include the impact of FleetBoston for nine months of combined company results.

 

Economic Overview

 

In 2005, economic performance was strong, despite a near doubling in energy prices, persistent hikes in the Federal Funds rate and the destructive hurricanes in the second half of 2005. In the United States, real Gross Domestic Product rose a solid 3.6 percent. Global economic expansion was healthy, as robust growth in Asian nations was offset by weaker activity in core European nations. In the U.S., consumer spending was particularly resilient to the higher energy prices that reduced real purchasing power. Rising employment and wages lifted personal income and financial wealth reached an all-time high, while the rate of personal savings fell again. Following several years of robust increases in real estate activity and housing values, real estate softened in the second half of 2005 and the volume of mortgage refinancing receded. Heightened efficiencies generated sustained productivity gains that constrained costs of production and contributed to record-breaking operating profits and cash flows. While business investment spending was strong and employment gains firm, inventories remained lean. The strong business performance generated growth in business lending and supported healthy credit quality. Although the higher energy prices pushed up headline inflation, core inflation, which excludes the volatile food and energy prices, remained low. The Federal Reserve raised rates at every Federal Open Market Committee meeting in 2005, lifting the Federal Funds rate to 4.25 percent at year-end. However, these rate hikes were widely anticipated, contributing to very low bond yields and a significantly flatter yield curve.

 

 

17


Table of Contents

Performance Overview

 

Net Income totaled $16.5 billion, or $4.04 per diluted common share in 2005, increases of 18 percent and 11 percent from $13.9 billion, or $3.64 per diluted common share in 2004.

 

Business Segment Total Revenue and Net Income

 

     Total Revenue

    Net Income

(Dollars in millions)    2005

   

2004

(Restated)


    2005

  

2004

(Restated)


Global Consumer and Small Business Banking

   $ 28,876     $ 25,156     $ 7,156    $ 5,971

Global Business and Financial Services

     11,160       9,251       4,562      3,844

Global Capital Markets and Investment Banking

     9,009       9,046       1,736      1,924

Global Wealth and Investment Management

     7,393       5,933       2,388      1,605

All Other

     485       296       623      603
    


 


 

  

Total FTE basis(1)

     56,923       49,682       16,465      13,947

FTE adjustment(1)

     (832 )     (717 )     —        —  
    


 


 

  

Total

   $ 56,091     $ 48,965     $ 16,465    $ 13,947
    


 


 

  


(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 24.

 

Global Consumer and Small Business Banking

 

Net Income increased $1.2 billion, or 20 percent, to $7.2 billion in 2005. Driving the increase was the impact of FleetBoston, which contributed to increases in Net Interest Income, Card Income and Service Charges. Also impacting the increase in Net Income was higher Mortgage Banking Income driven by lower MSR impairment charges. Partially offsetting these increases was higher Provision for Credit Losses and Noninterest Expense. For more information on Global Consumer and Small Business Banking, see page 28.

 

Global Business and Financial Services

 

Net Income increased $718 million, or 19 percent, to $4.6 billion in 2005. The increase was primarily due to higher Net Interest Income as Average Loans and Leases, and Average Deposits increased. Also driving the increase in Net Income was higher other noninterest income, Service Charges and the impact of FleetBoston. Offsetting these increases were higher Noninterest Expense and a reduced benefit from Provision for Credit Losses. For more information on Global Business and Financial Services, see page 34.

 

Global Capital Markets and Investment Banking

 

Net Income decreased $188 million, or 10 percent, to $1.7 billion in 2005. The decrease was driven by lower trading-related Net Interest Income and Service Charges, and a reduced benefit from Provision for Credit Losses partially offset by higher Trading Account Profits, Equity Investment Gains, and Investment and Brokerage Services Income. For more information on Global Capital Markets and Investment Banking, see page 35.

 

Global Wealth and Investment Management

 

Net Income increased $783 million, or 49 percent, to $2.4 billion in 2005. The increase was due to higher Net Interest Income as we experienced increases in Average Deposits, and Average Loans and Leases driven by the impact of FleetBoston. Also impacting the increase in Net Income was higher Investment and Brokerage Services Income. Partially offsetting these increases was higher Personnel Expense. Total assets under management increased $30.9 billion to $482.4 billion at December 31, 2005. For more information on Global Wealth and Investment Management, see page 38.

 

All Other

 

Net Income increased $20 million, or three percent, to $623 million in 2005. This increase was primarily a result of an increase in Equity Investment Gains offset by a decrease in Gains on Sales of Debt Securities and Other Income. Other Income decreased primarily as a result of negative changes in the fair value of derivative instruments, which do not qualify for SFAS 133 hedge accounting, due to increasing rates during 2005. For more information on All Other, see page 40.

 

18


Table of Contents

Financial Highlights

 

Net Interest Income

 

Net Interest Income on a FTE basis increased $2.9 billion to $31.6 billion in 2005 compared to 2004. The primary drivers of the increase were the FleetBoston Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, higher domestic deposit levels and a larger ALM portfolio (primarily securities). Partially offsetting these increases was the adverse impact of spread compression due to the flattening of the yield curve, which contributed to lower Net Interest Income. The net interest yield on a FTE basis declined 33 basis points (bps) to 2.84 percent in 2005. This was primarily due to the adverse impact of an increase in lower-yielding, trading-related balances and spread compression, which was partially offset by growth in core deposit and consumer loans. For more information on Net Interest Income on a FTE basis, see Table I on page 80.

 

Noninterest Income

 

Noninterest Income

 

(Dollars in millions)    2005

  

2004

(Restated)


Service charges

   $ 7,704    $ 6,989

Investment and brokerage services

     4,184      3,614

Mortgage banking income

     805      414

Investment banking income

     1,856      1,886

Equity investment gains

     2,040      863

Card income

     5,753      4,592

Trading account profits

     1,812      869

Other income

     1,200      1,778
    

  

Total noninterest income

   $ 25,354    $ 21,005
    

  

 

Noninterest Income increased $4.3 billion to $25.4 billion for 2005 compared to 2004, due to the following which includes the impact of FleetBoston:

 

    Service Charges grew $715 million driven by organic account growth.

 

    Investment and Brokerage Services increased $570 million due to increases in asset management fees and mutual fund fees.

 

    Mortgage Banking Income increased $391 million due to lower MSR impairment charges which were partially offset by lower production income.

 

    Equity Investment Gains increased $1.2 billion, primarily in Principal Investing, as liquidity in the private equity markets increased.

 

    Card Income increased $1.2 billion due to increased interchange income and merchant discount fees driven by growth in debit and credit purchase volumes and the acquisition of NPC.

 

    Trading Account Profits increased $943 million due to increased customer activity driven by our strategic initiative in Global Capital Markets and Investment Banking 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. For more information on the Certificates, see Note 1 of the Consolidated Financial Statements.

 

    Other Income decreased $578 million primarily related to losses on derivative instruments used as economic hedges in the ALM process that did not qualify for SFAS 133 hedge accounting.

 

Provision for Credit Losses

 

The Provision for Credit Losses increased $1.2 billion to $4.0 billion in 2005 with credit card being the primary driver of the increase. Consumer credit card net charge-offs increased $1.3 billion from 2004 to $3.7 billion with an estimated $578 million related to the increase in bankruptcy filings prior to the effective date of the new bankruptcy legislation enacted in the fourth quarter of 2005. We estimate that approximately 70 percent of these bankruptcy-related charge-offs represent acceleration from 2006 and were provided for previously. Also impacting credit card net charge-offs and the Provision for Credit Losses were organic growth and seasoning of the portfolio, the impact of the FleetBoston portfolio and new advances on accounts for which previous loan balances were sold to the securitization trusts. The provision also increased as the rate of credit quality improvement slowed in the commercial portfolio and a $50 million reserve was established for estimated losses associated with Hurricane Katrina. Partially offsetting these increases was a reduction in the reserves of $250 million due to reduced uncertainties resulting from the completion of credit-related integration activities for FleetBoston.

 

19


Table of Contents

For more information on credit quality, see Credit Risk Management beginning on page 49.

 

Gains on Sales of Debt Securities

 

Gains on Sales of Debt Securities in 2005 were $1.1 billion compared to $1.7 billion in 2004. For more information on Gains on Sales of Debt Securities, see Market Risk Management beginning on page 65.

 

Noninterest Expense

 

Noninterest Expense

 

(Dollars in millions)    2005

   2004

Personnel

   $ 15,054    $ 13,435

Occupancy

     2,588      2,379

Equipment

     1,199      1,214

Marketing

     1,255      1,349

Professional fees

     930      836

Amortization of intangibles

     809      664

Data processing

     1,487      1,330

Telecommunications

     827      730

Other general operating

     4,120      4,457

Merger and restructuring charges

     412      618
    

  

Total noninterest expense

   $ 28,681    $ 27,012
    

  

 

Noninterest Expense increased $1.7 billion to $28.7 billion in 2005 compared to 2004, primarily due to the impact of FleetBoston and increases in personnel-related costs. Pre-tax cost savings from the FleetBoston Merger included in the above were $909 million in 2004 and $1.9 billion in 2005, which exceeded the $1.6 billion estimate in the October 2003 FleetBoston Merger announcement.

 

Income Tax Expense

 

Income Tax Expense was $8.0 billion in 2005, reflecting an effective tax rate of 32.7 percent. The effective tax rate was lower than 2004 primarily as a result of a tax benefit of $70 million related to the special one-time deduction associated with the repatriation of certain foreign earnings under the American Jobs Creation Act of 2004. In 2004, Income Tax Expense was $7.0 billion, reflecting an effective tax rate of 33.3 percent. For more information on Income Tax Expense, see Note 18 of the Consolidated Financial Statements.

 

20


Table of Contents

Balance Sheet Analysis

 

Table 1

 

Selected Balance Sheet Data

 

     December 31

   Average Balance

(Dollars in millions)    2005

  

2004

(Restated)


   2005

   2004
(Restated)


Assets

                           

Federal funds sold and securities purchased under agreements to resell

   $ 149,785    $ 91,360    $ 169,132    $ 128,981

Trading account assets

     131,707      93,587      133,502      104,616

Securities:

                           

Available-for-sale

     221,556      194,743      219,651      149,628

Held-to-maturity

     47      330      192      543

Loans and leases, net of allowance for loan and lease losses

     565,746      513,187      528,793      464,408

All other assets

     222,962      217,225      218,622      196,455
    

  

  

  

Total assets

   $ 1,291,803    $ 1,110,432    $ 1,269,892    $ 1,044,631
    

  

  

  

Liabilities

                           

Deposits

   $ 634,670    $ 618,570    $ 632,432    $ 551,559

Federal funds purchased and securities sold under agreements to repurchase

     240,655      119,741      230,751      165,218

Trading account liabilities

     50,890      36,654      57,689      35,326

Commercial paper and other short-term borrowings

     116,269      78,598      95,657      62,347

Long-term debt

     100,848      97,116      97,709      92,303

All other liabilities

     46,938      59,518      55,793      53,063
    

  

  

  

Total liabilities

     1,190,270      1,010,197      1,170,031      959,816

Shareholders’ equity

     101,533      100,235      99,861      84,815
    

  

  

  

Total liabilities and shareholders’ equity

   $ 1,291,803    $ 1,110,432    $ 1,269,892    $ 1,044,631
    

  

  

  

 

Balance Sheet Overview

 

At December 31, 2005, Total Assets were $1.3 trillion, an increase of $181.4 billion, or 16 percent, from December 31, 2004. Average Total Assets in 2005 increased $225.3 billion, or 22 percent, from 2004. Growth in Total Assets (both period end and average balances) in 2005 was attributable to increases in various line items primarily driven by an increase in trading-related activity due to the strategic growth initiative, growth in the ALM portfolio and growth in Loans and Leases. Average Total Assets also increased due to the impact of the FleetBoston Merger.

 

At December 31, 2005, Total Liabilities were $1.2 trillion, an increase of $180.1 billion, or 18 percent, from December 31, 2004. Average Total Liabilities in 2005 increased $210.2 billion, or 22 percent, from 2004. Growth in Total Liabilities (both period end and average balances) in 2005 was primarily due to increases in trading-related liabilities due to the strategic growth initiative, increase in wholesale funding and organic growth in core deposits. Average Total Liabilities also increased due to the impact of the FleetBoston Merger.

 

Federal Funds Sold and Securities Purchased under Agreements to Resell

 

The Federal Funds Sold and Securities Purchased under Agreements to Resell average balance increased $40.2 billion to $169.1 billion in 2005 from activities in the trading businesses as a result of expanded trading activities related to the strategic initiative and to meet a variety of customers’ needs.

 

Trading Account Assets

 

Our Trading Account Assets consist primarily of fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $28.9 billion to $133.5 billion in 2005, which was due to growth in client-driven market-making activities in interest rate, credit and equity products, and an increase in proprietary trading activities. For additional information, see Market Risk Management beginning on page 65.

 

Securities

 

AFS Securities include fixed income securities such as mortgage-backed securities, foreign debt, asset-backed securities, municipal debt, equity instruments, U.S. Government agencies and corporate debt. We use the AFS portfolio

 

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primarily to manage interest rate risk, liquidity risk and regulatory capital, and to take advantage of market conditions that create more economically attractive returns on these investments. The average balance in the AFS portfolio grew by $70.0 billion from 2004 primarily due to the reinvestment of available liquidity and as part of our ALM strategy. For additional information, see Market Risk Management beginning on page 66.

 

Loans and Leases, Net of Allowance for Loan and Lease Losses

 

Average Loans and Leases, net of allowance for loan and lease losses, were $528.8 billion in 2005, an increase of 14 percent from 2004. The increase of $40.0 billion in the consumer loan and lease portfolio and $24.6 billion in the commercial loan and lease portfolio was primarily due to organic loan growth. Average Loans and Leases, net of allowance for loan and lease losses, also increased due to the impact of the FleetBoston Merger. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see Credit Risk Management beginning on page 49, and Notes 7 and 8 of the Consolidated Financial Statements.

 

Deposits

 

Average Deposits increased $80.9 billion to $632.4 billion in 2005 compared to 2004 due to a $46.3 billion increase in average domestic interest-bearing deposits and a $24.1 billion increase in average noninterest-bearing deposits primarily due to organic growth including the impact of FleetBoston. We categorize our deposits as core or market-based deposits. Core deposits are generally customer-based and represent a stable, low-cost funding source that usually reacts more slowly to interest rate changes than market-based deposits. Core deposits include savings, NOW and money market accounts, consumer CDs and IRAs, and noninterest-bearing deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest-bearing deposits. Average core deposits increased $69.5 billion to $563.6 billion in 2005, a 14 percent increase from the prior year. The increase was distributed between consumer CDs, noninterest-bearing deposits, NOW and money market deposits, and savings. Average market-based deposit funding increased $11.4 billion to $68.8 billion in 2005 compared to 2004. The increase was primarily due to a $10.5 billion increase in foreign interest-bearing deposits.

 

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

 

The Federal Funds Purchased and Securities Sold under Agreements to Repurchase average balance increased $65.5 billion to $230.8 billion in 2005 as a result of expanded trading activities related to the strategic initiative and investor client activities.

 

Trading Account Liabilities

 

Our Trading Account Liabilities consist primarily of short positions in fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $22.4 billion to $57.7 billion in 2005, which was due to growth in client-driven market-making activities in interest rate, credit and equity products, and an increase in proprietary trading activities. For additional information, see Market Risk Management beginning on page 66.

 

Commercial Paper and Other Short-term Borrowings

 

Commercial Paper and Other Short-term Borrowings provide a funding source to supplement Deposits in our ALM strategy. The average balance increased $33.3 billion to $95.7 billion in 2005 due to funding needs associated with the growth of core asset portfolios, primarily Loans and Leases, and AFS Securities.

 

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Table 2

 

Five-Year Summary of Selected Financial Data(1)

 

(Dollars in millions, except per share information)    2005

   

2004

(Restated)


   

2003

(Restated)


   

2002

(Restated)


   

2001

(Restated)


 

Income statement

                                        

Net interest income

   $ 30,737     $ 27,960     $ 20,505     $ 20,117     $ 19,904  

Noninterest income

     25,354       21,005       17,329       14,874       15,863  

Total revenue

     56,091       48,965       37,834       34,991       35,767  

Provision for credit losses

     4,014       2,769       2,839       3,697       4,287  

Gains on sales of debt securities

     1,084       1,724       941       630       475  

Noninterest expense

     28,681       27,012       20,155       18,445       20,709  

Income before income taxes

     24,480       20,908       15,781       13,479       11,246  

Income tax expense

     8,015       6,961       5,019       3,926       3,747  

Net income

     16,465       13,947       10,762       9,553       7,499  

Average common shares issued and outstanding
(in thousands)

     4,008,688       3,758,507       2,973,407       3,040,085       3,189,914  

Average diluted common shares issued and outstanding
(in thousands)

     4,068,140       3,823,943       3,030,356       3,130,935       3,251,308  
    


 


 


 


 


Performance ratios

                                        

Return on average assets

     1.30 %     1.34 %     1.44 %     1.46 %     1.16 %

Return on average common shareholders’ equity

     16.51       16.47       21.50       19.96       15.42  

Return on average tangible common shareholders’ equity(2)

     34.03       32.59       29.20       27.53       23.51  

Total ending equity to total ending assets

     7.86       9.03       6.76       7.92       7.92  

Total average equity to total average assets

     7.86       8.12       6.69       7.33       7.55  

Dividend payout

     46.61       46.31       39.76       38.79       48.40  
    


 


 


 


 


Per common share data

                                        

Earnings

   $ 4.10     $ 3.71     $ 3.62     $ 3.14     $ 2.35  

Diluted earnings

     4.04       3.64       3.55       3.05       2.30  

Dividends paid

     1.90       1.70       1.44       1.22       1.14  

Book value

     25.32       24.70       16.86       17.04       15.63  
    


 


 


 


 


Average balance sheet

                                        

Total loans and leases

   $ 537,218     $ 472,617     $ 356,220     $ 336,820     $ 365,447  

Total assets

     1,269,892       1,044,631       749,104       653,732       644,887  

Total deposits

     632,432       551,559       406,233       371,479       362,653  

Long-term debt

     97,709       92,303       67,077       65,550       69,621  

Common shareholders’ equity

     99,590       84,584       50,035       47,837       48,610  

Total shareholders’ equity

     99,861       84,815       50,091       47,898       48,678  
    


 


 


 


 


Capital ratios (at year end)

                                        

Risk-based capital:

                                        

Tier 1

     8.25 %     8.20 %     8.02 %     8.41 %     8.44 %

Total

     11.08       11.73       12.05       12.63       12.81  

Leverage

     5.91       5.89       5.86       6.44       6.67  
    


 


 


 


 


Market price per share of common stock

                                        

Closing

   $ 46.15     $ 46.99     $ 40.22     $ 34.79     $ 31.48  

High closing

     47.08       47.44       41.77       38.45       32.50  

Low closing

     41.57       38.96       32.82       27.08       23.38  
    


 


 


 


 



(1)   As a result of the adoption of SFAS 142 on January 1, 2002, we no longer amortize Goodwill. Goodwill amortization expense was $662 million in 2001.
(2)   Return on average tangible common shareholders’ equity equals net income available to common shareholders plus amortization of intangibles, divided by average common shareholders’ equity less goodwill, core deposit intangibles and other intangibles.

 

MBNA Merger Overview

 

Pursuant to the Agreement and Plan of Merger, dated June 30, 2005, by and between the Corporation and MBNA (the MBNA Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of MBNA on January 1, 2006. The MBNA Merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the company by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations. MBNA’s results of operations will be included in the Corporation’s results beginning January 1, 2006. The transaction will be accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA Merger date.

 

Under the terms of the MBNA Merger Agreement, MBNA stockholders received 0.5009 of a share of the Corporation’s common stock plus $4.125 for each MBNA share of common stock. As provided by the MBNA Merger

 

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Agreement, approximately 1.3 billion shares of MBNA common stock were exchanged for approximately 631 million shares of the Corporation’s common stock. At the date of the MBNA Merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. On November 3, 2005, MBNA redeemed all shares of its 7 1/2% Series A Cumulative Preferred Stock and Series B Adjustable Rate Cumulative Preferred Stock, in accordance with the terms of the MBNA Merger Agreement.

 

Supplemental Financial Data

 

Table 3 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by accounting principles generally accepted in the United States (GAAP). Other companies may define or calculate supplemental financial data differently.

 

Operating Basis Presentation

 

In managing our business, we may at times look at performance excluding certain non-recurring items. For example, as an alternative to Net Income, we view results on an operating basis, which represents Net Income excluding Merger and Restructuring Charges. The operating basis of presentation is not defined by GAAP. We believe that the exclusion of Merger and Restructuring Charges, which represent events outside our normal operations, provides a meaningful year-to-year comparison and is more reflective of normalized operations.

 

Net Interest Income—FTE Basis

 

In addition, we view Net Interest Income and related ratios and analysis (i.e. efficiency ratio, net interest yield and operating leverage) on a FTE basis. Although this is a non-GAAP measure, we believe managing the business with Net Interest Income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, Net Interest Income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in Income Tax Expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of Net Interest Income arising from taxable and tax-exempt sources.

 

Performance Measures

 

As mentioned above, certain performance measures including the efficiency ratio, net interest yield, and operating leverage utilize Net Interest Income (and thus Total Revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many basis points we are earning over the cost of funds. Operating leverage measures the total percentage revenue growth minus the total percentage expense growth for the corresponding period. During our annual integrated planning process, we set operating leverage and efficiency targets for the Corporation and each line of business. Targets vary by year and by business and are based on a variety of factors, including: maturity of the business, investment appetite, competitive environment, market factors, and other items (e.g. risk appetite). The aforementioned performance measures and ratios, earnings per common share (EPS), return on average assets, return on average common shareholders’ equity and dividend payout ratio, as well as those measures discussed more fully below, are presented in Table 3.

 

Return on Average Common Shareholders’ Equity, Return on Average Tangible Common Shareholders’ Equity and Shareholder Value Added

 

We also evaluate our business based upon return on average common shareholders’ equity (ROE), return on average tangible common shareholders’ equity (ROTE) and shareholder value added (SVA) measures. ROE, ROTE and SVA utilize non-GAAP allocation methodologies. ROE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity allocated to that unit. ROTE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity reduced by Goodwill, Core Deposit Intangibles and Other Intangibles, allocated to that unit. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. For more information, see Basis of Presentation beginning on page 27. These measures are used to evaluate our use of equity (i.e. capital) at the individual unit level and are integral components in the analytics for resource allocation. Using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments. Investments and initiatives are analyzed using SVA during the annual planning process for maximizing allocation of corporate resources. In addition, profitability, relationship and investment models all use ROE and SVA as key measures to support our overall growth goal.

 

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Table 3

 

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

 

(Dollars in millions, except per share information)   2005

    2004
(Restated)


    2003
(Restated)


    2002
(Restated)


    2001
(Restated)


 

Operating basis(1,2)

                                       

Operating earnings

  $ 16,740     $ 14,358     $ 10,762     $ 9,553     $ 8,749  

Operating earnings per common share

    4.17       3.82       3.62       3.14       2.74  

Diluted operating earnings per common share

    4.11       3.75       3.55       3.05       2.69  

Shareholder value added

    6,594       5,718       5,475       4,030       3,794  

Return on average assets

    1.32 %     1.37 %     1.44 %     1.46 %     1.36 %

Return on average common shareholders’ equity

    16.79       16.96       21.50       19.96       17.99  

Return on average tangible common shareholders’ equity

    34.57       33.51       29.20       27.53       27.02  

Operating efficiency ratio (FTE basis)

    49.66       53.13       52.38       51.84       53.74  

Dividend payout ratio

    45.84       44.98       39.76       38.79       41.48  

Operating leverage (combined basis)(3)

    8.33       0.44       (6.06 )     n/a       n/a  
   


 


 


 


 


FTE basis data

                                       

Net interest income

  $ 31,569     $ 28,677     $ 21,149     $ 20,705     $ 20,247  

Total revenue

    56,923       49,682       38,478       35,579       36,110  

Net interest yield

    2.84 %     3.17 %     3.26 %     3.63 %     3.61 %

Efficiency ratio

    50.38       54.37       52.38       51.84       57.35  
   


 


 


 


 


Reconciliation of net income to operating earnings

                                       

Net income

  $ 16,465     $ 13,947     $ 10,762     $ 9,553     $ 7,499  

Merger and restructuring charges

    412       618       —         —         1,700  

Related income tax benefit

    (137 )     (207 )     —         —         (450 )
   


 


 


 


 


Operating earnings

  $ 16,740     $ 14,358     $ 10,762     $ 9,553     $ 8,749  
   


 


 


 


 


Reconciliation of EPS to operating EPS

                                       

Earnings per common share

  $ 4.10     $ 3.71     $ 3.62     $ 3.14     $ 2.35  

Effect of merger and restructuring charges, net of tax benefit

    0.07       0.11       —         —         0.39  
   


 


 


 


 


Operating earnings per common share

  $ 4.17     $ 3.82     $ 3.62     $ 3.14     $ 2.74  
   


 


 


 


 


Reconciliation of diluted EPS to diluted operating EPS

                                       

Diluted earnings per common share

  $ 4.04     $ 3.64     $ 3.55     $ 3.05     $ 2.30  

Effect of merger and restructuring charges, net of tax benefit

    0.07       0.11       —         —         0.39  
   


 


 


 


 


Diluted operating earnings per common share

  $ 4.11     $ 3.75     $ 3.55     $ 3.05     $ 2.69  
   


 


 


 


 


Reconciliation of net income to shareholder value added

                                       

Net income

  $ 16,465     $ 13,947     $ 10,762     $ 9,553     $ 7,499  

Amortization of intangibles(2)

    809       664       217       218       878  

Merger and restructuring charges, net of tax benefit

    275       411       —         —         1,250  
   


 


 


 


 


Cash basis earnings on an operating basis

    17,549       15,022       10,979       9,771       9,627  

Capital charge

    (10,955 )     (9,304 )     (5,504 )     (5,741 )     (5,833 )
   


 


 


 


 


Shareholder value added

  $ 6,594     $ 5,718     $ 5,475     $ 4,030     $ 3,794  
   


 


 


 


 


Reconciliation of return on average assets to operating return on average assets

                                       

Return on average assets

    1.30 %     1.34 %     1.44 %     1.46 %     1.16 %

Effect of merger and restructuring charges, net of tax benefit

    0.02       0.03       —         —         0.20  
   


 


 


 


 


Operating return on average assets

    1.32 %     1.37 %     1.44 %     1.46 %     1.36 %
   


 


 


 


 


Reconciliation of return on average common shareholders’ equity to operating return on average common shareholders’ equity

                                       

Return on average common shareholders’ equity

    16.51 %     16.47 %     21.50 %     19.96 %     15.42 %

Effect of merger and restructuring charges, net of tax benefit

    0.28       0.49       —         —         2.57  
   


 


 


 


 


Operating return on average common shareholders’ equity

    16.79 %     16.96 %     21.50 %     19.96 %     17.99 %
   


 


 


 


 


Reconciliation of return on average tangible common shareholders’ equity to operating return on average tangible common shareholders’ equity

                                       

Return on average tangible common shareholders’ equity

    34.03 %     32.59 %     29.20 %     27.53 %     23.51 %

Effect of merger and restructuring charges, net of tax benefit

    0.54       0.92       —         —         3.51  
   


 


 


 


 


Operating return on average tangible common shareholders’ equity

    34.57 %     33.51 %     29.20 %     27.53 %     27.02 %
   


 


 


 


 


Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis)

                                       

Efficiency ratio

    50.38 %     54.37 %     52.38 %     51.84 %     57.35 %

Effect of merger and restructuring charges, net of tax benefit

    (0.72 )     (1.24 )     —         —         (3.61 )
   


 


 


 


 


Operating efficiency ratio

    49.66 %     53.13 %     52.38 %     51.84 %     53.74 %
   


 


 


 


 


Reconciliation of dividend payout ratio to operating dividend payout ratio

                                       

Dividend payout ratio

    46.61 %     46.31 %     39.76 %     38.79 %     48.40 %

Effect of merger and restructuring charges, net of tax benefit

    (0.77 )     (1.33 )     —         —         (6.92 )
   


 


 


 


 


Operating dividend payout ratio

    45.84 %     44.98 %     39.76 %     38.79 %     41.48 %
   


 


 


 


 


Reconciliation of operating leverage to operating leverage (combined basis)

                                       

Operating leverage

    8.41 %     (4.91 )%     (1.12 )%     n/a       n/a  

Effect of merger and restructuring charges

    (0.93 )     3.07       —         n/a       n/a  

Effect of FleetBoston pro forma results

    0.85       2.28       (4.94 )     n/a       n/a  
   


 


 


 


 


Operating leverage (combined basis)(3)

    8.33 %     0.44 %     (6.06 )%     n/a       n/a  
   


 


 


 


 



(1)   Operating basis excludes Merger and Restructuring Charges. Merger and Restructuring Charges were $412 million and $618 million in 2005 and 2004. Merger and Restructuring Charges in 2001 represented Provision for Credit Losses of $395 million and Noninterest Expense of $1.3 billion, both of which were related to the exit of certain consumer finance businesses.
(2)   As a result of the adoption of SFAS 142 on January 1, 2002, we no longer amortize Goodwill. Goodwill amortization expense was $662 million in 2001.
(3)   Operating leverage (combined basis) includes the results of FleetBoston for the year ended December 31, 2004 and 2003 on a pro forma basis. In 2004, operating leverage was impacted by the costs to integrate FleetBoston; however, in 2005, operating leverage benefited from FleetBoston Merger’s cost savings.
n/a   = not available

 

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Table of Contents

Core Net Interest Income—Managed Basis

 

In managing our business, we review core net interest income on a managed basis, which adjusts reported Net Interest Income on a FTE basis for the impact of trading-related activities and revolving securitizations. As discussed in the Global Capital Markets and Investment Banking business segment section beginning on page 35, we evaluate our trading results and strategies based on total trading-related revenue, calculated by combining trading-related Net Interest Income with Trading Account Profits. We also adjust for loans that we originated and sold into revolving credit card, home equity line and commercial loan securitizations. Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. An analysis of core net interest income—managed basis, core average earning assets—managed basis and core net interest yield on earning assets—managed basis, which adjusts for the impact of these two non-core items from reported Net Interest Income on a FTE basis, is shown below.

 

Table 4

 

Core Net Interest Income—Managed Basis

 

(Dollars in millions)    2005

    2004
(Restated)


    2003
(Restated)


 

Net interest income

                        

As reported (FTE basis)

   $ 31,569     $ 28,677     $ 21,149  

Impact of trading-related net interest income

     (1,444 )     (2,039 )     (2,235 )
    


 


 


Core net interest income

     30,125       26,638       18,914  

Impact of revolving securitizations

     708       882       311  
    


 


 


Core net interest income—managed basis

   $ 30,833     $ 27,520     $ 19,225  
    


 


 


Average earning assets

                        

As reported

   $ 1,111,994     $ 905,273     $ 649,598  

Impact of trading-related earning assets

     (299,374 )     (227,230 )     (172,428 )
    


 


 


Core average earning assets

     812,620       678,043       477,170  

Impact of revolving securitizations

     8,440       10,181       3,342  
    


 


 


Core average earning assets—managed basis

   $ 821,060     $ 688,224     $ 480,512  
    


 


 


Net interest yield contribution

                        

As reported (FTE basis)

     2.84 %     3.17 %     3.26 %

Impact of trading-related activities

     0.87       0.76       0.70  
    


 


 


Core net interest yield on earning assets

     3.71       3.93       3.96  

Impact of revolving securitizations

     0.04       0.06       0.03  
    


 


 


Core net interest yield on earning assets—managed basis

     3.75 %     3.99 %     3.99 %
    


 


 


 

Core net interest income on a managed basis increased $3.3 billion for 2005. This increase was driven by the impact of the FleetBoston Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, higher domestic deposit levels and a larger ALM portfolio (primarily securities). Partially offsetting these increases was the adverse impact of spread compression due to the flattening of the yield curve.

 

Core average earning assets on a managed basis increased $132.8 billion primarily due to higher ALM levels (primarily securities) and higher levels of consumer loans (primarily home equity and credit card). The increases in these assets were due to organic growth as well as the impact of the FleetBoston Merger.

 

The core net interest yield on a managed basis decreased 24 bps as a result of the impact of spread compression due to flattening of the yield curve and a larger ALM portfolio partially offset by higher levels of core deposits and consumer loans.

 

Business Segment Operations

 

Segment Description

 

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. 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. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new

 

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segment is called Global Corporate and Investment Banking. This new segment will enable us to more effectively leverage the universal bank model in servicing our business clients. In the universal bank model, teams of consumer, commercial and investment bankers work together to provide all clients, regardless of size, the right combination of products and services to meet their needs. All Other consists primarily of Equity Investments, the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with the ALM process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities. For more information on All Other, see page 40.

 

Basis of Presentation

 

We prepare and evaluate segment results using certain non-GAAP methodologies and performance measures many of which are discussed in Supplemental Financial Data on page 24. We begin by evaluating the operating results of the businesses, which by definition excludes Merger and Restructuring Charges. The segment results also reflect certain revenue and expense methodologies, which are utilized to determine operating income. The Net Interest Income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net Interest Income also reflects an allocation of Net Interest Income generated by assets and liabilities used in our ALM process. The results of the business segments will fluctuate based on the performance of corporate ALM activities. The restatement impact to Net Interest Income, associated with the economic hedges that did not qualify for SFAS 133 hedge accounting, was included in All Other, and was not allocated to the business segments.

 

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 costs of certain centralized or shared functions are allocated based on methodologies which reflect utilization.

 

Equity is allocated to the business segments using a risk-adjusted methodology incorporating each unit’s credit, market and operational risk components. The nature of these risks is discussed further beginning on page 49. ROE is calculated by dividing Net Income by allocated equity. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital (i.e. equity). Cash basis earnings on an operating basis is defined as Net Income adjusted to exclude Merger and Restructuring Charges, and Amortization of Intangibles. The charge for capital is calculated by multiplying 11 percent (management’s estimate of the shareholders’ minimum required rate of return on capital invested) by average total common shareholders’ equity at the corporate level and by average allocated equity at the business segment level. Average equity is allocated to the business level using a methodology identical to that used in the ROE calculation. Management reviews the estimate of the rate used to calculate the capital charge annually. The Capital Asset Pricing Model is used to estimate our cost of capital.

 

See Note 20 of the Consolidated Financial Statements for additional business segment information, selected financial information for the business segments and reconciliations to consolidated Total Revenue and Net Income amounts.

 

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Global Consumer and Small Business Banking

 

The strategy of Global Consumer and Small Business Banking is to attract, retain and deepen customer relationships. We achieve this strategy through our ability to offer a wide range of products and services through a franchise that stretches coast to coast through 29 states and the District of Columbia. We serve more than 38 million consumer and small business relationships utilizing our network of 5,873 banking centers, 16,785 domestic branded ATMs, and telephone and Internet channels. Within Global Consumer and Small Business Banking, our most significant product groups are Card Services, Consumer Real Estate and Consumer Deposit and Debit Products.

 

Global Consumer and Small Business Banking

 

(Dollars in millions)    2005

    2004

 

Net interest income (FTE basis)

   $ 17,053     $ 15,911  

Noninterest income:

                

Service charges

     4,996       4,329  

Mortgage banking income

     1,012       589  

Card income(1)

     5,476       4,359  

All other income

     339       (32 )
    


 


Total noninterest income

     11,823       9,245  
    


 


Total revenue (FTE basis)

     28,876       25,156  

Provision for credit losses

     4,271       3,333  

Gains (losses) on sales of debt securities

     (2 )     117  

Noninterest expense

     13,440       12,555  
    


 


Income before income taxes

     11,163       9,385  

Income tax expense

     4,007       3,414  
    


 


Net income

   $ 7,156     $ 5,971  
    


 


Shareholder value added

   $ 4,013     $ 3,325  

Net interest yield (FTE basis)

     5.63 %     5.46 %

Return on average equity

     21.31       21.28  

Efficiency ratio (FTE basis)

     46.54       49.91  

Average:

                

Total loans and leases

   $ 144,019     $ 122,148  

Total assets

     330,342       316,204  

Total deposits

     306,038       283,481  

Common equity/Allocated equity

     33,589       28,057  

Year end:

                

Total loans and leases

     151,646       139,507  

Total assets

     335,551       336,902  

Total deposits

     306,083       299,062  

(1)   Includes Credit Card Income of $3,847 million and $3,127 million for 2005 and 2004, and Debit Card Income of $1,629 million and $1,232 million for 2005 and 2004.

 

In 2005, Net Interest Income increased $1.1 billion, or seven percent. Growth in deposits, a low cost source of funding, positively impacted Net Interest Income. Average Deposits increased $22.6 billion, or eight percent, driven by the impact of FleetBoston customers, deepening existing relationships and our focus on attracting new customers. Partially offsetting this growth was the migration of account balances of $28.1 billion from Global Consumer and Small Business Banking to Global Wealth and Investment Management. Net Interest Income was also positively impacted by the $21.9 billion, or 18 percent, increase in Average Loans and Leases. This increase was driven by higher average balances on home equity loans and lines of credit and average held credit card outstandings. The growth in held credit card outstandings was due to the impact of FleetBoston, increases in purchase volumes, the addition of more than 5 million new accounts primarily through our branch network and direct marketing programs, and new advances on accounts for which previous loan balances were sold to the securitization trusts.

 

Noninterest Income increased $2.6 billion, or 28 percent, in 2005. The increase was primarily due to increases of $1.1 billion, or 26 percent, in Card Income, $667 million, or 15 percent, in Service Charges and $423 million in Mortgage Banking Income. Card Income increased mainly due to higher purchase volumes for credit and debit cards, the impact of the NPC acquisition in the fourth quarter of 2004, and increases in average managed credit card outstandings. The increases in card purchase volumes and average managed credit card outstandings were due to continued growth in our card business as we more effectively leveraged our branch network. The increase in Service Charges was due primarily

 

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to the growth in new accounts. Mortgage Banking Income increased primarily due to a $400 million decrease in the impairment of MSRs. Also impacting these increases was the impact of FleetBoston.

 

The Provision for Credit Losses increased $938 million, or 28 percent, to $4.3 billion in 2005 mainly due to credit card. For further discussion of the increased Provision for Credit Losses related to credit card, see the following section, Card Services.

 

Noninterest Expense grew $885 million, or seven percent in 2005. The majority of the increase was due to the impact of FleetBoston and NPC.

 

Card Services

 

Card Services, which excludes debit cards, provides a broad offering of credit cards to an array of customers including consumers and small businesses. Our products include traditional credit cards, and a variety of co-branded and affinity card products. We also provide processing services for merchant card receipts, a business where we are a market leader, due in part to our acquisition of NPC during the fourth quarter of 2004.

 

We evaluate our Card Services business on both a held and managed basis (a non-GAAP measure). Managed basis treats securitized loan receivables as if they were still on the balance sheet and presents the earnings on the sold loan receivables as if they were not sold. We evaluate credit card operations on a managed basis as the receivables that have been securitized are subject to the same underwriting standards and ongoing monitoring as the held loans. The credit performance of the managed portfolio is important to understanding the results of card operations.

 

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The following table reconciles the credit card portfolio on a held basis to a managed basis to reflect the impact of securitizations. For assets that have been securitized, we record Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, as we are compensated for servicing income and gains or losses on securitizations. In a securitization, the credit card receivables, not the ongoing relationships, are sold to the trust. After the revolving period of the securitization, assuming no new securitizations, the newly generated credit card receivables arising from these relationships are recorded on our balance sheet. This has the effect of increasing Loans and Leases and increasing Net Interest Income and the Provision for Credit Losses (including net charge-offs), with a reduction in Noninterest Income.

 

Credit Card Services

 

(Dollars in millions)    2005

    2004

 

Income Statement Data

                

Held net interest income(1)

   $ 4,984     $ 4,283  

Securitizations impact

     572       799  
    


 


Managed net interest income

     5,556       5,082  
    


 


Held noninterest income(1)

     3,951       3,243  

Securitizations impact

     (115 )     (185 )
    


 


Managed noninterest income

     3,836       3,058  
    


 


Held total revenue(1)

     8,935       7,526  

Securitizations impact

     457       614  
    


 


Managed total revenue

     9,392       8,140  
    


 


Held provision for credit losses(1)

     3,999       3,112  

Securitizations impact

     434       524  
    


 


Managed credit impact

     4,433       3,636  
    


 


Balance Sheet Data

                

Average held credit card outstandings(1)

   $ 53,997     $ 43,435  

Securitizations impact

     5,051       6,861  
    


 


Average managed credit card outstandings

   $ 59,048     $ 50,296  
    


 


Ending held credit card outstandings(1)

   $ 58,548     $ 51,726  

Securitizations impact

     2,237       6,903  
    


 


Ending managed credit card outstandings

   $ 60,785     $ 58,629  
    


 


Credit Quality Statistics

                

Held net charge-offs(1)

   $ 3,652     $ 2,305  

Securitizations impact

     434       524  
    


 


Managed credit card net losses

   $ 4,086     $ 2,829  
    


 


Held net charge-offs(1)

     6.76 %     5.31 %

Securitizations impact

     0.16       0.31  
    


 


Managed credit card net losses

     6.92 %     5.62 %
    


 



(1)   Held basis is a GAAP measure.

 

Strong credit card growth drove Card Services revenue in 2005. Held credit card revenue increased $1.4 billion, or 19 percent, to $8.9 billion. Contributing to this increase was the $701 million increase in held Net Interest Income, due to a $10.6 billion, or 24 percent, increase in average held credit card outstandings. The increase in average held credit card outstandings was due to the impact of FleetBoston, increases in purchase volumes, the addition of more than 5 million new accounts primarily through our branch network and direct marketing programs, and new advances on accounts for which previous loan balances were sold to the securitization trusts.

 

Also driving Card Services held revenue was an increase in Noninterest Income of $708 million, or 22 percent, in 2005. The increase resulted from higher merchant discount fees, interchange fees, cash advance fees and late fees. Merchant discount fees increased $418 million primarily due to the acquisition of NPC. Interchange fees increased $87 million mainly due to a $10.4 billion, or 13 percent, increase in consumer credit card purchase volumes. Cash advance fees increased $64 million due to higher balance transfers. Late fees increased $62 million in 2005.

 

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Held Provision for Credit Losses increased $887 million to $4.0 billion in 2005, driven primarily by higher net charge-offs. Consumer card net charge-offs were $3.7 billion, or 6.76 percent in 2005 compared to $2.3 billion, or 5.31 percent in 2004. Higher credit card net charge-offs were driven by an increase in bankruptcy related charge-offs of $578 million as card customers “rushed to file” ahead of the new bankruptcy law. Also impacting net charge-offs were organic portfolio growth and seasoning, increases effective in 2004 in credit card minimum payment requirements, the impact of FleetBoston and new advances on accounts for which previous loan balances were sold to the securitization trusts. We estimate that approximately 70 percent of the increased bankruptcy-related charge-offs represent acceleration from 2006. Excluding bankruptcy-related charge-offs representing acceleration from 2006 and charge-offs associated with the 2004 changes in credit card minimum payment requirements that were provided for in late 2004, the increased net charge-offs were the primary driver of the higher Provision for Credit Losses. In addition, the Provision for Credit Losses was impacted by new advances on accounts for which previous loan balances were sold to the securitization trusts, and the establishment of reserves in 2005 for additional changes made in late 2005 in credit card minimum payment requirements.

 

Managed card revenue increased $1.3 billion, or 15 percent, to $9.4 billion in 2005, driven by a $474 million, or nine percent, increase in managed Net Interest Income, and a $778 million, or 25 percent increase, in managed Noninterest Income. Average managed credit card outstandings were $59.0 billion in 2005 compared to $50.3 billion in 2004. The impact of FleetBoston and organic growth drove the increases in 2005.

 

Managed consumer credit card net losses were $4.1 billion, or 6.92 percent of total average managed credit card loans in 2005, compared to $2.8 billion, or 5.62 percent in 2004. Higher managed credit card net losses were driven by an increase in bankruptcy net losses resulting from the change in the bankruptcy law, continued growth and seasoning, increases effective in 2004 in credit card minimum payment requirements and the impact of FleetBoston. For more information, see Credit Risk Management beginning on page 49.

 

Consumer Real Estate

 

Consumer Real Estate generates revenue by providing an extensive line of mortgage products and services to customers nationwide. Consumer Real Estate products are available to our customers through a retail network of personal bankers located in 5,873 banking centers, dedicated sales account executives in over 150 locations and through a dedicated sales force offering our customers direct telephone and online access to our products. Additionally, we serve our customers through a partnership with more than 6,600 mortgage brokers in 49 states. The mortgage product offerings for home purchase and refinancing needs include fixed and adjustable rate loans, and home equity lines of credit. To manage this portfolio, these products are either sold into the secondary mortgage market to investors while retaining Bank of America customer relationships or are held on our balance sheet for ALM purposes.

 

Consumer Real Estate is managed with a focus on its two primary businesses, first mortgage and home equity. The first mortgage business includes the origination, fulfillment and servicing of first mortgage loan products. Servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers, and accounting for and remitting principal and interest payments to investors. Servicing income includes ancillary income derived in connection with these activities, such as late fees. The home equity business includes lines of credit and second mortgages. These two businesses provide us with a business model that meets customer real estate borrowing needs in various interest rate cycles.

 

Total revenue for the Consumer Real Estate business increased $558 million to $3.2 billion in 2005. The following table shows the Global Consumer and Small Business Banking revenue components of the Consumer Real Estate business.

 

Consumer Real Estate Revenue

 

(Dollars in millions)    2005

   2004

 

Net Interest Income

               

Home equity

   $ 1,340    $ 1,108  

Residential first mortgage

     806      1,140  
    

  


Net interest income

     2,146      2,248  
    

  


Mortgage banking income(1)

     1,012      589  

Trading account profits

     —        (349 )

Other income

     66      178  
    

  


Total consumer real estate revenue

   $ 3,224    $ 2,666  
    

  



(1)   For more information, see the following Mortgage Banking Income table.

 

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Net Interest Income decreased $102 million primarily driven by the impact of spread compression due to flattening of the yield curve and the $2.3 billion decrease in average residential first mortgage balances. This decrease was partially offset by higher average balances in the home equity portfolio, which grew $11.2 billion, or 31 percent, to $47.7 billion which was attributable to account growth and larger line sizes resulting from enhanced product offerings, the expanding home equity market and the impact of FleetBoston.

 

In 2005, home equity average balances across all business lines grew $18.8 billion, or 42 percent, to $63.9 billion and home equity production improved $15.3 billion, or 27 percent, to $72.0 billion compared to 2004.

 

In 2005, there were no Trading Account Profits compared to a loss of $349 million in 2004, related to the Certificates. Effective June 1, 2004, the Certificates were converted to MSRs. Prior to the conversion, changes in the value of the Certificates, MSRs and derivatives used for risk management were recognized as Trading Account Profits. In 2004, Trading Account Profits included $342 million of downward adjustments for changes to valuation assumptions and prepayment adjustments.

 

Mortgage Banking Income increased $423 million to $1.0 billion in 2005. The following summarizes the components of Mortgage Banking Income which include production income from loans sold in the secondary market and servicing income that reflects the performance of the servicing portfolio.

 

Mortgage Banking Income

 

(Dollars in millions)    2005

    2004

 

Production income(1)

   $ 674     $ 765  
    


 


Servicing income:

                

Servicing fees and ancillary income

     848       615  

Amortization of MSRs

     (613 )     (345 )

Gains on sales of MSRs

     14       —    

Net MSR and SFAS 133 derivative hedge adjustments(2)

     167       18  

Losses on derivatives(3)

     (15 )     (1 )

Impairment of MSRs

     (63 )     (463 )
    


 


Total net servicing income

     338       (176 )
    


 


Total mortgage banking income(4)

   $ 1,012     $ 589  
    


 



(1)   Includes $(14) million and $2 million related to hedge ineffectiveness of cash flow hedges on our mortgage warehouse for 2005 and 2004.
(2)   Represents derivative hedge losses of $124 million under SFAS 133, offset by an increase in the value of the MSRs of $291 million for 2005, and derivative hedge gains of $228 million offset by a decrease in the value of the MSRs of $210 million for 2004. For additional information on MSRs, see Note 9 of the Consolidated Financial Statements.
(3)   Net losses on derivatives used as economic hedges of MSRs not designated as SFAS 133 hedges.
(4)   Includes revenue for mortgage services provided to other segments that are eliminated in consolidation (in All Other) of $207 million and $175 million for 2005 and 2004.

 

Production for residential first mortgages, within Global Consumer and Small Business Banking, was $74.7 billion in 2005 compared to $80.2 billion in 2004, a decrease of seven percent. In 2005, production income decreased $91 million to $674 million due to lower production volume and margin compression. The volume reduction resulted in lower loan sales to the secondary market in 2005 of $65.1 billion, an eight percent decrease from 2004.

 

Across all segments, residential first mortgage production was $86.8 billion in 2005 compared to $87.5 billion in 2004. Of the volume across all segments during 2005, $60.3 billion was originated through retail channels, and $26.5 billion was originated through the wholesale channel. This compares to $57.6 billion and $30.0 billion during 2004. Refinance activity in 2005 was approximately 49 percent of the production compared to 57 percent in 2004.

 

The Consumer Real Estate servicing portfolio includes originated and retained residential mortgages, loans serviced for others and home equity loans. The servicing portfolio at December 31, 2005 was $368.4 billion, $35.9 billion higher than December 31, 2004, driven primarily by production, home equity account growth and lower prepayment rates.

 

Net servicing income rose $514 million in 2005, primarily driven by a $400 million decrease in impairment of MSRs. Impairment charges in 2004 included a $261 million adjustment for changes in valuation assumptions and prepayment adjustments to align with changing market conditions and customer behavioral trends.

 

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As of December 31, 2005, the MSR balance was $2.7 billion, an increase of $300 million, or 13 percent, from December 31, 2004. This value represented 122 bps of the related unpaid principal balance, a three percent increase from December 31, 2004. The following table outlines our MSR statistical information:

 

Consumer Real Estate Mortgage Servicing Rights(1)

 

     December 31

 
(Dollars in millions)    2005

    2004

 

MSR data:

                

Balance

   $ 2,658     $ 2,358  

Capitalization value

     1.22 %     1.19 %

Unpaid balance(2)

   $ 218,172     $ 197,795  

Number of customers (in thousands)

     1,619       1,582  

(1)   Excludes MSRs in Global Capital Markets and Investment Banking at December 31, 2005 and 2004 of $148 million and $123 million.
(2)   Represents the portion of our servicing portfolio for which a MSR asset has been recorded.

 

MSRs are accounted for at the lower of cost or market with impairment recognized as a reduction to Mortgage Banking Income. A combination of derivatives and AFS securities (e.g. mortgage-backed securities) is utilized to hedge the changes in value associated with the MSRs. At December 31, 2005, $2.3 billion of MSRs were hedged using a SFAS 133 strategy and $250 million of MSRs were economically hedged using AFS securities. During 2005, Net Interest Income included $18 million on these AFS securities. At December 31, 2005, the unrealized loss on AFS securities used to economically hedge the MSRs was $29 million compared to an unrealized gain of $21 million at December 31, 2004. For more information on MSRs, see Notes 1 and 9 of the Consolidated Financial Statements.

 

Consumer Deposit and Debit Products

 

Consumer Deposit and Debit Products provides a comprehensive range of products to consumers and small businesses. Our products include traditional savings accounts, money market savings accounts, CDs and IRAs, regular and interest-checking accounts, debit cards and a variety of business checking options.

 

In 2005, we added approximately 2.3 million net new retail checking accounts and 1.9 million net new retail savings accounts. This growth resulted from continued improvement in sales and service results in the Banking Center Channel, the introduction of new products, the addition of 99 new stores and the impact of FleetBoston. In the FleetBoston franchise, we opened 431,000 net new retail checking and 348,000 net new retail savings accounts since the FleetBoston Merger on April 1, 2004.

 

Consumer deposit products provide a relatively stable and inexpensive source of liquidity. We earn net interest spread revenues from investing this liquidity in earning assets through client facing lending activity and our ALM process. The revenue streams from these activities are allocated to our deposit products using our funds transfer pricing process which takes into account the interest rates and maturity characteristics of the deposits. Deposits also generate account fees while debit cards generate interchange income. The following table shows the components of Total Revenue for Consumer Deposit and Debit Products.

 

Consumer Deposit and Debit Products Revenue

 

(Dollars in millions)    2005

   2004

Net interest income

   $ 8,380    $ 6,982
    

  

Deposit service charges

     4,986      4,321

Debit card income

     1,629      1,232
    

  

Total noninterest income

     6,615      5,553
    

  

Total deposit and debit revenue

   $ 14,995    $ 12,535
    

  

 

Total deposit and debit revenue grew $2.5 billion, or 20 percent, in 2005. Driving this growth was an increase of $1.4 billion, or 20 percent, in Net Interest Income resulting from higher levels of deposits. Also impacting the growth in Net Interest Income was our pricing strategy and the positive impact of the FleetBoston Merger.

 

Deposit service charges increased $665 million, or 15 percent, in 2005. The increase was primarily due to the growth of new accounts across our franchise and the impact of the FleetBoston Merger.

 

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Debit card income, which is included in Card Income on the Consolidated Statement of Income, increased $397 million, or 32 percent, in 2005. Driving the increase was growth in transaction activity as purchase volumes increased 29 percent due to new accounts, growth in average ticket size and the positive impact of the FleetBoston Merger, as well as higher interchange rates on debit card transactions.

 

Global Business and Financial Services

 

Global Business and Financial Services serves mid-sized 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 including Global Treasury Services, Middle Market Banking, Business Banking, Commercial Real Estate Banking, Leasing, Business Capital, and Dealer Financial Services. It also includes our businesses in Latin America. 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. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new segment is called Global Corporate and Investment Banking.

 

Global Treasury Services provides integrated working capital management and treasury solutions to clients across the U.S. and 50 countries through our network of proprietary offices and clearing arrangements with other financial institutions. Our clients include multinationals, middle-market companies, correspondent banks, commercial real estate firms and governments. Our services include treasury management, trade finance, foreign exchange, short-term credit facilities and short-term investing. The revenues and operating results are reflected in this segment as well as Global Consumer and Small Business Banking and Global Capital Markets and Investment Banking, based upon where customers and clients are serviced.

 

Middle Market Banking provides commercial lending, treasury management products, investment banking, capital markets, and insurance services to middle-market companies across the U.S.

 

Business Banking offers our client-managed small business customers a variety of business solutions to grow and manage their businesses. Products and services include a wide range of credit and treasury management solutions, advisory services such as merchant services, card products, payroll and employee benefits.

 

Commercial Real Estate Banking, with offices in more than 60 cities across the U.S., provides project financing and treasury management solutions to private developers, homebuilders and commercial real estate firms. This business also includes community development banking, which provides lending and investing services to low- and moderate-income communities.

 

Leasing provides leasing solutions to small businesses, middle-market and large corporations in the U.S. and internationally, offering expertise in the municipal, corporate aircraft, healthcare and vendor markets.

 

Business Capital provides asset-based lending financing solutions that are customized to meet the capital needs of our clients by leveraging their assets on a primarily secured basis in the U.S., Canada and European markets.

 

Dealer Financial Services provides indirect and direct lending and investing services, including floor plan programs and consumer financing for marine, recreational vehicle and auto dealerships through more than 10,000 dealer clients across the U.S.

 

Latin America includes our full-service Latin American operations in Brazil, Chile, Argentina, and Uruguay, and our commercial and wealth and investment management operations in Mexico. These businesses primarily service indigenous and multinational corporations, small businesses and affluent consumers. On October 13, 2005, we announced an agreement to sell our asset management business in Mexico with $1.8 billion of assets under management to an entity in which we have a 24.9 percent investment. The sale will be completed in 2006. In December 2005, we entered into a definitive agreement for the sale of BankBoston Argentina assets and assumption of liabilities. The transaction is subject to obtaining all necessary regulatory approvals. For more information on our Latin American operations, see Foreign Portfolio beginning on page 56.

 

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Global Business and Financial Services

 

(Dollars in millions)    2005

    2004

 

Net interest income (FTE basis)

   $ 7,788     $ 6,534  

Noninterest income:

                

Service charges

     1,469       1,287  

Investment and brokerage services

     221       168  

All other income

     1,682       1,262  
    


 


Total noninterest income

     3,372       2,717  
    


 


Total revenue (FTE basis)

     11,160       9,251  

Provision for credit losses

     (49 )     (442 )

Gains on sales of debt securities

     146       —    

Noninterest expense

     4,162       3,598  
    


 


Income before income taxes

     7,193       6,095  

Income tax expense

     2,631       2,251  
    


 


Net income

   $ 4,562     $ 3,844  
    


 


Shareholder value added

   $ 1,486     $ 1,297  

Net interest yield (FTE basis)

     4.05 %     4.06 %

Return on average equity

     15.63       15.89  

Efficiency ratio (FTE basis)

     37.29       38.90  

Average:

                

Total loans and leases

   $ 180,557     $ 151,725  

Total assets

     222,584       184,771  

Total deposits

     106,951       93,254  

Common equity/Allocated equity

     29,182       24,193  

Year end:

                

Total loans and leases

     192,532       170,698  

Total assets

     237,679       214,045  

Total deposits

     114,241       107,838  

 

Net Interest Income increased $1.3 billion, or 19 percent in 2005. The increase was largely due to growth in commercial loans and leases, deposit balances, and the impact of FleetBoston earning assets offset by spread compression driven by a flattening yield curve. Average outstanding Loans and Leases increased $28.8 billion, or 19 percent, in 2005 due to loan growth in Middle Market Banking, Dealer Financial Services (primarily due to consumer bulk purchases), Commercial Real Estate Banking, Leasing and Business Banking. Average commercial deposits, which are a lower cost source of funding, increased $13.7 billion, or 15 percent, in 2005, driven by deposit growth in Middle Market Banking, Business Banking, Latin America and Commercial Real Estate Banking.

 

Noninterest Income increased $655 million, or 24 percent, in 2005. The increase was driven by a $420 million increase in other noninterest income to $1.7 billion, primarily due to the FleetBoston Merger and gains on early lease terminations. Higher Service Charges impacted the increase in Noninterest Income, primarily driven by the FleetBoston Merger.

 

The Provision for Credit Losses increased $393 million to negative $49 million in 2005 compared to negative $442 million in 2004. The negative provision reflects continued improvement in commercial credit quality although at a slower rate than experienced in 2004. An improved risk profile in Latin America and reduced uncertainties resulting from the completion of credit-related integration activities for FleetBoston also contributed to the negative provision. For more information, see Credit Risk Management beginning on page 49.

 

Noninterest Expense increased $564 million, or 16 percent. The increase was primarily due to higher Personnel expense as a result of increased performance based incentive compensation, higher processing costs and the FleetBoston Merger.

 

Global Capital Markets and Investment Banking

 

Our strategy is to align our resources with sectors where we can deliver value-added financial solutions to our issuer and investor clients. This segment provides a broad range of financial services to large corporate domestic and international clients, financial institutions, and government entities. It also provides significant resources and capabilities to our investor clients providing them with financial solutions as well as allowing greater access to market liquidity and risk management capabilities through various distribution channels. Clients are supported through offices in 27 countries that are divided into three distinct geographic regions: U.S. and Canada; Asia; and Europe, Middle East

 

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and Africa. Our products and services include loan originations, mergers and acquisitions advisory, debt and equity underwriting, distribution and trading, cash management, derivatives, foreign exchange, leveraged finance, structured finance and trade services. 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. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new segment is called Global Corporate and Investment Banking.

 

During the fourth quarter of 2004, we announced a strategic initiative to invest approximately $675 million in Global Capital Markets and Investment Banking to expand on opportunities in the business’s platform. These investments were primarily focused on expanding our fixed income activities with both the issuer and investor client sectors. As of December 31, 2005, approximately 80 percent of this investment had been invested on personnel, technology and other infrastructure costs, which are all in various phases of execution. We remain committed to the build out of this business and believe that in time we will be well-positioned in the markets where we choose to compete.

 

This segment offers clients a comprehensive range of global capabilities through the following three financial services: Global Investment Banking, Global Credit Products and Global Treasury Services.

 

Global Investment Banking is comprised of Corporate and Investment Banking, and Global Capital Markets. Global Investment Banking underwrites and makes markets in equity and equity-linked securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities. We also provide debt and equity securities research, loan syndications, mergers and acquisitions advisory services, and private placements. Further, we provide risk management solutions for customers using interest rate, equity, credit and commodity derivatives, foreign exchange, fixed income and mortgage-related products. In support of these activities, the businesses may take positions in these products and participate in market-making activities. The Global Investment Banking business is a primary dealer in the U.S. and in several international locations.

 

Global Credit Products provides credit and lending services for our corporate clients and institutional investors. Global Credit Products is also responsible for actively managing loan and counterparty risk in our large corporate portfolio using risk mitigation techniques including credit default swaps (CDS).

 

Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and corporate clients manage their cash flows. For additional information on Global Treasury Services, see Global Business and Financial Services on page 34.

 

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Global Capital Markets and Investment Banking

 

(Dollars in millions)    2005

    2004

 

Net interest income (FTE basis):

                

Core net interest income

   $ 1,854     $ 2,019  

Trading-related net interest income

     1,444       2,039  
    


 


Total net interest income

     3,298       4,058  
    


 


Noninterest income:

                

Service charges

     1,146       1,287  

Investment and brokerage services

     806       705  

Investment banking income

     1,749       1,783  

Trading account profits

     1,664       1,023  

All other income

     346       190  
    


 


Total noninterest income

     5,711       4,988  
    


 


Total revenue (FTE basis)

     9,009       9,046  

Provision for credit losses

     (244 )     (445 )

Gains (losses) on sales of debt securities

     117       (10 )

Noninterest expense

     6,678       6,581  
    


 


Income before income taxes

     2,692       2,900  

Income tax expense

     956       976  
    


 


Net income

   $ 1,736     $ 1,924  
    


 


Shareholder value added

   $ 642     $ 873  

Net interest yield (FTE basis)

     0.92 %     1.47 %

Return on average equity

     16.73       19.34  

Efficiency ratio (FTE basis)

     74.13       72.76  

Average:

                

Total loans and leases

   $ 34,353     $ 33,891  

Trading-related earning assets

     299,374       227,230  

Total assets

     410,979       321,743  

Total deposits

     84,979       74,738  

Common equity/Allocated equity

     10,372       9,946  

Period end:

                

Total loans and leases

     40,213       33,387  

Trading-related earning assets

     282,456       189,596  

Total assets

     395,900       303,897  

Total deposits

     86,144       76,986  

 

Net Interest Income declined $760 million, or 19 percent, in 2005. Driving the decrease was lower trading-related Net Interest Income of $595 million, or 29 percent. Despite the growth in average trading-related earning assets of $70.9 billion, or 33 percent, the contribution to Net Interest Income decreased due to a flattening yield curve. In 2005, core net interest income decreased $165 million to $1.9 billion primarily due to spread compression. Average Deposits increased $10.2 billion, or 14 percent, due to higher foreign deposits and escrow balances.

 

Noninterest Income increased $723 million, or 14 percent, in 2005. Driving the increase were higher Trading Account Profits of $641 million, Equity Investment Gains (included in all other income) of $123 million and Investment and Brokerage Services of $101 million. The increase in Trading Account Profits was due to growth in average trading-related earning assets as a result of increased client activity as we continued to invest in the business. These increases were partially offset by declines in Service Charges of $141 million due to effects of rising earnings credits on balances required for services and lower Investment Banking Income of $34 million.

 

Provision for Credit Losses increased $201 million to negative $244 million in 2005, compared to negative $445 million in 2004, driven by a slower rate of improvement in commercial credit quality. Net charge-offs declined $245 million from the prior year, driven partially by increased recoveries. For more information, see Credit Risk Management beginning on page 49.

 

Noninterest Expense remained relatively unchanged in 2005. Other general operating expense decreased primarily due to the segment’s share of the mutual fund settlement and other litigation reserves recorded in 2004. This decrease was offset by higher Personnel expense, including costs associated with the strategic initiative.

 

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Trading-related revenue and equity commissions, both key measures reviewed by management, are presented in the following table.

 

Trading-related Revenue and Equity Commissions

 

(Dollars in millions)    2005

   2004

 

Trading-related net interest income(1)

   $ 1,444    $ 2,039  

Trading account profits(2)

     1,664      1,023  
    

  


Total trading-related revenue(2)

     3,108      3,062  

Equity commissions(1,3)

     794      667  
    

  


Total trading-related revenue and equity commissions

   $ 3,902    $ 3,729  
    

  


Trading-related Revenue by Product and Equity Commissions

               

Fixed income

   $ 1,054    $ 1,547  

Interest rate(1)

     767      667  

Foreign exchange

     744      752  

Equities and equity commissions(1)

     1,201      862  

Commodities

     87      45  
    

  


Market-based trading-related revenue and equity commissions

     3,853      3,873  

Credit portfolio hedges(4)

     49      (144 )
    

  


Total trading-related revenue and equity commissions(2)

   $ 3,902    $ 3,729  
    

  



(1)   FTE basis
(2)   Total corporate Trading Account Profits were $1,812 million and $869 million in 2005 and 2004. Total corporate trading-related revenue was $3,256 million and $2,908 million in 2005 and 2004.
(3)   Equity commissions are included in Investment and Brokerage Services in the Consolidated Statement of Income.
(4)   Includes CDS and related products used for credit risk management. For additional information on CDS, see Concentrations of Commercial Credit Risk beginning on page 53.

 

In 2005, market-based trading-related revenue was $3.9 billion, relatively unchanged from the prior year. Fixed income revenue decreased $493 million due to increased spread volatility in certain industries and lack of investor demand. Offsetting this decline were increases in equities and equity commissions, interest rate-related revenues and commodities. Trading-related revenue from equities and equity commissions increased $339 million due to higher customer activity and the absence of net losses on a stock position that occurred in 2004. Interest rate-related revenues increased $100 million primarily related to higher sales activity. In 2005, commodities revenue increased $42 million as the prior year included losses related to positions in gas and jet fuel.

 

Total trading-related revenue and equity commissions included net gains of $49 million associated with credit portfolio hedges, an improvement of $193 million from 2004. The improvement was primarily due to widening of spreads on CDS in certain industries.

 

The following table presents the detail of Investment Banking Income within the segment.

 

Investment Banking Income

 

(Dollars in millions)    2005

   2004

Securities underwriting

   $ 787    $ 920

Syndications

     528      521

Advisory services

     409      310

Other

     25      32
    

  

Total investment banking income(1)

   $ 1,749    $ 1,783
    

  


(1)   Investment Banking Income recorded in other business units in 2005 and 2004 was $107 million and $103 million.

 

Investment Banking Income decreased $34 million, or two percent, in 2005. The decrease was due primarily to a decline in securities underwriting as the overall market contracted and private placement activity declined. This decline was partially offset by market share gains in certain debt issuance markets and higher advisory services income due to increased merger and advisory activity.

 

Global Wealth and Investment Management

 

This segment provides tailored investment services to individual and institutional clients in various stages and economic cycles. Our clients are offered specific products and services based on their needs through five major businesses: Premier Banking and Investments (PB&I), The Private Bank, Family Wealth Advisors (FWA), Columbia Management Group (Columbia) and Other Services.

 

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PB&I includes Banc of America Investments (BAI), our full-service retail brokerage business and our Premier Banking channel. PB&I brings personalized banking and investment expertise through priority service with client-dedicated teams. PB&I provides a high-touch client experience through a network of more than 2,100 client managers to our affluent customers with a personal wealth profile that includes investable assets plus a mortgage that exceeds $250,000 or they have at least $100,000 of investable assets. BAI is the third largest bank-owned brokerage company in the U.S. with $151 billion in client assets. BAI serves approximately 1.6 million accounts through a network of approximately 1,895 financial advisors throughout the U.S.

 

The Private Bank provides integrated wealth management solutions to high-net-worth individuals, middle market institutions and charitable organizations with investable assets greater than $3 million. Services include investment, trust, banking and lending services as well as specialty asset management services (oil and gas, real estate, farm and ranch, timberland, private businesses and tax advisory).

 

FWA at the Private Bank is designed to serve the needs of ultra high-net-worth individuals and families. This new business provides a higher level of contact and tailored service and wealth management solutions that address the complex needs of clients with investable assets greater than $50 million. FWA was rolled out during the first quarter of 2005.

 

Columbia is an asset management organization primarily serving the needs of institutional customers. Columbia provides asset management services, liquidity strategies and separate accounts. Columbia also provides mutual funds offering a full range of investment styles across an array of products including equities, fixed income (taxable and nontaxable) and cash products (taxable and nontaxable). In addition to servicing institutional clients, Columbia distributes its products and services to individuals through The Private Bank, PB&I, FWA and nonproprietary channels including other brokerage firms.

 

Other Services include the Investment Services Group, which provides products and services from traditional capital markets products to alternative investments and Banc of America Specialist, a New York Stock Exchange market-maker.

 

Global Wealth and Investment Management

 

(Dollars in millions)    2005

    2004

 

Net interest income (FTE basis)

   $ 3,770     $ 2,869  

Noninterest income:

                

Investment and brokerage services

     3,122       2,728  

All other income

     501       336  
    


 


Total noninterest income

     3,623       3,064  
    


 


Total revenue (FTE basis)

     7,393       5,933  

Provision for credit losses

     (5 )     (20 )

Noninterest expense

     3,672       3,431  
    


 


Income before income taxes

     3,726       2,522  

Income tax expense

     1,338       917  
    


 


Net income

   $ 2,388     $ 1,605  
    


 


Shareholder value added

   $ 1,337     $ 754  

Net interest yield (FTE basis)

     3.21 %     3.36 %

Return on average equity

     23.34       19.35  

Efficiency ratio (FTE basis)

     49.66       57.83  

Average:

                

Total loans and leases

   $ 54,021     $ 44,057  

Total assets

     125,289       91,889  

Total deposits

     115,301       83,053  

Common equity/Allocated equity

     10,232       8,296  

Year end:

                

Total loans and leases

     58,277       49,783  

Total assets

     127,156       122,587  

Total deposits

     113,389       111,107  

 

Net Interest Income increased $901 million, or 31 percent, in 2005. This increase was due to growth in deposits and loans in PB&I and The Private Bank. Average Deposits increased $32.2 billion, or 39 percent, in 2005 primarily due to the migration of $28.1 billion of account balances from Global Consumer and Small Business Banking to PB&I, and organic growth in PB&I and The Private Bank. Average Loans and Leases increased $10.0 billion, or 23 percent, due to higher loan volume in PB&I and The Private Bank. The secondary driver of the increase in Average Deposits, and Loans and Leases was the impact of the FleetBoston portfolio.

 

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Noninterest Income increased $559 million, or 18 percent, in 2005. Noninterest Income consists primarily of Investment and Brokerage Services, which represents fees earned on client assets and brokerage commissions. The Investment and Brokerage Services revenue increase in 2005, compared to 2004, was mainly due to the impact of FleetBoston.

 

Client Assets

 

     December 31

(Dollars in billions)    2005

   2004

Assets under management

   $ 482.4    $ 451.5

Client brokerage assets

     161.7      149.9

Assets in custody

     94.2      107.0
    

  

Total client assets

   $ 738.3    $ 708.4
    

  

 

Total client assets increased $29.9 billion, or four percent, in 2005. This increase was due to the $30.9 billion increase in assets under management in 2005, which was driven by net inflows primarily in short-term money market assets and an increase in overall market valuations. Assets under management generate fees based on a percentage of their market value. They consist largely of mutual funds and separate accounts, which are comprised of taxable and nontaxable money market products, equities, and taxable and nontaxable fixed income securities.

 

Noninterest Expense increased $241 million, or seven percent, in 2005. The increase was due primarily to increased Personnel expenses driven by PB&I growth in the Northeast and the impact of FleetBoston. This increase was partially offset by lower other general operating expenses due to the segment’s share of the mutual fund settlement recorded in 2004.

 

All Other

 

Included in All Other are our Equity Investments businesses, and Other.

 

Equity Investments include Principal Investing and corporate investments. Principal Investing is comprised of a diversified portfolio of investments in privately-held and publicly-traded companies at all stages of their life cycle from start-up to buyout. Corporate investments include CCB, Grupo Financiero Santander Serfin and various other investments.

 

Other includes the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. Other also includes certain amounts associated with the ALM process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities. The objective of the funds transfer pricing allocation methodology is to neutralize the business segments from changes in interest rate and foreign exchange fluctuations. Accordingly, for segment reporting purposes, the business segments receive the neutralizing benefit to Net Interest Income related to the economic hedges previously mentioned, with the offset recorded in Other.

 

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All Other

 

(Dollars in millions)    2005

    2004
(Restated)


 

Net interest income (FTE basis)(1)

   $ (340 )   $ (695 )

Noninterest income:

                

Equity investment gains

     1,646       750  

All other income(1)

     (821 )     241  
    


 


Total noninterest income

     825       991  
    


 


Total revenue (FTE basis)

     485       296  

Provision for credit losses

     41       343  

Gains on sales of debt securities(1)

     823       1,617  

Merger and restructuring charges

     412       618  

All other noninterest expense

     317       229  
    


 


Income before income taxes

     538       723  

Income tax expense (benefit)

     (85 )     120  
    


 


Net income

   $ 623     $ 603  
    


 


Shareholder value added

   $ (884 )   $ (531 )

(1)   Included in these amounts are impacts related to derivatives designated as economic hedges which do not qualify for SFAS 133 hedge accounting treatment of $(419) million and $(834) million in Net Interest Income and $(256) million and $920 million in Noninterest Income. The impact, including $0 and a loss of $(399) million in Gains on Sales of Debt Securities, totaled $(675) million and $(313) million in 2005 and 2004. For additional information, see Note 1 of the Consolidated Financial Statements.

 

Total Revenue for All Other increased $189 million to $485 million in 2005, primarily driven by an increase in Equity Investment Gains in 2005. Offsetting this increase was the decline in fair value of derivative instruments which were used as economic hedges of interest and foreign exchange rates as part of the ALM process. Changes in value of these derivative instruments were due to interest rate fluctuations during the year.

 

Provision for Credit Losses decreased $302 million to $41 million in 2005, resulting from changes to components of the formula and other factors effective in 2004, and reduced credit costs in 2005 associated with previously exited businesses. These decreases were offset in part by the establishment of a $50 million reserve for estimated losses associated with Hurricane Katrina.

 

Gains on Sales of Debt Securities decreased $794 million primarily due to lower gains realized in 2005 on mortgage-backed securities and corporate bonds than in 2004. Securities gains are the result of the repositioning of the securities portfolio to manage interest rate fluctuations and mortgage prepayment risk. The Corporation utilized a forward purchase agreement to hedge the variability of cash flows from the anticipated purchase of securities. The Corporation subsequently sold the related securities and did not originally reclassify the loss from Accumulated OCI at the time the related securities were sold.

 

Merger and Restructuring Charges decreased $206 million in 2005 as the FleetBoston integration is nearing completion and the infrastructure initiative was completed in the first quarter of 2005. For more information on Merger and Restructuring Charges, see Note 2 of the Consolidated Financial Statements.

 

The Income Tax Expense (Benefit) was a benefit of $85 million in 2005, compared to an expense of $120 million in 2004. The change in Income Tax Expense (Benefit) was driven by an increase in tax benefits for low-income housing credits. These tax benefits are allocated to Global Consumer and Small Business Banking as FTE Noninterest Income through our segment reporting process. All Other includes an offset to this FTE impact.

 

Equity Investments

 

Equity Investments reported Net Income of $796 million in 2005, a $594 million improvement compared to 2004. The improvements were primarily due to higher revenues in Principal Investing driven by increasing liquidity in the private equity markets. When compared to the prior year, Principal Investing revenue increased $966 million to $1.4 billion. The increased revenues were driven by higher realized gains and reduced impairments compared to the prior year.

 

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The following table presents the carrying value of equity investments in the Principal Investing portfolio by major industry at December 31, 2005 and 2004:

 

Equity Investments in the Principal Investing Portfolio

 

     December 31

(Dollars in millions)    2005

   2004

Consumer discretionary

   $ 1,607    $ 2,058

Information technology

     1,131      1,089

Industrials

     1,017      1,118

Telecommunication services

     708      769

Financials

     632      606

Healthcare

     560      576

Materials

     288      421

Consumer staples

     213      230

Real estate

     188      229

Energy

     56      81

Individual trusts, nonprofits, government

     43      49

Utilities

     19      24
    

  

Total

   $ 6,462    $ 7,250
    

  

 

On- and Off-balance Sheet Financing Entities

 

Off-balance Sheet Commercial Paper Conduits

 

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

 

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

 

We manage our credit risk on these commitments by subjecting them to our normal underwriting and risk management processes. At December 31, 2005 and 2004, we had off-balance sheet liquidity commitments and SBLCs to these entities of $25.9 billion and $23.8 billion. Substantially all of these liquidity commitments and SBLCs mature within one year. These amounts are included in Table 6. Net revenues earned from fees associated with these off-balance sheet financing entities were approximately $71 million and $80 million in 2005 and 2004.

 

From time to time, we may purchase some of the commercial paper issued by certain of these entities for our own account or acting as a dealer on behalf of third parties. Derivative instruments related to these entities are marked to market through the Consolidated Statement of Income. SBLCs are initially recorded at fair value in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees” (FIN 45). Liquidity commitments and SBLCs subsequent to inception are accounted for pursuant to SFAS No. 5, “Accounting for Contingencies” (SFAS 5), and are discussed further in Note 13 of the Consolidated Financial Statements.

 

The commercial paper conduits are variable interest entities (VIEs) as defined in FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R), which provides a framework for identifying VIEs and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements. In accordance with FIN 46R, the primary beneficiary is the party that consolidates a VIE based on its assessment that it will absorb a

 

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majority of the expected losses or expected residual returns of the entity, or both. We have determined that we are not the primary beneficiary of the commercial paper conduits described above and, therefore, have not included the assets and liabilities or results of operations of these conduits in the Consolidated Financial Statements of the Corporation.

 

On-balance Sheet Commercial Paper Conduits

 

In addition to the off-balance sheet financing entities previously described, we also utilize commercial paper conduits that have been consolidated based on our determination that we are the primary beneficiary of the entities in accordance with FIN 46R. At December 31, 2005 and 2004, the consolidated assets and liabilities of these conduits were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Capital Markets and Investment Banking. At December 31, 2005 and 2004, we held $6.6 billion and $7.7 billion of assets of these entities while our maximum loss exposure associated with these entities, including unfunded lending commitments, was approximately $8.0 billion and $9.4 billion. We manage our credit risk on the on-balance sheet commitments by subjecting them to the same processes as the off-balance sheet commitments.

 

Qualified Special Purpose Entities

 

In addition, to control our capital position, diversify funding sources and provide customers with commercial paper investments, we will, from time to time, sell assets to off-balance sheet commercial paper entities. The commercial paper entities are Qualified Special Purpose Entities (QSPEs) that have been isolated beyond our reach or that of our creditors, even in the event of bankruptcy or other receivership. The accounting for these entities is governed by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125,” (SFAS 140) which provides that QSPEs are not included in the consolidated financial statements of the seller. Assets sold to the entities consist of high-grade corporate or municipal bonds, collateralized debt obligations and asset-backed securities. These entities issue collateralized commercial paper or notes with similar repricing characteristics to third party market participants and passive derivative instruments to us. Assets sold to the entities typically have an investment rating ranging from Aaa/AAA to Aa/AA. We may provide liquidity, SBLCs or similar loss protection commitments to the entity, or we may enter into derivatives with the entity in which we assume certain risks. The liquidity facility and derivatives have the same legal standing with the commercial paper.

 

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

 

We manage any credit or market risk on commitments or derivatives through normal underwriting and risk management processes. At December 31, 2005 and 2004, we had off-balance sheet liquidity commitments, SBLCs and other financial guarantees to these entities of $7.1 billion and $7.4 billion. Substantially all of these commitments mature within one year and are included in Table 6. Derivative activity related to these entities is included in Note 5 of the Consolidated Financial Statements. Net revenues earned from fees associated with these entities were $86 million and $61 million in 2005 and 2004.

 

We generally do not purchase any of the commercial paper issued by these types of financing entities other than during the underwriting process when we act as issuing agent nor do we purchase any of the commercial paper for our own account. Derivative instruments related to these entities are marked to market through the Consolidated Statement of Income. SBLCs are initially recorded at fair value in accordance with FIN 45. Liquidity commitments and SBLCs subsequent to inception are accounted for pursuant to SFAS 5 and are discussed further in Note 13 of the Consolidated Financial Statements.

 

Credit and Liquidity Risks

 

Because we provide liquidity and credit support to the commercial paper conduits and QSPEs described above, our credit ratings and changes thereto will affect the borrowing cost and liquidity of these entities. In addition, significant changes in counterparty asset valuation and credit standing may also affect the liquidity of the commercial paper issuance. Disruption in the commercial paper markets may result in our having to fund under these commitments and SBLCs discussed above. We seek to manage these risks, along with all other credit and liquidity risks, within our policies and practices. See Notes 1 and 9 of the Consolidated Financial Statements for additional discussion of off-balance sheet financing entities.

 

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Other Off-balance Sheet Financing Entities

 

To improve our capital position and diversify funding sources, we also sell assets, primarily loans, to other off-balance sheet QSPEs that obtain financing primarily by issuing term notes. We may retain a portion of the investment grade notes issued by these entities, and we may also retain subordinated interests in the entities which reduce the credit risk of the senior investors. We may provide liquidity support in the form of foreign exchange or interest rate swaps. We generally do not provide other forms of credit support to these entities, which are described more fully in Note 9 of the Consolidated Financial Statements. In addition to the above, we had significant involvement with variable interest entities (VIEs) other than the commercial paper conduits. These VIEs were not consolidated because we will not absorb a majority of the expected losses or expected residual returns and are therefore not the primary beneficiary of the VIEs. These entities are described more fully in Note 9 of the Consolidated Financial Statements.

 

Obligations and Commitments

 

We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations. Included in purchase obligations are vendor contracts of $4.0 billion, commitments to purchase securities of $34.2 billion and commitments to purchase loans of $51.7 billion. The most significant of our vendor contracts include communication services, processing services and software contracts. Other long-term liabilities include our obligations related to the Qualified Pension Plans, Nonqualified Pension Plans and Postretirement Health and Life Plans (the Plans). Obligations to the Plans are based on the current and projected obligations of the Plans, performance of the Plans’ assets and any participant contributions, if applicable. During 2005 and 2004, we contributed $1.1 billion and $303 million to the Plans, and we expect to make at least $134 million of contributions during 2006. Management believes the effect of the Plans on liquidity is not significant to our overall financial condition. Debt, lease and other obligations are more fully discussed in Notes 12 and 13 of the Consolidated Financial Statements.

 

Table 5 presents total long-term debt and other obligations at December 31, 2005.

 

Table 5

 

Long-term Debt and Other Obligations

 

December 31, 2005                         
(Dollars in millions)    Due in
1 year
or less


   Due after
1 year
through
3 years


   Due after
3 years
through
5 years


   Due after
5 years


   Total

Long-term debt and capital leases(1)

   $ 11,188    $ 24,065    $ 20,689    $ 44,906    $ 100,848

Purchase obligations(2)

     44,635      21,235      22,989      1,076      89,935

Operating lease obligations

     1,324      2,202      1,449      3,477      8,452

Other long-term liabilities

     134      —        —        —        134
    

  

  

  

  

Total

   $ 57,281    $ 47,502    $ 45,127    $ 49,459    $ 199,369
    

  

  

  

  


(1)   Includes principal payments and capital lease obligations of $40 million.
(2)   Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations.

 

Many of our lending relationships contain funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded component of these commitments is not recorded on our balance sheet until a draw is made under the loan facility; however, a reserve is established for probable losses. These commitments, as well as guarantees, are more fully discussed in Note 13 of the Consolidated Financial Statements.

 

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The following table summarizes the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date. At December 31, 2005, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.4 billion (related outstandings of $171 million) were not included in credit card line commitments in the table below.

 

Table 6

 

Credit Extension Commitments

 

December 31, 2005                         
(Dollars in millions)   

Expires

in 1
year

or less


  

Expires

after 1
year

through

3 years


  

Expires

after 3
years