10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 14, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[check mark] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State of incorporation:
Delaware
IRS Employer Identification Number:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(888) 279-3457
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 (check mark) No
On October 31, 2000, there were 1,627,537,119 shares of Bank of America
Corporation Common Stock outstanding.
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Bank of America Corporation
September 30, 2000 Form 10-Q
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1
Part I. Financial Information
Item 1. Financial Statements
See accompanying notes to consolidated financial statements.
2
See accompanying notes to consolidated financial statements.
3
(1) Changes in Accumulated Other Comprehensive Income (Loss) include after-tax
net unrealized gains (losses) on available-for-sale and marketable equity
securities of $852 and $(2,047) and after-tax net unrealized losses on
foreign currency translation adjustments of $2 and $34 for the nine months
ended September 30, 2000 and 1999, respectively.
(2) Accumulated Other Comprehensive Income (Loss) consists of the after-tax
valuation allowance for available-for-sale and marketable equity securities
of $(1,618) and $(2,470) and foreign currency translation adjustments of
$(190) and $(188) at September 30, 2000 and December 31, 1999,
respectively.
See accompanying notes to consolidated financial statements.
4
Loans transferred to foreclosed properties amounted to $289 and $267 for the
nine months ended September 30, 2000 and 1999, respectively.
Loans securitized and retained in the available-for-sale securities portfolio
amounted to $224 and $3,206 for the nine months ended September 30, 2000 and
1999, respectively.
There were no acquisitions for the nine months ended September 30, 2000. The
fair value of noncash assets acquired and liabilities assumed in acquisitions
for the nine months ended September 30, 1999 were $1,557 and $74, net of cash
acquired.
See accompanying notes to consolidated financial statements.
5
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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Bank of America Corporation (the Corporation) is a Delaware corporation, a
bank holding company and a financial holding company. Through its banking and
nonbanking subsidiaries, the Corporation provides a diverse range of financial
services and products throughout the U.S. and in selected international markets.
Note One - Accounting Policies
The consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. In the opinion of management, all normal recurring adjustments
necessary for a fair statement of the interim period results have been made.
Certain prior period amounts have been reclassified to conform to current period
classifications.
Accounting policies followed in the presentation of interim financial
results are presented on pages 58 to 63 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1999.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of Financial
Accounting Standards Board Statement No. 133", and Statement of Financial
Accounting Standards No.138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" is effective for the Corporation as of January 1,
2001. SFAS 133 requires all derivative instruments to be recognized as either
assets or liabilities and measured at their fair values. In addition, SFAS 133
allows special hedge accounting for some types of transactions provided that
certain criteria are met. If SFAS 133 were adopted as of September 30, 2000, the
transition adjustment would not materially impact the Corporation's results of
operations and financial condition. The estimated impact of adopting SFAS 133 is
based on amounts, positions and market conditions that existed at September 30,
2000. The actual impact of adopting SFAS 133 on January 1, 2001 could be
materially different due to changes in market conditions as well as various
discretionary factors.
On September 29, 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
A Replacement of FASB Statement No. 125" (SFAS 140). SFAS 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Corporation is in the process of evaluating the impact of
SFAS 140 on its results of operations and financial condition.
In 1999, the Federal Financial Institutions Examination Council (FFIEC)
issued The Uniform Classification and Account Management Policy (the Policy)
which provides guidance for and promotes consistency among banks on the
treatment of delinquent and bankruptcy-related consumer loans. The Corporation
is required to implement the Policy by December 31, 2000 and expects to be in
full compliance with the Policy by that date. The Corporation estimates
additional charge-offs in the consumer portfolio, primarily within the consumer
finance products, of approximately $100 million in the fourth quarter to comply
with the Policy.
6
Note Two - Acquisition and Merger Activities
At September 30, 2000, the Corporation operated its banking activities
primarily under two charters: Bank of America, National Association (Bank of
America, N.A.) and Bank of America, N.A. (USA). On September 1, 2000, Bank of
America Community Development Bank, National Association changed its name to
Bank of America California, National Association. On March 31, 1999, NationsBank
of Delaware, N.A. merged with and into Bank of America, N.A. (USA), a national
association headquartered in Phoenix, Arizona (formerly known as Bank of America
National Association), which operates the Corporation's credit card business. On
April 1, 1999, the mortgage business of BankAmerica transferred to NationsBanc
Mortgage Corporation. On December 1, 1999, NationsBanc Mortgage Corporation
merged with and into BA Mortgage, LLC, a Delaware limited liability company and
a Bank of America, N.A. subsidiary. On April 8, 1999, the Corporation merged
Bank of America Texas, N.A. into NationsBank, N.A. On July 5, 1999, NationsBank,
N.A. changed its name to Bank of America, N.A. On July 23, 1999, Bank of
America, N.A. merged into Bank of America National Trust and Savings Association
(Bank of America NT&SA), and the surviving entity of that merger changed its
name to Bank of America, N.A. On December 1, 1999, Bank of America, FSB, a
federal savings bank formerly headquartered in Portland, Oregon, was converted
into a national bank and merged into Bank of America, N.A. On September 30,
1998, BankAmerica Corporation (BankAmerica) merged (the Merger) with and into
the Corporation, formerly NationsBank Corporation (NationsBank).
In connection with the Merger, the Corporation recorded pre-tax merger
charges of $525 million ($358 million after-tax) in 1999 and $1,325 million
($960 million after-tax) in 1998. Of the $525 million in 1999, $200 million
($145 million after-tax) and $325 million ($213 million after-tax) were recorded
in the second and fourth quarters, respectively. Of the $1,325 million in 1998,
$725 million ($519 million after-tax) and $600 million ($441 million after-tax)
were recorded in the third and fourth quarters, respectively. The total pre-tax
charge for 1999 consisted of approximately $219 million primarily of severance,
change in control and other employee-related costs, $187 million of conversion
and related costs including occupancy, equipment and customer communication
expenses, $128 million of exit and related costs and a $9 million reduction of
other merger costs. The total pre-tax charge for 1998 consisted of approximately
$740 million primarily of severance, change in control and other
employee-related costs, $150 million of conversion and related costs including
occupancy and equipment expenses (primarily lease exit costs and the elimination
of duplicate facilities and other capitalized assets) and customer communication
expenses, $300 million of exit and related costs and $135 million of other
merger costs (including legal, investment banking and filing fees).
Total severance, change in control and other employee-related costs include
amounts related to job eliminations of former associates of BankAmerica and
NationsBank impacted by the Merger. Through September 30, 2000, approximately
13,800 employees had entered the severance process. Employee-related costs of
the Merger were principally in overlapping functions, operations and businesses
of the Corporation. The BankAmerica merger reserve balance was $300 million at
January 1, 2000. Cash payments applied to the reserve in 2000 were approximately
$206 million and non-cash reductions were $48 million. The remaining merger
reserve balance was $46 million at September 30, 2000.
During 2000, the Corporation entered into several unrelated transactions
to invest in technologies and service providers. In addition, the Corporation
disposed of some of its assets and investments. Certain of these transactions,
primarily related to Internet activities, contained agreements requiring the
Corporation to purchase agreed upon levels of service each year.
On June 15, 2000, the Corporation entered into an agreement, effective
January 2, 2001, to acquire the remaining 50 percent of Marsico Capital
Management, LLC (Marsico) for a total investment of $1.1 billion. The
Corporation acquired the first 50 percent in 1999. Marsico is a Denver-based
investment
7
management firm with almost $17 billion in assets under management, specializing
in large capitalization growth stocks.
For additional information on the Corporation's merger activities, refer
to Note Two of the Corporation's 1999 Annual Report on Form 10-K.
Note Three - Productivity and Investment Initiatives
As part of its productivity and investment initiatives announced on July
28, 2000, the Corporation recorded a pre-tax restructuring charge of $550
million ($346 million after-tax) in the third quarter of 2000 which is included
in merger and restructuring charges in the Consolidated Statement of Income. As
part of these initiatives and in order to reallocate resources, the Corporation
announced that it would eliminate 9,000 to 10,000 positions, or six to seven
percent of its work force, over a twelve-month period. Of the $550 million
restructuring charge, approximately $475 million will be used to cover severance
and related costs and $75 million for other costs related to process change and
channel consolidation. Over half of the severance and related costs are related
to management positions which were eliminated in a review of span of control and
management structure. The restructuring charge includes severance and related
payments for 8,300 positions, which are company-wide and across all levels. The
difference between the 8,300 positions and the 10,000 positions initially
announced is expected to come from normal attrition. Through September 30, 2000,
there were approximately 2,500 employees who had moved to severance status as
part of these initiatives and approximately 3,500 additional employees who had
been notified. The remaining 2,300 positions have been identified and the
employees in these positions will be notified by March 31, 2001. Cash payments
applied to the restructuring reserve in the third quarter of 2000 were
approximately $81 million primarily related to severance costs, and noncash
reductions were $39 million, primarily related to restricted stock
accelerations. The remaining restructuring reserve balance was $430 million at
September 30, 2000.
8
Note Four - Trading Activities
Trading-Related Revenue
Trading account profits represent the net amount earned from the
Corporation's trading positions, which include trading account assets and
liabilities as well as derivative-dealer positions. These transactions include
positions to meet customer demand as well as for the Corporation's own trading
account. Trading positions are taken in a diverse range of financial instruments
and markets. The profitability of these trading positions is largely dependent
on the volume and type of transactions, the level of risk assumed, and the
volatility of price and rate movements. Trading account profits, as reported in
the Consolidated Statement of Income, includes neither the net interest
recognized on interest-earning and interest-bearing trading positions, nor the
related funding charge or benefit. Trading account profits and trading-related
net interest income ("trading-related revenue") are presented in the table below
as they are both considered in evaluating the overall profitability of the
Corporation's trading positions. Trading-related revenue is derived from foreign
exchange spot, forward and cross-currency contracts, fixed income and equity
securities and derivative contracts in interest rates, equities, credit and
commodities.
9
Trading Account Assets and Liabilities
The fair value of the components of trading account assets and liabilities
at September 30, 2000 and December 31,1999 were:
See Note Seven for additional information on derivative-dealer positions,
including credit risk.
Note Five - Loans and Leases
Loans and leases at September 30, 2000 and December 31, 1999 were:
10
The table below summarizes the changes in the allowance for credit losses
for the three months and nine months ended September 30, 2000 and 1999:
The following table presents the recorded investment in specific loans that
were considered individually impaired at September 30, 2000 and December 31,
1999:
September 30 December 31
(Dollars in millions) 2000 1999
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Commercial - domestic $2,574 $1,133
Commercial - foreign 587 503
Commercial real estate - domestic 313 449
Commercial real estate - foreign 1 -
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Total impaired loans $3,475 $2,085
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A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect all
amounts due, including principal and interest, according to the contractual
terms of the agreement. Due to their homogeneous nature, consumer loans and
certain smaller business loans are generally evaluated as a group based on
individual loan type. Commercial and commercial real estate loans are generally
evaluated individually due to a general lack of uniformity among individual
loans within each loan type and business segment. Loans that have been
identified as impaired are measured by management for impairment in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114). Impaired loans are measured
based on the present value of payments expected to be received, observable
market prices or for loans that are solely dependent on the collateral for
repayment, the estimated fair value of the collateral. If the recorded
investment in impaired loans exceeds the measure of estimated fair value, a
valuation allowance is established as a component of the allowance for credit
losses.
At September 30, 2000 and December 31, 1999, nonperforming loans including
certain loans which were considered impaired totaled $4.2 billion and $3.0
billion, respectively. Foreclosed properties amounted to $226 million and $163
million at September 30, 2000 and December 31, 1999, respectively.
11
Note Six - Short-Term Borrowings and Long-Term Debt
During 2000, Bank of America Corporation issued $6.2 billion in senior and
subordinated long-term debt, domestically and internationally, with maturities
ranging from 2002 to 2015. Of the $6.2 billion issued, $4.6 billion was
converted from fixed rates ranging from 7.32 percent to 8.42 percent to floating
rates through interest rate swaps at spreads ranging from nine to 59 basis
points over three-month London InterBank Offered Rate (LIBOR) and 45 to 130
basis points over one-month LIBOR. The remaining $1.6 billion bears interest at
floating rates ranging primarily from eight to 43 basis points over three-month
LIBOR and 22 to 29 basis points over one-month LIBOR.
At September 30, 2000, Bank of America Corporation had the authority to
issue approximately $13.9 billion of corporate debt and other securities under
its existing shelf registration statements.
During 2000, Bank of America, N.A. issued $14.0 billion in senior long-term
bank notes having maturities ranging from 2001 to 2013. Of the $14.0 billion
issued, $5.1 billion bears interest at spreads ranging from zero to 15 basis
points above three-month LIBOR, $4.1 billion bears interest at spreads ranging
from 287 to 272 basis points below the prime rate, $3.1 billion bears interest
at fixed rates ranging from 6.45 percent to 7.40 percent, $1.0 billion bears
interest at spreads ranging from 14 to 28 basis points above the Fed Funds rate
and $695 million bears interest at spreads ranging from five to 12 basis points
above one-month LIBOR.
Bank of America, N.A. maintains a domestic program to offer up to a
maximum of $50.0 billion, at any one time, of bank notes with fixed or floating
rates and maturities ranging from seven days or more from date of issue.
Short-term bank notes outstanding under this program totaled $21.3 billion at
September 30, 2000 compared to $15.2 billion at December 31, 1999. These
short-term bank notes, along with Treasury tax and loan notes and term federal
funds purchased, are reflected in other short-term borrowings in the
Consolidated Balance Sheet. Long-term debt under current and former programs
totaled $17.5 billion at September 30, 2000 compared to $10.1 billion at
December 31, 1999.
Bank of America Corporation and Bank of America, N.A. maintain a joint
Euro medium-term note program to offer up to $20.0 billion of senior, or in the
case of Bank of America Corporation, subordinated notes exclusively to
non-United States residents. The notes bear interest at fixed or floating rates
and may be denominated in U.S. dollars or foreign currencies. Bank of America
Corporation uses foreign currency contracts to convert certain
foreign-denominated debt into U.S. dollars. Bank of America Corporation's notes
outstanding under this program totaled $5.2 billion at September 30, 2000
compared to $4.5 billion at December 31, 1999. Bank of America, N.A.'s notes
outstanding under this program totaled $1.4 billion at September 30, 2000. Bank
of America, N.A. had no notes outstanding under this program at December 31,
1999. Of the $20.0 billion authorized at September 30, 2000, Bank of America
Corporation and Bank of America, N.A. had remaining authority to issue in the
aggregate of debt securities under the current program approximately $4.8
billion and $8.6 billion, respectively. At September 30, 2000 and December 31,
1999, $2.7 billion and $3.3 billion, respectively, were outstanding under the
former BankAmerica Euro medium-term note program. No additional debt securities
will be offered under that program.
Subsequent to September 30, 2000, the Corporation allocated $2 billion of
the joint Euro medium-term note program to be used exclusively for secondary
offerings to non-United States residents for a shelf registration statement
filed in Japan. In addition, the Corporation filed a 300 billion yen
(approximately U.S. $3 billion) shelf registration statement in Japan to be used
exclusively for primary offerings to non-United States residents.
12
Note Seven - Commitments and Contingencies
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters of
credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial institutions.
The following table summarizes outstanding commitments to extend credit:
Derivatives
Credit Risk Associated with Derivative-Dealer Activities
The table on the following page presents the notional or contract amounts
at September 30, 2000 and December 31, 1999 and the credit risk amounts (the net
replacement cost of contracts in a gain position) of the Corporation's
derivative-dealer positions which are primarily executed in the over-the-counter
market for trading purposes. This table should be read in conjunction with Note
Eleven of the Corporation's 1999 Annual Report on Form 10-K. The notional or
contract amounts indicate the total volume of transactions and significantly
exceed the amount of the Corporation's credit or market risk associated with
these instruments. Credit risk associated with derivatives is measured as the
net replacement cost should the counterparties with contracts in a gain position
to the Corporation completely fail to perform under the terms of those contracts
and any collateral underlying the contracts proves to be of no value. The credit
risk amounts presented in the following table do not consider the value of any
collateral but generally take into consideration the effects of legally
enforceable master netting agreements.
13
The table above includes both long and short derivative-dealer positions.
The average fair value of derivative-dealer assets for the nine months ended
September 30, 2000 and for the year ended December 31, 1999 was $18.6 billion
and $16.0 billion, respectively. The average fair value of derivative-dealer
liabilities for the nine months ended September 30, 2000 and for the year ended
December 31, 1999 was $19.3 billion and $16.5 billion, respectively. The fair
value of derivative-dealer assets at September 30, 2000 and December 31, 1999
was $15.4 billion and $16.1 billion, respectively. The fair value of
derivative-dealer liabilities at September 30, 2000 and December 31, 1999 was
$18.9 billion and $16.2 billion, respectively. See Note Four for a discussion of
trading-related revenue.
During the nine months ended September 30, 2000 and 1999, there were no
significant credit losses associated with derivative contracts. At September 30,
2000 and December 31, 1999, there were no nonperforming derivative positions
that were material to the Corporation.
In addition to credit risk management activities, the Corporation uses
credit derivatives to generate revenue by taking on exposure to underlying
credits. The Corporation also provides credit derivatives to sophisticated
customers who wish to hedge existing credit exposures or take on additional
credit exposure to generate revenue. The Corporation's credit derivative
positions at September 30, 2000 and December 31, 1999 consisted of credit
default swaps and total return swaps.
14
Asset and Liability Management (ALM) Activities
The table below outlines the status of the Corporation's ALM activity at
September 30, 2000 and December 31, 1999. It presents the notional amount and
fair value of the Corporation's open and closed ALM contracts. This table should
be read in conjunction with the "Market Risk Management" section on pages 42
through 46 and Note Eleven of the Corporation's 1999 Annual Report on Form 10-K.
(1) Fair value represents the net unrealized losses on open contracts.
(2) Represents the unamortized net realized deferred gains associated with
closed contracts.
When-Issued Securities
At September 30, 2000, the Corporation had commitments to purchase and sell
when-issued securities of $21.9 billion and $27.4 billion, respectively. At
December 31, 1999, the Corporation had commitments to purchase and sell
when-issued securities of $12.0 billion and $16.8 billion, respectively.
Litigation
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and directors have
been named as defendants in a number of actions filed in several federal courts
that have been consolidated for pretrial purposes before a Missouri federal
court. The amended complaint in the consolidated actions alleges, among other
things, that the defendants failed to disclose material facts about
BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. and related
entities until mid-October 1998, in violation of various provisions of federal
and state laws. The amended complaint also alleges that the proxy
statement-prospectus of August 4, 1998, falsely stated that the Merger would be
one of equals and alleges a scheme to have NationsBank gain control over the
newly merged entity. The Missouri federal court has certified classes consisting
generally of persons who were stockholders of NationsBank or
15
BankAmerica on September 30, 1998, or were entitled to vote on the Merger, or
who purchased or acquired securities of the Corporation or its predecessors
between August 4, 1998 and October 13, 1998. The amended complaint substantially
survived a motion to dismiss, and discovery is underway. Claims against certain
director-defendants were dismissed with leave to replead. Similar class actions
(including one limited to California residents raising the claim that the proxy
statement-prospectus of August 4, 1998, falsely stated that the Merger would be
one of equals) were filed in California state court, alleging violations of the
California Corporations Code and other state laws. The action on behalf of
California residents was certified but was dismissed. The Court of Appeals
reversed the dismissal. A Petition for Review is pending in the Supreme Court of
California. The remaining California actions have been consolidated, but have
not been certified as class actions. The Missouri federal court has enjoined
prosecution of those consolidated class actions as a class action. The
plaintiffs who were enjoined have appealed that injunction to the United States
Court of Appeals for the Eighth Circuit. The Corporation believes the actions
lack merit and will defend them vigorously. The amount of any ultimate exposure
cannot be determined with certainty at this time.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
Note Eight - Shareholders' Equity and Earnings Per Common Share
On July 26, 2000, the Corporation's Board of Directors (the Board)
authorized a new stock repurchase program of up to 100 million shares of the
Corporation's common stock at an aggregate cost of up to $7.5 billion.
On June 23, 1999, the Board authorized the repurchase of up to 130 million
shares of the Corporation's common stock at an aggregate cost of up to $10.0
billion. Through September 30, 2000, the Corporation had repurchased 128 million
shares of its common stock in open market repurchases and under accelerated
share repurchase programs at an average per-share price of $57.18 which reduced
shareholders' equity by $7.3 billion. The remaining buyback authority for common
stock under the 1999 program totaled $2.7 billion or two million shares at
September 30, 2000.
Earnings per common share is computed by dividing net income available to
common shareholders by the weighted average common shares issued and
outstanding. For diluted earnings per common share, net income available to
common shareholders can be affected by the conversion of the registrant's
convertible preferred stock. Where the effect of this conversion would have been
dilutive, net income available to common shareholders is adjusted by the
associated preferred dividends. This adjusted net income is divided by the
weighted average number of common shares issued and outstanding for each period
plus amounts representing the dilutive effect of stock options outstanding and
the dilution resulting from the conversion of the registrant's convertible
preferred stock, if applicable. The effect of convertible preferred stock is
excluded from the computation of diluted earnings per common share in periods in
which the effect would be antidilutive.
16
The calculation of earnings per common share and diluted earnings per
common share for the three months and nine months ended September 30, 2000 and
1999 is presented below:
Note Nine - Business Segment Information
During the first quarter of 2000, the Corporation realigned its business
segments to report the results of the Corporation's operations through three
business segments: Consumer and Commercial Banking, Asset Management and Global
Corporate and Investment Banking. In the third quarter of 2000, the Corporation
continued to realign its business segments to report its results of operations
through four business segments, which now include Equity Investments as a
reporting segment. Consumer and Commercial Banking provides a diversified range
of products and services to individuals and small businesses through multiple
delivery channels and commercial lending and treasury management services to
middle market companies with annual revenue between $10 million and $500
million. Asset Management offers customized asset management and credit,
financial advisory, fiduciary and trust services, and banking services. It also
provides management of equity, fixed income, cash and alternative investments to
individuals, corporations and a wide array of institutional clients and full
service and discount brokerage services. Global Corporate and Investment Banking
provides a diversified range of financial products such as investment banking,
trade finance, treasury management, capital markets, leasing and financial
advisory services to domestic and international corporations, financial
institutions and government entities. Equity Investments includes Principal
Investing, which formerly was a component of Global Corporate and Investment
Banking. Principal Investing makes both direct and indirect equity investments
in a wide variety of transactions. Equity Investments also includes the
Corporation's strategic technology and alliances investment portfolio in
addition to other parent company investments.
The following tables include total revenue, net income and average total
assets for the three months and nine months ended September 30, 2000 and 1999,
respectively, for each business segment. Certain prior period amounts have been
reclassified between segments to conform to the current period presentation.
17
(1) Net interest income is presented on a taxable-equivalent basis.
(2) There were no material intersegment revenues among the four business
segments.
18
(1) Net interest income is presented on a taxable-equivalent basis.
(2) There were no material intersegment revenues among the four business
segments.
A reconciliation of the segments' net income to consolidated net income follows:
19
This report on Form 10-Q contains certain forward-looking statements that
are subject to risks and uncertainties and include information about possible or
assumed future results of operations. Many possible events or factors could
affect the future financial results and performance of the Corporation. This
could cause results or performance to differ materially from those expressed in
our forward-looking statements. Words such as "expects", "anticipates",
"believes", "estimates", variations of such words and other similar expressions
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions, which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in, or
implied by, such forward-looking statements. Readers of the Corporation's Form
10-Q should not rely solely on the forward-looking statements and should
consider all uncertainties and risks discussed throughout this report, as well
as those discussed in the Corporation's 1999 Annual Report on Form 10-K. These
statements are representative only on the date hereof, and the Corporation
undertakes no obligation to update any forward-looking statements made.
The possible events or factors include the following: the Corporation's
loan growth is dependent on economic conditions, as well as various
discretionary factors, such as decisions to securitize, sell, or purchase
certain loans or loan portfolios; syndications or participations of loans;
retention of residential mortgage loans; and the management of borrower,
industry, product and geographic concentrations and the mix of the loan
portfolio. The rate of nonperforming assets, charge-offs and provision expense
can be affected by local, regional and international economic and market
conditions, concentrations of borrowers, industries, products and geographic
locations, the mix of the loan portfolio and management's judgments regarding
the collectibility of loans. Liquidity requirements may change as a result of
fluctuations in assets and liabilities and off-balance sheet exposures, which
will impact the capital and debt financing needs of the Corporation and the mix
of funding sources. Decisions to purchase, hold or sell securities are also
dependent on liquidity requirements and market volatility, as well as on- and
off-balance sheet positions. Factors that may impact interest rate risk include
local, regional and international economic conditions, levels, mix, maturities,
yields or rates of assets and liabilities, utilization and effectiveness of
interest rate contracts and the wholesale and retail funding sources of the
Corporation. The Corporation is also exposed to the potential of losses arising
from adverse changes in market rates and prices which can adversely impact the
value of financial products, including securities, loans, deposits, debt and
derivative financial instruments, such as futures, forwards, swaps, options and
other financial instruments with similar characteristics.
In addition, the banking industry in general is subject to various monetary
and fiscal policies and regulations, which include those determined by the
Federal Reserve Board, the Office of the Comptroller of Currency, the Federal
Deposit Insurance Corporation, state regulators and the Office of Thrift
Supervision, whose policies and regulations could affect the Corporation's
results. Other factors that may cause actual results to differ from the
forward-looking statements include the following: projected business increases
following process changes and productivity and investment initiatives are lower
than expected or do not pay for severance or other related costs as quickly as
anticipated; competition with other local, regional and international banks,
thrifts, credit unions and other nonbank financial institutions, such as
investment banking firms, investment advisory firms, brokerage firms, investment
companies and insurance companies, as well as other entities which offer
financial services, located both within and outside the United States and
through alternative delivery channels such as the Internet; interest rate,
market and monetary fluctuations; inflation; market volatility; general economic
conditions and economic conditions in the geographic regions and industries in
which the Corporation operates; introduction and acceptance of new
banking-related products, services and enhancements; fee pricing strategies;
mergers and acquisitions and their integration into the Corporation; and
management's ability to manage these and other risks.
20
Overview
The Corporation is a Delaware corporation, a bank holding company and a
financial holding company, and it is headquartered in Charlotte, North Carolina.
The Corporation provides a diversified range of banking and nonbanking financial
services and products both domestically and internationally through four major
business segments: Consumer and Commercial Banking, Asset Management, Global
Corporate and Investment Banking, and Equity Investments. At September 30, 2000,
the Corporation had $672 billion in assets and approximately 146,000 full-time
equivalent employees.
The remainder of management's discussion and analysis of the Corporation's
results of operations and financial condition should be read in conjunction
with the consolidated financial statements and related notes presented on pages
2 through 19.
Refer to Table One for selected financial data for the three months and
nine months ended September 30, 2000 and 1999 and Table Thirteen for the three
quarters ending September 30, 2000.
Key performance highlights for the nine months ended September 30, 2000 compared
to the same period in 1999:
(diamond) Net income totaled $6.1 billion, or $3.66 per common share
(diluted), an increase of $152 million, or $0.29 per common share
(diluted). Excluding merger and restructuring charges for both
periods, net income increased $353 million, or $0.42 per common
share (diluted).
(diamond) Cash basis ratios on an operating basis measure performance
excluding goodwill and other intangible assets and their related
amortization expense. Cash basis diluted earnings per common share
were $4.26, an increase of $0.43 per share. Return on average
tangible common shareholders' equity was 28.68 percent, an
increase of 20 basis points. The cash basis efficiency ratio was
50.84 percent, an improvement of 152 basis points, primarily due
to a seven percent increase in noninterest income.
(diamond) The return on average common shareholders' equity was 17.46
percent, an increase of 27 basis points. Excluding merger and
restructuring charges, the return on average common shareholders'
equity increased 84 basis points to 18.45 percent.
(diamond) Total revenue includes net interest income on a taxable-equivalent
basis and noninterest income. Total revenue was $25.2 billion, an
increase of $783 million.
>> Net interest income remained essentially unchanged at $14.0
billion. Managed loan growth, particularly in consumer
products, and higher levels of core deposits and equity were
partially offset by spread compression, the impact of
securitizations and asset sales, the cost of share repurchases
and deterioration in auto lease residual values. Average
managed loans and leases were $417.4 billion, a $41.1 billion
increase, primarily due to a 17 percent increase in consumer
loans and leases. Average core deposits grew to $298.9
billion, an $8.6 billion increase. The net interest yield was
3.21 percent, a 31 basis point decline. The decrease was
primarily due to spread compression, an increase in lower
spread trading-related earning assets and the cost of share
repurchases.
>> Noninterest income was $11.2 billion, a $718 million increase.
The increase in noninterest income was partially offset by a
$681 million decrease in other income to $464 million,
reflecting a third quarter 2000 charge of $186 million related
to the deterioration of auto lease residual values, the
absence of securitization gains and lower loan sales gains in
2000, and a gain on the sale of certain businesses in 1999.
Consumer and Commercial Banking experienced a $185 million, or
13 percent, increase in card income to $1.6 billion as
successful marketing campaigns in 2000 led to higher purchase
volume and number of accounts. Income from investment and
brokerage services increased $81 million to $1.1 billion in
the Asset Management segment as a result of new asset
management business and market growth combined with
productivity increases in consumer brokerage. Global Corporate
and Investment Banking had significant increases in trading
account profits and
21
investment banking income. Trading account profits increased
$359 million, or 30 percent, to $1.6 billion driven by
higher revenues from interest rate contracts and equities,
partially offset by decreases in foreign exchange contracts
and fixed income activities. Investment banking income
increased $129 million to $1.1 billion, or 13 percent,
primarily attributable to growth in equity underwriting.
Equity Investments had equity investment gains of $1.0
billion, reflecting an increase of $478 million, and
included gains in both the principal investing and strategic
technology and alliances areas.
(diamond) The provision for credit losses was $.3 billion, a $145 million
decrease. Net charge-offs were $1.3 billion, or 0.45 percent of
average loans and leases. The resulting decrease of $174 million,
or 10 basis points, was driven primarily by lower losses on
bankcard loans. Nonperforming assets were $4.4 billion, or 1.09
percent of loans, leases and foreclosed properties at
September 30, 2000, a $1.2 billion, or 23 basis point increase
from December 31, 1999. The increase reflects a rise in
nonperforming loans in the commercial - domestic portfolio,
primarily in the financial services, theater and paging
industries. Nonperforming loans also increased in real estate
secured consumer finance loans, resulting from growth and
seasoning in that portfolio. The allowance for credit losses
totaled $6.7 billion and $6.8 billion at September 30, 2000 and
December 31, 1999, respectively.
(diamond) Noninterest expense was unchanged at $13.4 billion, reflecting
higher revenue-related incentive compensation and spending on
projects to improve sales and service, partially offset by cost
reductions resulting from recent mergers.
Employee-Related Matters
Bank of America Pension Plan
The Corporation and the BankAmerica 401(k) retirement plans were combined
effective June 30, 2000. With the introduction of the revised Bank of America
retirement plan, qualified BankAmerica employees who are currently active had a
one-time opportunity to transfer certain assets in their 401(k) plan account to
their Bank of America Pension Plan (pension plan) account effective August 4,
2000. The total amount of 401(k) plan assets transferred to the pension plan was
$1.3 billion. The pension plan (which is a cash balance type of pension plan)
has a balance guarantee feature, applied at the time a benefit payment is made
from the plan, that protects the transferred portion of participants' accounts
from future market downturns. The Corporation is responsible for funding any
shortfall on the guarantee feature.
Productivity and Investment Initiatives
As part of its productivity and investment initiatives announced on July
28, 2000, the Corporation recorded a pre-tax restructuring charge of $550
million ($346 million after-tax) in the third quarter of 2000 which is included
in merger and restructuring charges in the Consolidated Statement of Income.
As part of these initiatives and in order to reallocate resources, the
Corporation announced that it would eliminate 9,000 to 10,000 positions, or six
to seven percent of its work force, over a twelve-month period. Of the $550
million restructuring charge, approximately $475 million will be used to cover
severance and related costs and $75 million for other costs related to process
change and channel consolidation. Over half of the severance and related costs
are related to management positions which were eliminated in a review of span of
control and management structure. The restructuring charge includes severance
and related payments for 8,300 positions, which are company-wide and across all
levels. The difference between the 8,300 positions and the 10,000 positions
initially announced is expected to come from normal attrition. Through September
30, 2000, there were approximately 2,500 employees who had moved to severance
status as part of these initiatives and approximately 3,500 additional employees
who had been notified. The remaining 2,300 positions have been identified and
the employees in these positions will be notified by March 31, 2001. Cash
payments applied to the restructuring reserve in the third quarter of 2000 were
approximately $81 million primarily related to severance costs, and noncash
reductions were $39 million, primarily related to restricted stock
accelerations. The remaining restructuring reserve balance was $430 million at
September 30, 2000.
Additionally, processes are being reviewed across the Corporation to ensure
that it is organized around its customers and their needs. Significant process
changes, primarily in the infrastructure of the
22
operations are expected in consumer real estate, commercial loan processing and
servicing and branch support.
The savings that are identified are targeted for reinvestment in areas that
the Corporation believes provide the best growth opportunities. Among these
areas are e-commerce, asset management and private banking, card and payment
businesses and the investment banking platform.
23
(1) Operating basis excludes merger and restructuring charges.
(2) Cash basis calculations exclude goodwill and other intangible assets
and their related amortization expense.
24
Business Segment Operations
The Corporation provides a diversified range of banking and nonbanking
financial services and products through its various subsidiaries. During the
first quarter of 2000, the Corporation realigned its business segments to report
the results of the Corporation's operations through three business segments:
Consumer and Commercial Banking, Asset Management, and Global Corporate and
Investment Banking. In the third quarter of 2000, the Corporation continued to
realign its business segments to report its results of operations through four
business segments, which now include Equity Investments as a reporting segment.
The business segments summarized in Table Two are primarily managed with a
focus on various performance measures including total revenue, net income,
return on average equity and efficiency. These performance measures are also
presented on a cash basis which excludes the impact of goodwill and other
intangible assets and their related amortization expense. Total revenue includes
net interest income on a taxable-equivalent basis and noninterest income. The
net interest yield of the business segments reflects the results of a funds
transfer pricing process which derives net interest income by matching assets
and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity is allocated to each business segment based on an
assessment of its inherent risk. Shareholder value added (SVA) is a new
performance measure that is better aligned with the Corporation's growth
strategy orientation and strengthens the Corporation's focus on generating
shareholder value. SVA is defined as cash basis operating earnings less a charge
for the use of capital. The capital charge is calculated by multiplying 12
percent (management's estimate of the shareholder's minimum required rate of
return on capital invested) by average total common shareholders' equity (at the
Corporation level) and by average allocated equity (at the business segment
level).
See Note Nine of the consolidated financial statements for additional
business segment information and reconciliations to consolidated amounts.
Additional information on noninterest income can be found in the "Noninterest
Income" section beginning on page 41. Certain prior period amounts have been
reclassified between segments and their components (presented after Table Two)
to conform to the current period presentation.
25
Consumer and Commercial Banking
The Corporation's market share in the consumer and commercial businesses is
significant across the fastest growing regions of the United States. The
Corporation continues its strategy of focusing entirely on the customer in terms
of sales and service. The results in 2000 also reflect the Corporation's
continued focus on Card Services as a growth area as the consumer credit and
debit card businesses experienced double-digit increases in both volume and in
new accounts compared to 1999. The Corporation also experienced success in the
middle market banking business by providing more investment banking services to
its commercial customer base.
Consumer and Commercial Banking provides a wide array of products and
services to individuals, small businesses and middle market companies through
multiple delivery channels.
26
(diamond) Strong card income and higher service charges for the nine months
ended September 30, 2000 were offset by lower mortgage servicing
income and lower gains on loan sales and securitizations. Included
in the 2000 results was a third quarter charge related to the
deterioration of auto lease residual values of $257 million, of
which $71 million impacted net interest income and $186 million
impacted other income included in noninterest income.
>> Annualized loan growth of 10 percent had a positive effect on
net interest income. This strong loan growth was more than
offset by spread compression.
>> Card income grew 13 percent as a result of successful
marketing campaigns in 2000 and service charges were up four
percent. These increases were offset by lower mortgage
servicing income reflecting an adjustment to mortgage
servicing rights in the prior year and 1999 gains on loan
sales and securitizations.
(diamond) Cash basis earnings for the nine months ended September 30, 2000
rose two percent, excluding auto lease residual charges in 2000
and 1999.
>> Noninterest expense was down four percent over the prior year
due to lower personnel expense, professional fees and
equipment expense.
>> The provision for credit losses decreased primarily due to
improved credit quality in the credit card portfolio.
The major components of Consumer and Commercial Banking are Banking
Regions, Consumer Products and Commercial Banking.
Banking Regions
Banking Regions serves approximately 30 million consumer households in 21
states and the District of Columbia and overseas through its extensive network
of approximately 4,500 banking centers, 14,000 ATMs, telephone and Internet
channels on www.bankofamerica.com. Banking Regions provides a wide array of
products and services, including deposit products such as checking, money market
savings accounts, time deposits and IRAs, and credit products such as home
equity, personal auto loans and auto leasing. Banking Regions also includes
small business banking providing treasury management, credit services, community
investment, debit card, e-commerce and brokerage services to over two million
small business relationships across the franchise.
27
(diamond) Total revenue for the nine months ended September 30, 2000
increased one percent primarily due to a rise in noninterest
income while net interest income remained essentially unchanged.
>> Loan growth, primarily in home equity lending, and deposit
growth had a positive effect on net interest income but was
offset by spread compression and 1999 loan sales.
>> Noninterest income increased five percent primarily due to a
47 percent increase in card income driven by a substantial
rise in debit card income and an increase in consumer service
charges of three percent throughout all Banking Regions.
(diamond) Cash basis earnings increased five percent for the nine months
ended September 30, 2000, primarily attributable to a decrease in
noninterest expense driven by merger-related savings and lower
merger transition costs.
Consumer Products
Consumer Products provides specialized services such as the origination and
servicing of residential mortgage loans, issuance and servicing of credit cards,
direct banking via telephone and Internet, student lending and certain insurance
services. Consumer Products also provides auto loans, retail finance programs to
dealerships and lease financing of new and used cars.
(diamond) Card Services experienced a nine percent increase in noninterest
income as the consumer credit and debit card lines of the Card
Services business had double-digit increases in both volume and in
new accounts compared to the prior year due to successful
marketing campaigns in 2000. In addition, noninterest income grew
33 percent in the Community Development Banking Group. These
increases were offset by higher auto lease residual charges, lower
mortgage servicing income and gains on loan sales and
securitizations in 1999.
28
(diamond) A decrease in expense resulted in a two percent increase in cash
basis earnings for the nine months ended September 30, 2000,
excluding auto lease residual charges in 2000 and 1999.
>> Noninterest expense decreased eight percent and was driven by
expense reduction initiatives.
>> The provision for credit losses decreased primarily due to
improved credit quality in the credit card portfolio.
(diamond) Net interest income remained essentially unchanged year-over-year
as loan growth was offset by spread compression.
Commercial Banking
Commercial Banking provides commercial lending and treasury management
services to middle market companies with annual revenue between $10 million and
$500 million. These services are available through relationship manager teams as
well as through alternative channels such as the telephone via the commercial
service center and the Internet by accessing Bank of America Direct.
(diamond) Total revenue for the nine months ended September 30, 2000
increased one percent due to an eleven percent increase in
noninterest income, partially offset by a two percent decrease in
net interest income.
>> The increase in noninterest income was attributable to higher
middle marketing investment banking fees and higher corporate
service charges.
>> Net interest income decreased primarily due to spread
compression.
(diamond) Higher noninterest income was offset by increased provision for
credit losses and noninterest expense, resulting in a five percent
decline in cash basis earnings for the nine months ended September
30, 2000.
>> The provision for credit losses rose as a result of
liquidation of businesses in the commercial finance portfolio
as well as growth in the commercial banking loan portfolio.
>> Noninterest expense increased three percent primarily due to
higher expenses related to the increase in the middle market
investment banking business.
Asset Management
The Corporation's strategy to focus on and grow the asset management
business is evident in the results for 2000. The 21 percent growth in assets
under management since September 30, 1999 and the six percent growth in revenue
for the nine months ended September 30, 2000 reveal that customers are buying
more investment products from the Corporation's asset management group.
29
Assets under management rose $47 billion to $275 billion at September 30,
2000 compared to September 30, 1999. The Nations Funds family of funds reached
$100 billion in mutual fund assets during the third quarter of 2000, driven by
increases in equity, fixed income and money market funds.
Asset Management includes the Private Bank, Banc of America Capital
Management and Banc of America Investment Services, Inc. The Private Bank offers
financial solutions to high-net-worth clients and foundations in the U.S. and
internationally by providing customized asset management and credit, financial
advisory, fiduciary, trust and banking services. Banc of America Capital
Management offers management of equity, fixed income, cash, and alternative
investments; manages the assets of individuals, corporations, municipalities,
foundations and universities, and public and private institutions; and provides
advisory services to the Corporation's affiliated family of mutual funds. Banc
of America Investment Services, Inc. provides both full-service and discount
brokerage services through investment professionals located throughout the
franchise and a brokerage web site that provides customers a wide array of
market analyses, investment research and self-help tools, account information
and transaction capabilities.
On June 15, 2000, the Corporation entered into an agreement, effective
January 2, 2001, to acquire the remaining 50 percent of Marsico Capital
Management LLC (Marsico) for a total investment of $1.1 billion. The Corporation
acquired the first 50 percent in 1999. Marsico is a Denver-based investment
management firm specializing in large capitalization growth stocks. Marsico
manages almost $17 billion in assets and has experienced compounded annual
revenue growth of approximately 460 percent since its inception in 1997. The
Corporation expects Marsico to benefit its marketing of investment capabilities
to financial intermediaries and institutional clients.
(diamond) Total revenue increased six percent for the nine months ended
September 30, 2000. The increase was attributable to increases in
both net interest income and noninterest income.
>> Net interest income increased 11 percent due to strong loan
growth in the commercial loan portfolio.
>> Noninterest income increased four percent primarily due to
increased investment and brokerage fees driven by new asset
management business and market growth combined with
productivity increases in consumer brokerage, partially offset
by gains in 1999 on the disposition of certain businesses.
(diamond) Cash basis earnings increased 24 percent for the nine months ended
September 30, 2000 due to the increase in total revenue, partially
offset by one-time business divestiture expenditures in 2000.
Global Corporate and Investment Banking
The Corporation continues to focus on the investment banking business and
continues to see success in building investment banking capabilities off of its
strong corporate banking base. This success is
30
evident in the 13 percent growth in investment banking income in 2000 and Banc
of America Securities LLC's top ten league table rankings in all key product
areas.
Global Corporate and Investment Banking provides a broad array of financial
products such as investment banking, trade finance, treasury management, capital
markets, leasing and financial advisory services to domestic and international
corporations, financial institutions and government entities. Clients are
supported through offices in 37 countries in four distinct geographic regions:
U.S. and Canada; Asia; Europe, Middle East and Africa; and Latin America.
Products and services provided include loan origination, merger and acquisition
advisory, debt and equity underwriting and trading, cash management,
derivatives, foreign exchange, leasing, leveraged finance, project finance, real
estate finance, senior bank debt, structured finance and trade services.
(diamond) For the nine months ended September 30, 2000, total revenue
increased 11 percent and was led by growth in noninterest income.
This growth was the result of the success in investment banking
activities and an increase in trading account profits driven by
very favorable market conditions in the first quarter of 2000.
>> Noninterest income increased 14 percent due to continued
growth in equity-related trading, equity underwriting and
advisory services.
>> Net interest income increased eight percent as a result of
higher trading-related activities and an increase in the
domestic commercial loan portfolio.
(diamond) For the nine months ended September 30, 2000, cash basis earnings
increased 13 percent. The increase was primarily due to the higher
revenue discussed above and was partially offset by an increase in
noninterest expense of nine percent resulting from higher
revenue-related incentive compensation and gains on sales of other
assets in the prior year.
Global Corporate and Investment Banking offers clients a comprehensive
range of global capabilities through four components: Global Credit Products,
Global Capital Raising, Global Markets, and Global Treasury Services.
Global Credit Products
Global Credit Products provides credit and lending services and includes
the corporate industry-focused portfolio, real estate, leasing and project
finance.
31
(diamond) For the nine months ended September 30, 2000, total revenue
remained essentially unchanged.
>> Noninterest income increased four percent mainly due to a rise
in corporate service charges.
>> The increase in noninterest income was offset by a decrease in
net interest income due to lower interest recoveries and the
reduction in the international loan portfolio offset by
domestic loan growth.
(diamond) Noninterest expense declined six percent for the nine months ended
September 30, 2000 mainly due to merger-related savings.
Offsetting this decrease was a rise in the provision for credit
losses driven by the charge-off of a single fraud-related credit
in the second quarter of 2000 and credit deterioration, resulting
in a six percent decline in cash basis earnings.
Global Capital Raising
Global Capital Raising includes the Corporation's investment banking
activities. Through a separate subsidiary, Banc of America Securities LLC,
Global Capital Raising underwrites and makes markets in equity securities,
high-grade and high-yield corporate debt securities, commercial paper, and
mortgage-backed and asset-backed securities. Banc of America Securities LLC also
provides correspondent clearing services for other securities broker/dealers,
traditional brokerage services to high-net-worth individuals and prime-brokerage
services. Debt and equity securities research, loan syndications, mergers and
acquisitions advisory services, private placements and equity derivatives are
also provided through Banc of America Securities LLC.
(diamond) Total revenue grew 50 percent for the nine months ended September
30, 2000 due to the continued growth and success of the investment
banking platform.
32
>> Net interest income was up $227 million primarily due
to higher equity-related trading activities.
>> Noninterest income rose 38 percent driven by a substantial
increase in equity-related trading account profits and higher
investment banking income. The growth in investment banking
income was driven by the equity platform while fixed income
remained flat reflecting market conditions.
(diamond) Cash basis earnings more than tripled with an increase of $328
million for the nine months ended September 30, 2000. These
results were led by the increase in revenue partially offset by
higher noninterest expense, which was driven by higher
revenue-related incentive compensation.
Global Markets
Global Markets provides business solutions for a global customer base using
interest rate derivatives, foreign exchange products, commodity derivatives and
mortgage-related products. In support of these activities, the businesses will
take positions in these products and capitalize on market-making activities. The
Global Markets business also takes an active role in the trading of fixed income
securities in all of the regions in which Global Corporate and Investment
Banking transacts business and is a primary dealer in the U.S., as well as in
several international locations.
(diamond) Net interest income increased nine percent for the nine months
ended September 30, 2000. This was offset by an 11 percent
decrease in noninterest income, resulting in a four percent
decrease in total revenue.
>> The increase in net interest income was driven by balance
sheet strategies in interest rate contract trading.
>> Noninterest income declined due to a decrease in trading
account profits and other income. The decrease in trading
account profits was partially offset by the increase in net
interest income while the decrease in other income was driven
by a reduction in an equity investment in the prior year.
(diamond) A decrease in noninterest expense of three percent was offset by
the decrease in noninterest income noted above. This resulted in a
13 percent decline in cash basis earnings for the nine months
ended September 30, 2000. The decrease in noninterest expense was
a result of a decline in revenue-related incentive compensation.
33
Global Treasury Services
Global Treasury Services provides the technology, strategies and integrated
solutions to help financial institutions, government agencies and public and
private companies of all sizes manage their operations and cash flows on a
local, regional, national and global level.
(diamond) Noninterest income increased two percent for the nine months ended
September 30, 2000 driven by an increase in corporate service
charges. Offsetting this increase was a four percent decline in
net interest income due to interest rate positions on U.S.
deposits and narrower spreads on offshore deposits. The result was
a one percent decline in revenue.
(diamond) The increase in cash basis earnings of nine percent for the nine
months ended September 30, 2000 was led by the increase in
noninterest income and a lower provision expense driven by credit
upgrades and declining emerging markets exposure in Trade Finance.
Equity Investments
Equity Investments includes Principal Investing, which formerly was a
component of Global Corporate and Investment Banking. Principal Investing is
comprised of a diversified portfolio of companies at all stages of the business
cycle, from start-up to buyout. Investments are made on both a direct and
indirect basis in the U.S. and overseas. Direct investing activity focuses on
playing an active role in the strategic and financial direction of the portfolio
company as well as providing broad business experience and access to the
Corporation's global resources. Indirect investments represent passive limited
partnership stakes in funds managed by experienced third party private equity
investors who act as general partners. Equity Investments also includes the
Corporation's strategic technology and alliances investment portfolio in
addition to other parent company investments.
34
(diamond) For the nine months ended September 30, 2000, both revenue and
cash basis earnings were up substantially. Total revenue growth
was 83 percent and cash basis earnings increased 110 percent.
>> Equity investment gains increased $478 million to $1.0 billion
and included principal investing gains of $808 million and
gains in the strategic technology and alliances area of $231
million.
35
Results of Operations
Net Interest Income
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheet for the most recent five
quarters and for the nine months ended September 30, 2000 and 1999 is presented
in Tables Three and Four, respectively.
As reported, net interest income on a taxable-equivalent basis was $4.7
billion for the three months ended September 30, 2000, an increase of $69
million compared to the same period in 1999. For the nine months ended September
30, 2000 and 1999, net interest income on a taxable-equivalent basis was $14.0
billion and $13.9 billion, respectively. Management also reviews "core net
interest income" which adjusts reported net interest income for the impact of
trading-related activities, securitizations, asset sales and divestitures. For
purposes of internal analysis, management combines trading-related net interest
income with trading account profits, as discussed in the "Noninterest Income"
section on page 41, as trading strategies are typically evaluated on total
revenue. The determination of core net interest income also requires adjustment
for the impact of securitizations (primarily home equity and credit card), asset
sales (primarily residential and commercial real estate loans) and divestitures.
Net interest income associated with assets that have been securitized is
predominantly offset in noninterest income, as the Corporation takes on the role
of servicer and records servicing income and gains on securitizations, where
appropriate.
The table below provides a reconciliation between net interest income on a
taxable-equivalent basis presented in Tables Three and Four and core net
interest income for the three months and nine months ended September 30, 2000
and 1999, respectively.
(1) Net interest income is presented on a taxable-equivalent basis.
(2) bp denotes basis points; 100 bp equals 1%.
Core net interest income on a taxable-equivalent basis was $4.6 billion and
$13.8 billion for the three months and nine months ended September 30, 2000,
respectively, an increase of $73 million and $238 million over the corresponding
periods in 1999. For both periods, managed loan growth, particularly in consumer
products, and higher levels of core deposits and equity were partially offset by
spread compression, the cost of share repurchases and deterioration in auto
lease residual values.
Core average earning assets were $486.9 billion and $482.2 billion for the
three months and nine months ended September 30, 2000, respectively, an increase
of $36.2 billion and $31.5 billion over the same periods in 1999, primarily
reflecting managed loan growth of 13 percent and 11 percent, respectively.
Managed consumer loans increased 17 percent for both the three months and nine
months
36
ended September 30, 2000, led by growth in residential mortgages, consumer
finance loans and home equity lines. Loan growth is dependent on economic
conditions, as well as various discretionary factors such as decisions to
securitize certain loan portfolios and the management of borrower, industry,
product and geographic concentrations.
The core net interest yield decreased 20 basis points to 3.74 percent and 18
basis points to 3.84 percent for the three months and nine months ended
September 30, 2000, respectively, mainly due to spread compression, the cost of
share repurchases and deterioration in auto lease residual values.
Provision for Credit Losses
The provision for credit losses totaled $435 million and $1.3 billion for
the three months and nine months ended September 30, 2000, respectively,
compared to $450 million and $1.5 billion for the comparable 1999 periods. The
decrease in the provision for credit losses was primarily due to a reduction in
the inherent risk and size of the Corporation's emerging markets portfolio and a
change in the composition of the loan portfolio from commercial and consumer
foreign to more consumer loans secured by residential real estate. Total net
charge-offs were $435 million and $1.3 billion for the three months and nine
months ended September 30, 2000, respectively, compared to $460 million and $1.5
billion for the comparable 1999 periods. The decrease in net charge-offs was
driven primarily by lower losses on bankcard loans. For additional information
on the allowance for credit losses, certain credit quality ratios and credit
quality information on specific loan categories see the "Credit Risk Management
and Credit Portfolio Review" section beginning on page 48.
Gains on Sales of Securities
Gains on sales of securities were $11 million and $23 million for the three
months and nine months ended September 30, 2000, respectively, compared to $44
million and $226 million in the respective periods of 1999. Securities gains
were lower in 2000 as a result of continued unfavorable market conditions for
certain debt securities.
37
38
(1) The average balance and yield on available-for-sale securities are
based on the average of historical amortized cost balances.
(2) Nonperforming loans are included in the average loan balances. Income
on such nonperforming loans is recognized on a cash basis.
(3) Interest income includes taxable-equivalent basis adjustments of $79,
$78 and $71 in the third, second and first quarters of 2000 and $66
and $53 in the fourth and third quarters of 1999, respectiely.
Interest income also includes the impact of risk management interest
rate contracts, which (decreased) increased interest income on the
underlying assets $(13), $(11) and $7 in the third, second and first
quarters of 2000 and $57 and $103 in the fourth and third quarters of
1999, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or
more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (increased) decreased interest expense on the
underlying liabilities $(16), $(5) and $(8) for the third, second and
first quarters of 2000 and $(2) and $6 in the fourth and third
quarters of 1999, respectively.
39
(1) The average balance and yield on available-for-sale securities are
based on the average of historical amortized cost balances.
(2) Nonperforming loans are included in the average loan balances. Income
on such nonperforming loans is recognized on a cash basis.
(3) Interest income includes taxable-equivalent basis adjustments of
$228 and $149 for the nine months ended September 30, 2000 and 1999,
respectively. Interest income also includes the impact of risk
management interest rate contracts, which (decreased) increased
interest income on the underlying assets $(17) and $249 for the nine
months ended September 30, 2000 and 1999, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or
more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (increased) decreased interest expense on the
underlying liabilities $(29) and $118 for the nine months ended
September 30, 2000 and 1999, respectively.
40
Noninterest Income
As presented in Table Five, noninterest income decreased $83 million and
increased $718 million to $3.6 billion and $11.2 billion for the three months
and nine months ended September 30, 2000, respectively, from the comparable 1999
periods. The decrease in noninterest income for the three months ended September
30, 2000 primarily reflects declines in other income and mortgage servicing
income partially offset by increases in equity investment gains, trading account
profits and investment and brokerage services. The increase in noninterest
income for the nine months ended September 30, 2000 reflects increases in equity
investment gains, trading account profits, card income, service charges,
investment and brokerage services and investment banking income. These increases
were partially offset by declines in other income and mortgage servicing income.
The following section discusses the noninterest income results of the
Corporation's four business segments, as well as other income for the total
Corporation. For additional business segment information, see "Business Segment
Operations" beginning on page 25.
Consumer and Commercial Banking
(diamond) Noninterest income for Consumer and Commercial Banking decreased
$263 million to $5.1 billion for the nine months ended September
30, 2000. The increase in card income as a result of successful
marketing campaigns and higher service charges were offset by a
charge in the third quarter related to the deterioration in auto
lease residual values, lower mortgage servicing income and lower
gains on loan sales and securitizations, causing a five percent
decrease in noninterest income for the nine months ended September
30, 2000.
>> Card income includes merchant discount, credit card and debit
card fees and interchange income. Card income increased $185
million to $1.6 billion primarily due to increased purchase
volume and number of accounts in both the credit card and
debit card portfolios resulting in higher interchange income,
fee income from the credit card portfolio and servicing income
from securitized credit card receivables. Growth in income for
the core portfolio is being generated through traditional
marketing channels, expanding relationships with existing
customers and leveraging the franchise network. Card income
included revenue from the securitized portfolio of $159
million for the nine months ended September 30, 2000. Card
income included revenue and gains from the securitized
portfolio of $149 million for the nine months ended September
30, 1999.
41
(diamond) Service charges include deposit account service charges,
non-deposit service charges and fees, bankers' acceptances and
letters of credit fees and fees on factored accounts receivable.
Service charges increased $94 million to $2.6 billion for the nine
months ended September 30, 2000 due to an increase in both
consumer and corporate service charges. Consumer service charges
increased $64 million primarily due to overdraft charges and
general banking service fees. Corporate service charges increased
$30 million primarily attributable to overdraft charges and
bankers' acceptances and letters of credit fee income.
(diamond) Mortgage servicing income decreased $55 million to $408 million
for the nine months ended September 30, 2000, primarily reflecting
an adjustment in the prior year to mortgage servicing rights to
reflect lower expected mortgage prepayments. The average managed
portfolio of mortgage loans serviced increased $40.8 billion to
$325.5 billion. Total production of first mortgage loans
originated through the Corporation decreased $20.6 billion to
$40.5 billion, reflecting a slowdown in refinancings as a result
of a general increase in levels of interest rates. First mortgage
loan origination volume was composed of approximately $16.4
billion of retail loans and $24.1 billion of correspondent and
wholesale loans.
>> In conducting its mortgage production activities, the
Corporation is exposed to interest rate risk for the periods
between the loan commitment date and the loan funding date. To
manage this risk, the Corporation enters into various
financial instruments including forward delivery contracts,
Euro dollar futures and option contracts. The notional amount
of such contracts was $8.1 billion at September 30, 2000 with
associated net unrealized losses of $32 million. At December
31, 1999, the notional amount of such contracts was $2.7
billion with associated net unrealized gains of $18 million.
These contracts have an average expected maturity of less than
90 days. To manage risk associated with changes in prepayment
rates and the impact on mortgage servicing rights, the
Corporation uses various financial instruments including
options and certain swap contracts. At September 30, 2000,
deferred net gains from mortgage servicing rights hedging
activity were $181 million, comprised of unamortized realized
deferred gains of $231 million and unrealized losses of $50
million on closed and open positions, respectively. At
December 31, 1999, deferred net losses from mortgage servicing
rights hedging activity were $20 million, comprised of
unamortized realized deferred gains of $313 million and
unrealized losses of $333 million on closed and open
positions, respectively. Notional amounts of hedge instruments
used for mortgage servicing rights hedging activities were
$48.1 billion and $43.4 billion at September 30, 2000 and
December 31, 1999, respectively.
Asset Management
(diamond) Noninterest income for Asset Management increased $51 million to
$1.2 billion for the nine months ended September 30, 2000. The
increase was primarily attributable to increased investment and
brokerage services, partially offset by gains in 1999 on the
disposition of certain businesses.
>> Investment and brokerage services include personal and
institutional asset management fees and consumer brokerage
fees. Income from investment and brokerage services increased
$81 million to $1.1 billion. This increase was primarily
attributable to higher revenue from consumer investment and
brokerage services reflecting new asset management business
and market growth combined with productivity increases in
consumer brokerage.
42
Global Corporate and Investment Banking
(diamond) Noninterest income for Global Corporate and Investment Banking
increased $462 million to $3.8 billion for the nine months ended
September 30, 2000. The increase was due to increases in trading
account profits, investment banking income and corporate service
charges.
>> Trading account profits represent the net amount earned from the
Corporation's trading positions, which include trading account assets
and liabilities as well as derivative-dealer positions. These
transactions include positions to meet customer demand as well as for
the Corporation's own trading account. Trading positions are taken in a
diverse range of financial instruments and markets. The profitability
of these trading positions is largely dependent on the volume and type
of transactions, the level of risk assumed, and the volatility of price
and rate movements. Trading account profits, as reported in the
Consolidated Statement of Income, includes neither the net interest
recognized on interest-earning and interest-bearing trading positions,
nor the related funding charge or benefit. Trading account profits, as
well as trading-related net interest income ("trading-related
revenue"), are presented in the table below as they are both considered
in evaluating the overall profitability of the Corporation's trading
positions. Trading-related revenue is derived from foreign exchange
spot, forward and cross-currency contracts, fixed income and equity
securities and derivative contracts in interest rates, equities, credit
and commodities.
Trading-related revenue increased $618 million to $2.3 billion for the
nine months ended September 30, 2000, primarily due to interest rate
contracts and equities (including equity derivatives), partially offset
by decreases in foreign exchange contracts, fixed income and
commodities and other contracts. Revenue from equities increased $587
million to $925 million. The increase reflects continued growth of this
business through enhanced client deal activity and volatility in equity
markets. Income from interest rate contracts increased $127 million to
$571 million. The increase was primarily attributable to market
volatility driven by interest rate uncertainty, coupled with stronger
client activity in domestic and international markets. Foreign exchange
revenue decreased $52 million to $400 million due primarily to reduced
volatility in the current year. Fixed income decreased $20 million to
$360 million primarily attributable to spread widening and a decline in
customer demand.
43
(diamond) Investment banking income increased $129 million to $1.1 billion for
the nine months ended September 30, 2000. The increase primarily
reflects an increase of $150 million to $489 million in securities
underwriting fees, attributable to continued growth in equity
underwriting. Advisory services fees increased $51 million to $227
million primarily attributable to strong revenue from a higher volume
of merger and acquisition deals in the first quarter. Syndication fees
increased $27 million to $384 million, reflecting the Corporation's
continued strong position as a lead arranger on syndications.
Investment banking income by major activity follows:
- ------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
(Dollars in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------
Investment banking income
Securities underwriting $160 $119 $489 $339
Syndications 130 167 384 357
Advisory services 69 52 227 176
Other 17 25 46 145
- ------------------------------------------------------------------------------
Total $376 $363 $1,146 $1,017
- ------------------------------------------------------------------------------
(diamond) Corporate service charges increased $59 million to $780 million for
the nine months ended September 30, 2000, driven by an increase in
non-deposit and deposit account service charges, partially offset by a
decline in bankers' acceptances and letters of credit fees.
Equity Investments
(diamond) Noninterest income for Equity investments increased $468 million to
$1.1 billion for the nine months ended September 30, 2000. This
increase was driven by strong equity investment gains.
>> Equity investment gains increased $478 million to $1.0 billion and
included principal investing gains of $808 million and gains in the
strategic technology and alliances area of $231 million.
Other Income
Other income for the Corporation decreased $681 million to $464 million for
the nine months ended September 30, 2000 reflecting a $186 million charge
related to the deterioration of auto lease residual values in the third quarter,
the absence of securitization gains and lower loan sales gains in 2000, and a
gain on the sale of certain businesses in 1999.
44
Other Noninterest Expense
As presented in Table Six, the Corporation's other noninterest expense
decreased $116 million and increased $10 million to $4.4 billion and $13.4
billion for the three months and nine months ended September 30, 2000,
respectively, from the comparable 1999 periods. The decrease for the three
months ended was primarily attributable to declines in professional fees,
personnel and equipment expenses. The increase for the nine months ended was
primarily attributable to increases in personnel, other general operating and
occupancy expenses, partially offset by decreases in professional fees,
equipment, data processing and marketing expenses.
(diamond) Personnel expense decreased $38 million and increased $213 million to
$2.3 billion and $7.1 billion for the three months and nine months
ended September 30, 2000, respectively. The decrease for the three
months ended September 30, 2000 was primarily attributable to lower
revenue-related incentive compensation. The increase for the nine
months ended September 30, 2000 was primarily attributable to higher
employee benefits and higher revenue-related incentive compensation
from the first half of the year.
(diamond) Equipment expense decreased $28 million and $128 million to $285
million and $882 million for the three months and nine months ended
September 30 2000, respectively. For the three months ended September
30, 2000 the decrease primarily reflects a decline in depreciation
expense, partially offset by an increase in rental expense. For the
nine months ended September 30, 2000 the decrease reflects a decline
in repairs and maintenance expense and a reduction in purchases of
non-capitalized equipment.
(diamond) Marketing expense decreased $41 million to $398 million for the nine
months ended September 30, 2000, primarily due to timing differences
related to the underlying marketing efforts across the Corporation.
(diamond) Professional fees declined $60 million and $154 million to $100
million and $298 million for the three months and nine months ended
September 30, 2000, respectively. For both periods, the declines
primarily reflect lower consulting fees.
(diamond) Data processing expense decreased $73 million to $495 million for the
nine months ended September 30, 2000. The decrease primarily reflects
declines in software-related expense, item processing and check
clearing expense from the first half of the year.
(diamond) Other general operating expense increased $165 million to $1.5 billion
for the nine months ended September 30, 2000. The increase primarily
reflects litigation costs from the first quarter related to pre-Merger
lawsuits.
45
Income Taxes
The Corporation's income tax expense for the three months and nine months
ended September 30, 2000 was $1.0 billion and $3.5 billion, respectively, for an
effective tax rate of 35.9 percent and 36.4 percent, respectively. Excluding
merger and restructuring charges, the effective tax rate for the three months
and nine months ended September 30, 2000 was 36.1 percent and 36.4 percent,
respectively. The Corporation's income tax expense for the three months and nine
months ended September 30, 1999 was $1.2 billion and $3.4 billion, respectively,
for an effective tax rate of 35.7 percent and 36.1 percent, respectively.
Excluding merger and restructuring charges, the effective tax rate for the three
months and nine months ended September 30, 1999 was 35.7 percent and 35.9
percent, respectively.
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its Balance
Sheet which includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. Going forward, the Corporation's goal
is to keep risk-weighted assets relatively flat over the next two years as
reductions in categories with lower returns offset underlying core growth. The
discussion of average balances below compares the nine months ended September
30, 2000 to the same period in 1999. With the exception of average managed
loans, the average balances discussed below can be derived from Table Four.
In looking at the Corporation's assets, average loans and leases, the
Corporation's primary use of funds, increased $28.0 billion to $390.3 billion
for the nine months ended September 30, 2000. Adjusting for securitizations,
sales and divestitures, average managed loans and leases increased $41.1 billion
to $417.4 billion for the nine months ended September 30, 2000. This increase
was primarily due to a strong $31.0 billion, or 17 percent, consumer loan
growth.
The majority of consumer loan growth occurred in residential real estate
secured loan products including residential mortgages, home equity lines and
consumer finance. Average managed residential mortgages increased $20.2 billion
to $94.3 billion, reflecting increased originations and subsequent retention of
adjustable-rate mortgages on the Balance Sheet. Average managed consumer finance
loans increased $6.6 billion to $32.3 billion. Average managed home equity lines
increased $3.1 billion to $18.9 billion, reflecting the impact of new marketing
programs and lower prepayments.
Average managed commercial loans increased $10.0 billion to $207.1 billion
for the nine months ended September 30, 2000. Domestic commercial loans
reflected growth of $9.9 billion to $152.4 billion, due to strong growth in the
Consumer and Commercial Banking and Asset Management business segments. This
domestic growth was partially offset by strategic reductions in foreign
commercial loans of $1.1 billion.
The average securities portfolio for the nine months ended September 30,
2000 increased $7.8 billion to $85.8 billion, representing 13 percent of total
uses of funds for the nine months ended September 30, 2000. See the following
"Securities" section for additional information on the securities portfolio.
Average other assets and cash and cash equivalents increased $3.9 billion
to $88.6 billion for the nine months ended September 30, 2000 due largely to
increases in the average balances of derivative-dealer assets and mortgage
servicing rights.
At September 30, 2000, cash and cash equivalents were $24.4 billion, a
decrease of $2.6 billion from December 31, 1999. During the nine months ended
September 30, 2000, net cash provided by operating activities was $2.8 billion,
net cash used in investing activities was $27.9 billion and net cash provided by
financing activities was $22.5 billion. For further information on cash flows,
see the Consolidated Statement of Cash Flows of the consolidated financial
statements.
46
On the liability side of the Balance Sheet, average levels of
customer-based funds increased $8.6 billion to $298.9 billion for the nine
months ended September 30, 2000 primarily due to increases in consumer time
deposits and noninterest-bearing demand deposits. As a percentage of total
sources, average levels of customer-based funds decreased to 45 percent for the
nine months ended September 30, 2000 from 47 percent.
Average levels of market-based funds increased $29.8 billion for the nine
months ended September 30, 2000 to $210.0 billion. In addition, average levels
of long-term debt increased $12.6 billion to $69.4 billion for the nine months
ended September 30, 2000 mainly the result of borrowings to fund earning asset
growth, business development opportunities, build liquidity, repay maturing debt
and fund share repurchases.
In conjunction with its funding activities, the Corporation carefully
monitors its liquidity position - the ability to fulfill its cash requirements.
The Corporation assesses its liquidity requirements and modifies its assets and
liabilities accordingly. This process, coupled with the Corporation's ability to
raise capital and debt financing, is designed to cover the liquidity needs of
the Corporation. The Corporation also takes into consideration the ability of
its subsidiary banks to pay dividends to the Corporation. For additional
information on the dividend capabilities of subsidiary banks, see Note Twelve of
the Corporation's 1999 Annual Report on Form 10-K. Management believes that the
Corporation's sources of liquidity are more than adequate to meet its cash
requirements.
Securities
The securities portfolio at September 30, 2000 consisted of
available-for-sale securities totaling $79.7 billion compared to $81.7 billion
at December 31, 1999. Held-to-maturity securities totaled $1.4 billion at both
September 30, 2000 and December 31, 1999.
The valuation allowance for available-for-sale and marketable equity
securities is included in shareholders' equity. At September 30, 2000 the
valuation allowance consists of unrealized losses of $1.6 billion, net of
related income taxes of $877 million, primarily reflecting market valuation
adjustments of $2.5 billion pre-tax net unrealized losses on available-for-sale
securities and $32 million pre-tax net unrealized gains on marketable equity
securities. At December 31, 1999 the valuation allowance reflects unrealized
losses of $2.5 billion, net of related income taxes of $1.1 billion, primarily
reflecting market valuation adjustments of $3.8 billion pre-tax net unrealized
losses on available-for-sale securities and $248 million pre-tax net unrealized
gains on marketable equity securities.
At September 30, 2000 and December 31, 1999, the market value of the
Corporation's held-to-maturity securities reflected pre-tax net unrealized
losses of $73 million and $152 million, respectively.
The estimated average duration of the available-for-sale securities
portfolio was 4.01 years at September 30, 2000 compared to 4.05 years at
December 31, 1999.
Capital Resources and Capital Management
Shareholders' equity at September 30, 2000 was $46.9 billion compared to
$44.4 billion at December 31, 1999, an increase of $2.5 billion. The increase
was in part due to net earnings (net income less dividends) of $3.7 billion,
partially offset by the repurchase of 50 million shares of common stock for
approximately $2.4 billion. The remaining increase of $1.2 billion was due to
changes in net unrealized gains on available-for-sale and marketable equity
securities, the issuance of restricted stock and the exercise of employee stock
options.
On July 26, 2000, the Corporation's Board of Directors (the Board)
authorized a new stock repurchase program of up to 100 million shares of the
Corporation's common stock at an aggregate cost of up to $7.5 billion.
47
On June 23, 1999, the Board authorized the repurchase of up to 130 million
shares of the Corporation's common stock at an aggregate cost of up to $10.0
billion. Through September 30, 2000, the Corporation had repurchased 128 million
shares of its common stock in open market repurchases and under accelerated
share repurchase programs at an average per-share price of $57.18 which reduced
shareholders' equity by $7.3 billion. The remaining buyback authority for common
stock under the 1999 program totaled $2.7 billion or two million shares at
September 30, 2000.
Presented below are the regulatory risk-based capital ratios and capital
amounts for the Corporation and Bank of America, N.A. at September 30, 2000 and
December 31, 1999. The Corporation and Bank of America, N.A. were considered
"well-capitalized" at September 30, 2000.
The regulatory capital guidelines measure capital in relation to the credit
and market risks of both on- and off-balance sheet items using various risk
weights. Under the regulatory capital guidelines, Total Capital consists of
three tiers of capital. Tier 1 Capital includes common shareholders' equity 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. 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 banking and finance subsidiaries represents qualifying total
capital, at least 50 percent of which must consist of Tier 1 Capital. Risk-based
capital ratios are calculated by dividing Tier 1 and Total Capital by
risk-weighted assets. In calculating risk-weighed assets, assets and off-balance
sheet exposures are assigned to one of four categories of risk-weights, based
primarily on relative credit risk. At September 30, 2000, the Corporation had no
subordinated debt that qualified as Tier 3 Capital.
At September 30, 2000, the regulatory risk-based capital ratios of the
Corporation and Bank of America, N.A. exceeded the regulatory minimums of four
percent for Tier 1 risk-based capital ratio, eight percent for total risk-based
capital ratio and the leverage guidelines of 100 to 200 basis points above the
minimum ratio of three percent.
Credit Risk Management and Credit Portfolio Review
The following section discusses credit risk in the loan portfolio. The
Corporation's primary credit exposure is concentrated in its loans and leases
portfolio, which totaled $402.6 billion and $370.7 billion at September 30, 2000
and December 31, 1999, respectively. In an effort to minimize the adverse impact
of any single event or set of occurrences, the Corporation strives to maintain a
diverse credit portfolio. Table Seven presents the distribution of loans and
leases, nonperforming assets and net charge-offs by
48
category. Additional information on the Corporation's real estate, industry and
foreign exposure can be found in the Concentrations of Credit Risk section
beginning on page 53.
n/m = not meaningful
(1) Percentage amounts are calculated as annualized net charge-offs divided by
average oustanding loans and leases during the period for each loan
category.
(2) Includes both on-balance sheet and securitized loans.
- --------------------------------------------------------------------------------
49
Commercial Portfolio
At September 30, 2000 and December 31, 1999, total commercial loans
outstanding totaled $206.6 billion and $195.8 billion, respectively, or 51
percent and 53 percent of total loans and leases, respectively, of which 85
percent and 86 percent, respectively, were domestic.
Commercial - domestic loans outstanding totaled $149.6 billion and $143.5
billion at September 30, 2000 and December 31, 1999, or 37 percent and 39
percent of total loans and leases, respectively. The Corporation had commercial
- - domestic loan net charge-offs of $583 million, or 0.52 percent of average
commercial - domestic loans for the nine months ended September 30, 2000,
compared to $520 million, or 0.51 percent of average commercial - domestic loans
for the same period in 1999. Net charge-offs increased primarily due to a single
fraud-related credit charged off in the second quarter of 2000. Nonperforming
commercial - domestic loans were $2.0 billion, or 1.30 percent of commercial -
domestic loans at September 30, 2000, compared to $1.2 billion, or 0.81 percent
of commercial - domestic loans at December 31, 1999. The increase was primarily
due to commercial - domestic loans in the financial services, theater and paging
industries. Commercial - domestic loans past due 90 days or more and still
accruing interest were $151 million at September 30, 2000, compared to $135
million at December 31, 1999, or 0.10 percent and 0.09 percent of commercial -
domestic loans, respectively.
In connection with decisions to exit certain businesses and sell certain
loans, approximately $864 million in commercial - domestic loans, net of
related reserves of $84 million, were transferred to assets held-for-sale during
the third quarter of 2000. This transfer included approximately $63 million in
loans that would be classified as nonperforming loans had they not been
transferred to assets held-for-sale. Subsequent to September 30, 2000,
approximately $376 million of these loans were sold to a third party.
Commercial - foreign loans outstanding totaled $30.5 billion and $28.0
billion at September 30, 2000 and December 31, 1999, respectively, or eight
percent of total loans and leases at both points in time. The Corporation had
commercial - foreign loan net charge-offs for the nine months ended September
30, 2000 of $52 million, or 0.24 percent of average commercial - foreign loans,
compared to $122 million, or 0.54 percent of average commercial - foreign loans
for the same period in 1999. Nonperforming commercial - foreign loans were $564
million, or 1.85 percent of commercial - foreign loans at September 30, 2000,
compared to $486 million, or 1.74 percent at December 31, 1999. Commercial -
foreign loans past due 90 days or more and still accruing interest were $60
million at September 30, 2000, compared to $58 million at December 31, 1999, or
0.20 percent and 0.21 percent of commercial - foreign loans, respectively. For
additional information see the Regional Foreign Exposure discussion beginning on
page 55.
Commercial real estate - domestic loans totaled $26.3 billion and $24.0
billion at September 30, 2000 and December 31, 1999, respectively, or seven
percent of total loans and leases at both points in time. Net charge-offs
remained negligible at $10 million, or 0.05 percent of average commercial real
estate - domestic loans for the nine months ended September 30, 2000.
Nonperforming commercial real estate - domestic loans were $136 million at
September 30, 2000, compared to $191 million at December 31, 1999. At September
30, 2000, commercial real estate - domestic loans past due 90 days or more and
still accruing interest were $5 million, or 0.02 percent of total commercial
real estate - domestic loans, compared to $6 million, or 0.02 percent at
December 31, 1999. Table Nine displays commercial real estate loans by
geographic region and property type, including the portion of such loans which
are nonperforming, and other real estate credit exposures.
Table Ten presents aggregate commercial loan and lease exposures by certain
significant industries.
Consumer Portfolio
At September 30, 2000 and December 31, 1999, total consumer loans
outstanding totaled $196.0 billion and $174.9 billion, respectively, or 49
percent and 47 percent of total loans and leases, respectively, of which
approximately 67 percent were secured by first and second mortgages on
residential real estate. Additional information on components of, and changes in
the Corporation's consumer loan portfolio can be found in the average earning
asset discussion within the "Net Interest Income" section on page 36 and
"Balance Sheet Review and Liquidity Risk Management" section on page 46.
50
Residential mortgage loans increased to $94.1 billion at September 30,
2000, compared to $81.9 billion at December 31, 1999. Net charge-offs on
residential mortgage loans remained negligible at $14 million, or 0.02 percent
of average residential mortgage loans for the nine months ended September 30,
2000. Nonperforming residential mortgage loans decreased $27 million to $502
million at September 30, 2000 compared to December 31, 1999.
Consumer bankcard receivables increased to $11.7 billion at September 30,
2000, compared to $9.0 billion at December 31, 1999. Net charge-offs on bankcard
receivables for the nine months ended September 30, 2000 decreased $164 million
from the same period in 1999 to $237 million, or 3.30 percent of average
bankcard receivables. The decrease resulted from portfolio sales in 1999 and
continued declines in delinquency levels and bankruptcy filing rates. Bankcard
loans past due 90 days or more and still accruing interest were $139 million, or
1.20 percent of bankcard receivables at September 30, 2000, compared to $138
million, or 1.53 percent at December 31, 1999.
Consumer finance loans outstanding totaled $25.4 billion and $22.3 billion
at September 30, 2000 and December 31, 1999, respectively, or six percent of
total loans and leases at both points in time. The Corporation had consumer
finance net charge-offs of $184 million, or 1.02 percent of average consumer
finance loans for the nine months ended September 30, 2000, compared to $157
million, or 1.18 percent for the nine months ended September 30, 1999. Consumer
finance nonperforming loans increased to $951 million at September 30, 2000 from
$598 million at December 31, 1999 reflecting continued growth and seasoning in
this portfolio.
Other domestic consumer loans, which include direct and indirect consumer
loans and home equity lines of credit increased to $62.6 billion at September
30, 2000, compared to $59.4 billion at December 31, 1999. Direct and indirect
consumer loan charge-offs were $213 million, or 0.68 percent of average direct
and indirect consumer loans outstanding, for the nine months ended September 30,
2000, compared to $260 million, or 0.83 percent of the average balance
outstanding, for the comparable period in 1999. Home equity line charge-offs
remained negligible at $8 million, or .05 percent of average home equity lines
outstanding, for the nine months ended September 30, 2000.
Excluding bankcard, total consumer loans past due 90 days or more and still
accruing interest were $148 million, or 0.07 percent of total consumer loans at
September 30, 2000, compared to $184 million or 0.11 percent at December 31,
1999.
In 1999, the Federal Financial Institutions Examination Council (FFIEC)
issued The Uniform Classification and Account Management Policy (the Policy)
which provides guidance for and promotes consistency among banks on the
treatment of delinquent and bankruptcy-related consumer loans. The Corporation
is required to implement the Policy by December 31, 2000 and expects to be in
full compliance with the Policy by that date. The Corporation estimates
additional charge-offs in the consumer portfolio, primarily within the consumer
finance products, of approximately $100 million in the fourth quarter to comply
with the Policy.
Nonperforming Assets
As presented in Table Seven, nonperforming assets increased to $4.4
billion, or 1.09 percent of loans, leases and foreclosed properties at September
30, 2000 from $3.2 billion or 0.86 percent at December 31, 1999. Nonperforming
loans increased to $4.2 billion at September 30, 2000 from $3.0 billion at
December 31, 1999, primarily due to an increase in commercial - domestic
nonperforming loans and higher real estate secured consumer finance
nonperformers as discussed above. The allowance coverage of nonperforming loans
was 161 percent at September 30, 2000 compared to 224 percent at December 31,
1999. Foreclosed properties increased to $226 million at September 30, 2000
compared to $163 million at December 31, 1999.
51
The Corporation expects credit quality to continue to deteriorate, which
will affect both nonperforming loans and net charge-off levels. In November
2000, one large commercial credit in the consumer services industry was
classified as nonperforming. As a result of this and other deterioration in
credit quality, the Corporation believes the increase in nonperforming loans in
the fourth quarter will exceed the 13 percent growth experienced in the third
quarter. The potential charge-off related to this single credit, combined with
the additional $100 million in charge-offs related to the implementation of the
new FFIEC policy (discussed above), and further weakness in the economy could
all contribute to net charge-off amounts more than double those recorded in the
third quarter. As a result of fourth quarter charge-offs at this level, the
Corporation at this time believes its net charge-offs for the year as a
percentage of average loans and leases will be approximately 60 basis points.
The Corporation anticipates recording a provision for loan losses in an amount
at least equal to its net charge-offs in the fourth quarter.
The Corporation believes its size, geographic reach, product and industry
mix afford a level of diversification which provides protection from a single
customer, industry or geographic credit problem.
In order to respond when deterioration of a credit occurs, internal loan
workout units are devoted to providing specialized expertise and full-time
management and/or collection of certain nonperforming assets as well as certain
performing loans. Management believes concerted collection strategies and a
proactive approach to managing overall problem assets have expedited the
disposition, collection and renegotiation of nonperforming and other
lower-quality assets. As part of this process, management routinely evaluates
all reasonable alternatives, including the sale of assets individually or in
groups, and selects the optimal strategy.
Note Five of the consolidated financial statements provides the reported
investment in specific loans considered to be impaired at September 30, 2000 and
December 31, 1999. The Corporation's investment in specific loans that were
considered to be impaired at September 30, 2000 was $3.5 billion, compared to
$2.1 billion at December 31, 1999. Commercial - domestic impaired loans
increased $1.4 billion to $2.6 billion at September 30, 2000, compared to
December 31, 1999. Commercial - foreign impaired loans increased $84 million to
$587 million at September 30, 2000 compared to December 31, 1999. Commercial
real estate - domestic impaired loans decreased $136 million to $313 million at
September 30, 2000, compared to December 31, 1999.
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its
loan and lease portfolios to identify risks inherent in and to assess the
overall collectibility of those portfolios. Certain homogeneous loan portfolios
are evaluated collectively based on individual loan type while remaining
portfolios are reviewed on an individual loan basis. These detailed reviews,
combined with historical loss experience and other factors, result in the
identification and quantification of specific allowances for credit losses and
loss factors which are used in determining the amount of the allowance and
related provision for credit losses. The actual amount of incurred credit losses
that may be confirmed may vary from the estimate of incurred losses due to
changing economic conditions or changes in industry or geographic
concentrations. The Corporation has procedures in place to monitor differences
between estimated and actual incurred credit losses. These procedures include
detailed periodic assessments by senior management of both individual loans and
credit portfolios and the models used to estimate incurred credit losses in
those portfolios.
Portions of the allowance for credit losses are assigned to cover the
estimated probable incurred losses in each loan and lease category based on the
results of the Corporation's detailed review process as described above. Further
assignments are made based on general and specific economic conditions, as well
as performance trends within specific portfolio segments and individual
concentrations of credit, including geographic and industry concentrations. The
assigned portion of the allowance for credit losses continues to be weighted
toward the commercial loan portfolio, which reflects a higher level of
nonperforming loans and the potential for higher individual losses. The
remaining unassigned portion of the allowance for credit losses, determined
separately from the procedures outlined above, addresses certain industry and
geographic concentrations, including global economic conditions. This procedure
helps to minimize the risk related to the margin of imprecision inherent in the
estimation of the assigned allowance for credit losses. Due to the subjectivity
involved in the determination of the unassigned portion of the allowance for
credit losses, the relationship of the unassigned component to the total
allowance for credit losses may fluctuate from period to period. Management
evaluates the adequacy of the allowance for credit losses based on the combined
total of the assigned and unassigned components and believes that the allowance
for credit losses reflects management's best estimate of incurred credit losses
as of the balance sheet date.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. After review of all relevant matters affecting loan collectibility,
management believes that the allowance for credit losses is appropriate given
its analysis of estimated incurred credit losses at September 30, 2000. Table
Eight provides the changes in the allowance for credit losses for the three
months and nine months ended September 30, 2000 and 1999.
52
Concentrations of Credit Risk
In an effort to minimize the adverse impact of any single event or set of
occurrences, the Corporation strives to maintain a diverse credit portfolio as
outlined in Tables Seven, Nine, Ten and Eleven.
53
The Corporation maintains an extremely diverse commercial loan portfolio,
representing 51 percent of total loans and leases, with the largest
concentration in commercial real estate, which represents seven percent of total
loans and leases. The exposure presented in Table Nine represents credit
extensions for real estate-related purposes to borrowers or counterparties who
are primarily in the real estate development or investment business and for
which the ultimate repayment of the credit is dependent on the sale, lease,
rental or refinancing of the real estate. The exposure included in the table
does not include credit extensions which were made on the general
creditworthiness of the borrower for which real estate was obtained as security
and for which the ultimate repayment of the credit is not dependent on the sale,
lease, rental or refinancing of the real estate. Accordingly, the exposure
presented does not include commercial loans secured by owner-occupied real
estate, except where the borrower is a real estate developer.
Table Nine
Commercial Real Estate Loans, Foreclosed Properties
and Other Real Estate Credit Exposure
54
Table Ten below presents aggregate commercial loan and lease exposures by
certain significant industries at September 30, 2000. Total commercial loans
outstanding, excluding commercial real estate loans, comprised 45 percent of
total loans and leases at September 30, 2000. No commercial industry
concentration is greater than three percent of total loans and leases.
Regional Foreign Exposure
Through its credit and market risk management activities, the Corporation
has been devoting particular attention to those countries negatively impacted by
global economic pressure. These include certain Asian countries as well as
countries within Latin America and Eastern Europe that have experienced currency
and other economic problems.
In connection with its efforts to maintain a diversified portfolio, the
Corporation limits its exposure to any one geographic region or country and
monitors this exposure on a continuous basis. Table Eleven sets forth selected
regional foreign exposure at September 30, 2000. At September 30, 2000, the
Corporation's total exposure to these select countries was $33.6 billion, an
increase of $5.8 billion from December 31, 1999, primarily due to increased
levels of Japanese government securities and Korean exposure in financial
institutions partially offset by decreased exposure in Pakistan due to the sale
of the Pakistan business. The Corporation's total exposure to these select
foreign markets has declined $3.1 billion and $13.2 billion since December 31,
1998 and 1997, respectively. Table Eleven is based on the Federal Financial
Institutions Examination Council's instructions for periodic reporting of
foreign exposure. The table has been expanded to include "Gross Local Country
Claims" as defined in the table below and may not be consistent with disclosures
by other financial institutions.
55
International Developments
In recent years, a number of countries in Asia, Latin America and Central
and Eastern Europe experienced economic difficulties due to a combination of
structural problems and negative market reaction that resulted from increased
awareness of these problems. While each country's situation is unique, many
share common factors such as: (1) government actions which restrain normal
functioning of free markets in physical goods, capital and/or currencies; (2)
perceived weaknesses of the banking systems; and (3) perceived overvaluation of
local currencies and/or pegged exchange rate systems. These factors resulted in
capital movement out of these countries or in reduced capital inflows;
accordingly, many of these countries experienced liquidity problems in addition
to the structural problems.
56
Moreover, since the Asian Crisis in 1997, contagion impact of problems in one
country into other emerging markets has been both quick to spread and quick to
be reversed to more normal conditions.
Since 1999 and into the first and second quarters of 2000, many of the
Asian economies had been showing signs of recovery from prior problems, slowly
implementing structural reforms. However, during the third quarter of 2000, the
combination of slower pace of reform implementation, new domestic problems and
tighter global market conditions has led to some loss of confidence in the
region's financial markets. Similar conditions are also affecting asset
valuation in Latin America, where an economic recovery is proving sustainable in
only a few of the largest markets, while in others it is faltering. In addition
to domestic problems inherent to these countries individually, the strength or
weakness of the U.S. economy, as well as the position of asset holders in the
developed markets, is significantly affecting both liquidity and asset
valuations in the emerging markets. As a result, the lessening of risks observed
earlier in the year is now in doubt.
Where appropriate, the Corporation has adjusted its activities (including
its borrower selection) in light of the risks and opportunities discussed above.
Throughout 1999, the Corporation continued to reduce its exposure in Asia, Latin
America and Central and Eastern Europe, adjusting to the changing economic
conditions. Accordingly, during the third quarter of 2000, the Corporation has
sharply decreased exposure in the higher-risk countries in Latin America and
Asia, corresponding with the rapid changes in economic activity in those
countries. The Corporation will continue to monitor and adjust its foreign
activities on a country-by-country basis depending on management's judgment of
the likely developments in each country and will take action as deemed
appropriate.
Market Risk Management
In the normal course of conducting its business activities, the Corporation
is exposed to market risks including price and liquidity risk. Market risk is
the potential of loss arising from adverse changes in market rates and prices,
such as interest rates (interest rate risk), foreign currency exchange rates
(foreign exchange risk), commodity prices (commodity risk) and prices of equity
securities (equity risk). Financial products that expose the Corporation to
market risk include securities, loans, deposits, debt and derivative financial
instruments such as futures, forwards, swaps, options and other financial
instruments with similar characteristics. Liquidity risk arises from the
possibility that the Corporation may not be able to satisfy current or future
financial commitments or that the Corporation may be more reliant on alternative
funding sources such as long-term debt.
Market risk is managed by the Corporation's Finance Committee, which
formulates policy based on desirable levels of market risk. In setting desirable
levels of market risk, the Finance Committee considers the impact on both
earnings and capital of the current outlook in market rates, potential changes
in market rates, world and regional economies, liquidity, business strategies
and other factors.
57
Trading Portfolio
The table below sets forth the calculated value-at-risk (VAR) amounts for
the twelve months ended September 30, 2000 and 1999. The amounts are calculated
on a pre-tax basis. The Corporation performs the VAR calculation for each major
trading portfolio segment on a daily basis. It then calculates the combined VAR
across these portfolio segments using two different sets of assumptions. The
first calculation assumes that each portfolio segment experiences adverse price
movements at the same time (i.e., the price movements are perfectly correlated).
The second calculation assumes that these adverse price movements within the
major portfolio segments do not occur at the same time (i.e., they are
uncorrelated). Average interest rate VAR was modestly lower and average foreign
exchange VAR was marginally higher in the twelve months ended September 30, 2000
as compared with the twelve months ended September 30, 1999. This general
stability reflects continued emphasis on customer led trading activities and
less reliance on proprietary trading. Equity VAR was significantly higher in the
twelve months ended September 30, 2000 than in the twelve months ended September
30, 1999. This increase in equity risk taking reflects growth in cash and
derivatives trading activities as well as the expansion of trading into the
European cash equity markets. For additional discussion of market risk
associated with the trading portfolio, the VAR model and how the Corporation
manages its exposure to market risk, see pages 42 and 43 of the Corporation's
1999 Annual Report on Form 10-K. The composition of the trading portfolio and
the related fair value are included in Note Four of the consolidated financial
statements.
Asset and Liability Management Activities
Non-Trading Portfolio
The Corporation's Asset and Liability Management (ALM) process is used to
manage interest rate risk through the structuring of balance sheet and
off-balance sheet portfolios and identifying and linking such off-balance sheet
positions to specific assets and liabilities. Interest rate risk represents the
only material market risk exposure to the Corporation's non-trading on-balance
sheet financial instruments.
Available-for-sale securities had an unrealized loss of $2.5 billion at
September 30, 2000, compared to an unrealized loss of $3.8 billion at December
31, 1999. The expected maturities, unrealized gains and losses and weighted
average effective yield and rate associated with the Corporation's other
significant non-trading on-balance sheet financial instruments at September 30,
2000 were not significantly different from those at December 31, 1999. For a
discussion of non-trading on-balance sheet financial instruments, see page 43
and Table Eighteen on page 44 of the "Market Risk Management" section of the
Corporation's 1999 Annual Report on Form 10-K.
Interest Rate and Foreign Exchange Contracts
Risk management interest rate contracts and foreign exchange contracts are
utilized in the ALM process. Interest rate contracts, which are generally
non-leveraged generic interest rate and basis swaps, options, futures and
forwards, allow the Corporation to effectively manage its interest rate risk
position. In addition, the Corporation uses foreign currency contracts to manage
the foreign exchange risk associated
58
with foreign-denominated assets and liabilities, as well as the Corporation's
equity investments in foreign subsidiaries. As reflected in Table Twelve, the
notional amount of the Corporation's receive fixed and pay fixed interest rate
swaps at September 30, 2000 was $59.3 billion and $19.7 billion, respectively.
The receive fixed interest rate swaps are primarily converting variable-rate
commercial loans to fixed-rate. The net receive fixed position at September 30,
2000 was $39.6 billion notional compared to $37.3 billion notional at December
31, 1999. The Corporation had $7.6 billion notional and $8.0 billion notional of
basis swaps at September 30, 2000 and December 31, 1999, respectively, linked
primarily to loans and long-term debt. The Corporation had $31.3 billion
notional and $35.1 billion notional of option products at September 30, 2000 and
December 31, 1999, respectively. In addition, open foreign exchange contracts at
September 30, 2000 had a notional amount of $5.9 billion compared to $6.2
billion at December 31, 1999.
Table Twelve also summarizes the expected maturity and the average estimated
duration, weighted average receive and pay rates and the net unrealized gains
and losses at September 30, 2000 and December 31, 1999 of the Corporation's open
ALM interest rate swaps, as well as the expected maturity and net unrealized
gains and losses at September 30, 2000 and December 31, 1999 of the
Corporation's open ALM basis swaps, options, futures and forward rate and
foreign exchange contracts. Unrealized gains and losses are based on the last
repricing and will change in the future primarily based on movements in one-,
three- and six-month LIBOR rates. The ALM swap portfolio had a net unrealized
loss of $0.9 billion and $1.6 billion at September 30, 2000 and December 31,
1999, respectively. The ALM option products had a net unrealized loss of $111
million at September 30, 2000 and a net unrealized gain of $5 million at
December 31, 1999. At September 30, 2000 and December 31, 1999, open foreign
exchange contracts had a net unrealized loss of $299 million and $30 million,
respectively.
The amount of unamortized net realized deferred gains associated with
closed ALM swaps was $113 million and $174 million at September 30, 2000 and
December 31, 1999, respectively. The amount of unamortized net realized deferred
gains associated with closed ALM options was $99 million and $82 million at
September 30, 2000 and December 31, 1999, respectively. The amount of
unamortized net realized deferred losses associated with closed ALM futures and
forward contracts was $19 million and $21 million at September 30, 2000 and
December 31, 1999, respectively. There were no unamortized net realized deferred
gains or losses associated with closed foreign exchange contracts at September
30, 2000 and December 31, 1999.
Management believes the fair value of the ALM interest rate and foreign
exchange portfolios should be viewed in the context of the overall balance
sheet, and the value of any single component of the balance sheet or off-balance
sheet positions should not be viewed in isolation.
For a discussion of the Corporation's management of risk associated with
mortgage production and servicing activities, see the "Noninterest Income"
section on page 42. See Note Seven of the consolidated financial statements for
information on the Corporation's ALM contracts.
59
Table Twelve
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
60
61
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Market Risk Management" on page 57 and the sections
referenced therein for Quantitative and Qualitative Disclosures about Market
Risk.
- --------------------------------------------------------------------------------
Part II. Other Information
- --------------------------------------------------------------------------------
Item 1. Legal Litigation
Proceedings
In the ordinary course of business, the Corporation
and its subsidiaries are routinely defendants in or
parties to a number of pending and threatened legal
actions and proceedings, including actions brought on
behalf of various classes of claimants. In certain of
these actions and proceedings, substantial money
damages are asserted against the Corporation and its
subsidiaries and certain of these actions and
proceedings are based on alleged violations of
consumer protection, securities, environmental,
banking and other laws.
The Corporation and certain present and former
officers and directors have been named as defendants
in a number of actions filed in several federal
courts that have been consolidated for pretrial
purposes before a Missouri federal court. The amended
complaint in the consolidated actions alleges, among
other things, that the defendants failed to disclose
material facts about BankAmerica's losses relating to
D.E. Shaw Securities Group, L.P. and related entities
until mid-October 1998, in violation of various
provisions of federal and state laws. The amended
complaint also alleges that the proxy
statement-prospectus of August 4, 1998, falsely
stated that the Merger would be one of equals and
alleges a scheme to have NationsBank gain control
over the newly merged entity. The Missouri federal
court has certified classes consisting generally of
persons who were stockholders of NationsBank or
BankAmerica on September 30, 1998, or were entitled
to vote on the Merger, or who purchased or acquired
securities of the Corporation or its predecessors
between August 4, 1998 and October 13, 1998. The
amended complaint substantially survived a motion to
dismiss, and discovery is underway. Claims against
certain director-defendants were dismissed with leave
to replead. Similar class actions (including one
limited to California residents raising the claim
that the proxy statement-prospectus of August 4,
1998, falsely stated that the Merger would be one of
equals) were filed in California state court,
alleging violations of the California Corporations
Code and other state laws. The action on behalf of
California residents was certified but was dismissed.
The Court of Appeals reversed the dismissal. A
Petition for Review is pending in the Supreme Court
of California. The remaining California actions have
been consolidated, but have not been certified as
class actions. The Missouri federal court has
enjoined prosecution of those consolidated class
actions as a class action. The plaintiffs who were
enjoined have appealed that injunction to the United
States Court of Appeals for the Eighth Circuit. The
Corporation believes the actions lack merit and will
defend them vigorously. The amount of any ultimate
exposure cannot be determined with certainty at this
time.
Management believes that the actions and
proceedings and the losses, if any, resulting from
the final outcome thereof, will not be material in
the aggregate to the Corporation's financial position
or results of operations.
62
Item 6. Exhibits a) Exhibits
and Reports on --------
Form 8-K
Exhibit 11 - Earnings Per Share Computation -
included in Note 8 of the consolidated
financial statements
Exhibit 12(a) - Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Ratio of Earnings to Fixed Charges
and Preferred Dividends
Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed by the
Corporation during the quarter ended September 30,
2000:
Current Report on Form 8-K dated July 17, 2000 and
filed July 21, 2000, Items 5 and 7.
Current Report on Form 8-K dated July 26, 2000 and
filed July 31, 2000, Items 5 and 7.
Current Report on Form 8-K dated September 19, 2000
and filed September 22, 2000, Items 5 and 7.
63
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bank of America Corporation
---------------------------
Registrant
Date: November 14, 2000 /s/ Marc D. Oken
----------------- -------------------------------------
MARC D. OKEN
Executive Vice President and
Principal Financial Executive
(Duly Authorized Officer and
Chief Accounting Officer)
64
Bank of America Corporation
Form 10-Q
Index to Exhibits
- --------------------------------------------------------------------------------
Exhibit Description
- ------- -----------
11 Earnings Per Share Computation - included in Note 8 of the
consolidated financial statements
12(a) Ratio of Earnings to Fixed Charges
12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends
27 Financial Data Schedule
65