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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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:
(800) 299-2265
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
On April 30, 2002, there were 1,539,328,021 shares of Bank of America
Corporation Common Stock outstanding.
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Bank of America Corporation
March 31, 2002 Form 10-Q
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INDEX
Page
----
Part I Item 1. Financial Statements:
Financial Consolidated Statement of Income for the Three
Information Months Ended March 31, 2002 and 2001 2
Consolidated Balance Sheet at March 31, 2002
and December 31, 2001 3
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended March 31,
2002 and 2001 4
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 67
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Part II
Other Information Item 1. Legal Proceedings 67
Item 2. Changes in Securities and Use of Proceeds 68
Item 6. Exhibits and Reports on Form 8-K 68
Signature 69
Index to Exhibits 70
Part I. Financial Information
Item 1. Financial Statements
================================================================================
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
----------------------------------------------------------------------------------------------------
Three Months Ended March 31
---------------------------
(Dollars in millions, except per share information) 2002 2001
----------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans and leases $ 5,349 $ 7,659
Interest and dividends on securities 946 846
Federal funds sold and securities purchased under agreements to resell 285 435
Trading account assets 878 846
Other interest income 413 455
--------------------------------------------------------------------------------------------------
Total interest income 7,871 10,241
--------------------------------------------------------------------------------------------------
Interest expense
Deposits 1,344 2,713
Short-term borrowings 477 1,377
Trading account liabilities 285 290
Long-term debt 612 1,222
--------------------------------------------------------------------------------------------------
Total interest expense 2,718 5,602
--------------------------------------------------------------------------------------------------
Net interest income 5,153 4,639
Noninterest income
Consumer service charges 692 694
Corporate service charges 567 499
--------------------------------------------------------------------------------------------------
Total service charges 1,259 1,193
--------------------------------------------------------------------------------------------------
Consumer investment and brokerage services 381 379
Corporate investment and brokerage services 170 136
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Total investment and brokerage services 551 515
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Mortgage banking income 192 121
Investment banking income 341 346
Equity investment gains 26 147
Card income 576 573
Trading account profits /(1)/ 345 699
Other income 150 186
--------------------------------------------------------------------------------------------------
Total noninterest income 3,440 3,780
--------------------------------------------------------------------------------------------------
Total revenue 8,593 8,419
Provision for credit losses 840 835
Gains (losses) on sales of securities 44 (8)
Noninterest expense
Personnel 2,446 2,401
Occupancy 432 433
Equipment 262 291
Marketing 170 177
Professional fees 91 126
Amortization of intangibles 55 223
Data processing 205 190
Telecommunications 119 119
Other general operating 590 545
General administrative and other 124 149
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Total noninterest expense 4,494 4,654
--------------------------------------------------------------------------------------------------
Income before income taxes 3,303 2,922
Income tax expense 1,124 1,052
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Net income $ 2,179 $ 1,870
==================================================================================================
Net income available to common shareholders $ 2,178 $ 1,869
==================================================================================================
Per common share information
Earnings $ 1.41 $ 1.16
==================================================================================================
Diluted earnings $ 1.38 $ 1.15
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Dividends $ 0.60 $ 0.56
==================================================================================================
Average common shares issued and outstanding (in thousands) 1,543,471 1,608,890
==================================================================================================
/(1)/ Trading account profits in the first quarter of 2001 included the $83
million, or $0.03 per share, transition adjustment loss resulting from the
adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," (SFAS 133)
on January 1, 2001.
See accompanying notes to consolidated financial statements.
2
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Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
------------------------------------------------------------------------------------------------------------------
March 31 December 31
(Dollars in millions) 2002 2001
------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 22,444 $ 26,837
Time deposits placed and other short-term investments 7,056 5,932
Federal funds sold and securities purchased under agreements to resell (includes $36,088
and $27,910 pledged as collateral) 40,771 28,108
Trading account assets (includes $22,255 and $22,550 pledged as collateral) 58,569 47,344
Derivative assets 19,116 22,147
Securities:
Available-for-sale (includes $39,028 and $37,422 pledged as collateral) 74,306 84,450
Held-to-maturity, at cost (market value - $1,003 and $1,009) 1,037 1,049
-----------------------------------------------------------------------------------------------------------------
Total securities 75,343 85,499
-----------------------------------------------------------------------------------------------------------------
Loans and leases 331,210 329,153
Allowance for credit losses (6,869) (6,875)
-----------------------------------------------------------------------------------------------------------------
Loans and leases, net of allowance for credit losses 324,341 322,278
-----------------------------------------------------------------------------------------------------------------
Premises and equipment, net 6,748 6,414
Mortgage banking assets 4,104 3,886
Goodwill 10,950 10,854
Core deposits and other intangibles 1,256 1,294
Other assets 49,223 61,171
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Total assets $619,921 $621,764
=================================================================================================================
Liabilities
Deposits in domestic offices:
Noninterest-bearing $108,409 $112,064
Interest-bearing 224,630 220,703
Deposits in foreign offices:
Noninterest-bearing 1,677 1,870
Interest-bearing 32,484 38,858
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Total deposits 367,200 373,495
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Federal funds purchased and securities sold under agreements to repurchase 48,545 47,727
Trading account liabilities 25,258 19,452
Derivative liabilities 12,053 14,868
Commercial paper 363 1,558
Other short-term borrowings 21,629 20,659
Accrued expenses and other liabilities 31,138 27,459
Long-term debt 60,036 62,496
Trust preferred securities 5,530 5,530
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Total liabilities 571,752 573,244
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Commitments and contingencies (Note Seven)
Shareholders' equity
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and
outstanding - 1,452,249 and 1,514,478 shares 62 65
Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and
outstanding - 1,544,521,073 and 1,559,297,220 shares 3,949 5,076
Retained earnings 44,245 42,980
Accumulated other comprehensive income (loss) (72) 437
Other (15) (38)
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Total shareholders' equity 48,169 48,520
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Total liabilities and shareholders' equity $619,921 $621,764
================================================================================================================
See accompanying notes to consolidated financial statements.
3
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
Preferred ------------------- Retained Comprehensive
(Dollars in millions, shares in thousands) Stock Shares Amount Earnings Income (Loss)/(1)/ Other
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $72 1,613,632 $ 8,613 $39,815 $(746) $(126)
Net income 1,870
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities 383
Net unrealized gains on foreign currency
translation adjustments 3
Net gains on derivatives 587
Comprehensive income
Cash dividends:
Common (900)
Preferred (1)
Common stock issued under employee
plans 2,701 34 20
Common stock repurchased (14,400) (739)
Conversion of preferred stock (1) 51 1
Other (37) 1 37
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Balance, March 31, 2001 $71 1,601,984 $ 7,872 $40,785 $ 227 $ (69)
========================================================================================================================
Balance, December 31, 2001 $65 1,559,297 $ 5,076 $42,980 $ 437 $ (38)
Net income 2,179
Other comprehensive income, net of tax:
Net unrealized losses on available-for-sale
and marketable equity securities (3)
Net unrealized gains on foreign currency
translation adjustments 2
Net losses on derivatives (508)
Comprehensive income
Cash dividends:
Common (925)
Preferred (1)
Common stock issued under employee
plans 16,323 808 9
Common stock repurchased (31,207) (1,955)
Conversion of preferred stock (3) 105 3
Other 3 17 12 14
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Balance, March 31, 2002 $62 1,544,521 $ 3,949 $44,245 $ (72) $ (15)
========================================================================================================================
-------------------------------------------------------------------------
Total
Share-
holders' Comprehensive
(Dollars in millions, shares in thousands) Equity Income
-------------------------------------------------------------------------
Balance, December 31, 2000 $47,628
Net income 1,870 $1,870
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities 383 383
Net unrealized gains on foreign currency
translation adjustments 3 3
Net gains on derivatives 587 587
------
Comprehensive income $2,843
======
Cash dividends:
Common (900)
Preferred (1)
Common stock issued under employee
plans 54
Common stock repurchased (739)
Conversion of preferred stock
Other 1
---------------------------------------------------------
Balance, March 31, 2001 $48,886
=========================================================
Balance, December 31, 2001 $48,520
Net income 2,179 $ 2,179
Other comprehensive income, net of tax:
Net unrealized losses on available-for-sale
and marketable equity securities (3) (3)
Net unrealized gains on foreign currency
translation adjustments 2 2
Net losses on derivatives (508) (508)
-------
Comprehensive income $ 1,670
=======
Cash dividends:
Common (925)
Preferred (1)
Common stock issued under employee
plans 817
Common stock repurchased (1,955)
Conversion of preferred stock
Other 43
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Balance, March 31, 2002 $48,169
=========================================================
/(1)/ At March 31, 2002 and December 31, 2001, Accumulated Other Comprehensive
Income (Loss) consisted of net unrealized losses on available-for-sale and
marketable equity securities of $(483) and $(480), respectively; foreign
currency translation adjustments of $(169) and $(171), respectively and net
gains on derivatives of $580 and $1,088, respectively.
See accompanying notes to consolidated financial statements.
4
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
--------------------
(Dollars in millions) 2002 2001
-----------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 2,179 $ 1,870
Reconciliation of net income to net cash provided by (used in) operating activities:
Provision for credit losses 840 835
(Gains) losses on sales of securities (44) 8
Depreciation and premises improvements amortization 217 214
Amortization of intangibles 55 223
Deferred income tax (benefit) expense (141) 162
Net increase in trading and hedging instruments (5,395) (4,458)
Net decrease in other assets 10,594 891
Net increase (decrease) in accrued expenses and other liabilities 3,549 (2,010)
Other operating activities, net (604) (2,438)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 11,250 (4,703)
-----------------------------------------------------------------------------------------------------------
Investing activities
Net increase in time deposits placed and other short-term investments (1,124) (101)
Net (increase) decrease in federal funds sold and securities purchased under
agreements to resell (12,663) 7,474
Proceeds from sales of available-for-sale securities 27,750 25,136
Proceeds from maturities of available-for-sale securities 7,221 856
Purchases of available-for-sale securities (24,916) (9,024)
Proceeds from maturities of held-to-maturity securities 12 --
Proceeds from sales and securitizations of loans and leases 4,448 5,761
Other changes in loans and leases, net (4,893) 3,777
Purchases and originations of mortgage banking assets (211) (310)
Purchases of premises and equipment (551) (147)
Proceeds from sales of foreclosed properties 83 71
Acquisition of business activities, net (110) (390)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (4,954) 33,103
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Financing activities
Net decrease in deposits (6,295) (11,784)
Net increase (decrease) in federal funds purchased and securities sold under
agreements to repurchase 818 (12,400)
Net decrease in commercial paper and other short-term borrowings (225) (5,932)
Proceeds from issuance of long-term debt and trust preferred securities 3,481 4,762
Retirement of long-term debt and trust preferred securities (6,337) (5,554)
Proceeds from issuance of common stock 817 54
Common stock repurchased (1,955) (739)
Cash dividends paid (926) (901)
Other financing activities, net (4) (41)
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Net cash used in financing activities (10,626) (32,535)
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Effect of exchange rate changes on cash and cash equivalents (63) (45)
-----------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,393) (4,180)
Cash and cash equivalents at January 1 26,837 27,513
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Cash and cash equivalents at March 31 $ 22,444 $ 23,333
-----------------------------------------------------------------------------------------------------------
Net loans and leases transferred from loans held for sale to the loan portfolio
amounted to $2,534 and $1,699 for the three months ended March 31, 2002 and
2001, respectively.
Loans transferred to foreclosed properties amounted to $82 and $101 for the
three months ended March 31, 2002 and 2001, respectively.
There were no loans and loans held for sale securitized and retained in the
available-for-sale portfolio for the three months ended March 31, 2002. Loans
and loans held for sale securitized and retained in the available-for-sale
securities portfolio amounted to $734 for the three months ended March 31, 2001.
See accompanying notes to consolidated financial statements.
5
Notes to Consolidated Financial Statements
Bank of America Corporation and Subsidiaries
================================================================================
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.
At March 31, 2002, the Corporation operated its banking activities primarily
under two charters: Bank of America, N.A. and Bank of America, N.A. (USA).
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 82 to 87 of the Corporation's Annual Report for
the year ended December 31, 2001.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 became effective for the Corporation on
January 1, 2002 and primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition. SFAS 142 requires that
goodwill be recorded at the reporting unit level. Reporting units are defined as
an operating segment or one level below. The Corporation has determined its
reporting units and assigned goodwill to them. The Corporation has evaluated the
lives of intangible assets as required by SFAS 142 and no change was made
regarding lives upon adoption. SFAS 142 prohibits the amortization of goodwill
but requires that it be tested for impairment at least annually at the reporting
unit level. Goodwill was tested upon adoption of the standard for impairment. As
a result of this testing, no impairment charges were recorded.
In June 2001, the FASB also issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Corporation does not expect the adoption
of this pronouncement to have an impact on its results of operations or
financial condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 was effective for financial statements issued for fiscal years
beginning after December 15, 2001. The standard addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS 144
became effective for the Corporation on January 1, 2002. The adoption of this
pronouncement had no impact on the Corporation's results of operations or
financial condition.
Goodwill and Other Intangibles
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition, as such, the historical cost basis of
individual assets and liabilities are adjusted to reflect their fair value.
Identified intangibles are amortized on an accelerated or straight-line basis
over the period benefited. Goodwill is not amortized, but is reviewed for
potential impairment on an annual basis at the reporting unit level. The
impairment test is performed in two phases. The first step of the goodwill
impairment test, used to identify potential impairment, compares the fair value
of the reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired; however, if the carrying amount of
the reporting unit exceeds its fair value an additional procedure must be
performed. That
6
additional procedure compares the implied fair value of the reporting unit's
goodwill (as defined in SFAS 142) with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of goodwill
exceeds its implied fair value. Other intangible assets are evaluated for
impairment if events and circumstances indicate a possible impairment. Such
evaluation of other intangible assets is based on undiscounted cash flow
projections.
Note Two - 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 positions and mortgage banking assets. 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, does not include
the net interest income recognized on interest-earning and interest-bearing
trading positions or the related funding charge or benefit. Trading account
profits and trading-related net interest income ("trading-related revenue") are
presented in the following table 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 account profits for
the three months ended March 31, 2001 included an $83 million transition
adjustment net loss recorded as a result of the implementation of SFAS 133.
-----------------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
-----------------------------------------------------------
Trading account profits - as reported $345 $ 699
Trading-related net interest income 435 362
-----------------------------------------------------------
Total trading-related revenue $780 $1,061
===========================================================
Trading-related revenue by product
Foreign exchange $129 $ 147
Interest rate 258 156
Fixed income 236 359
Equities and equity derivatives 133 348
Commodities 24 51
-----------------------------------------------------------
Total trading-related revenue $780 $1,061
===========================================================
7
Trading Account Assets and Liabilities
The fair values of the components of trading account assets and liabilities
at March 31, 2002 and December 31, 2001 were:
------------------------------------------------------------
March 31 December 31
(Dollars in millions) 2002 2001
------------------------------------------------------------
Trading account assets
U.S. Government & Agency securities $17,489 $15,009
Foreign sovereign debt 9,389 6,809
Corporate & other debt securities 13,502 11,596
Equity securities 4,288 2,976
Mortgage-backed securities 3,608 3,070
Other 10,293 7,884
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Total $58,569 $47,344
===========================================================
Trading account liabilities
U.S. Government & Agency securities $ 7,333 $ 4,121
Foreign sovereign debt 6,249 3,096
Corporate & other debt securities 1,927 1,501
Equity securities 4,949 6,151
Mortgage-backed securities 156 12
Other 4,644 4,571
-----------------------------------------------------------
Total $25,258 $19,452
===========================================================
See Note Three below for additional information on derivative positions,
including credit risk.
Note Three - Derivatives
The Corporation designates a derivative as held for trading or hedging
purposes when it enters into a derivative contract. Derivatives utilized by the
Corporation include swaps, financial futures and forward settlement contracts,
and option contracts. A swap agreement is a contract between two parties to
exchange cash flows based on specified underlying notional amounts, assets
and/or indices. Financial futures and forward settlement contracts are
agreements to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined future date and rate or price. An option
contract is an agreement that conveys to the purchaser the right, but not the
obligation, to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined rate or price during a period or at a time in
the future. Option agreements can be transacted on organized exchanges or
directly between parties. The Corporation also provides credit derivatives to
customers who wish to hedge existing credit exposures or take on credit exposure
to generate revenue.
Credit Risk Associated with Derivative Activities
Credit risk associated with derivatives is measured as the net replacement
cost should the counterparties with contracts in a net gain position to the
Corporation completely fail to perform under the terms of those contracts,
assuming no recoveries of underlying collateral. In managing derivative credit
risk, both the current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate of the potential change in value of
contracts over their remaining lives are considered. In managing credit risk
associated with its derivative activities, the Corporation deals primarily with
commercial banks, broker-dealers and corporations. To minimize credit risk, the
Corporation enters into legally enforceable master netting agreements, which
reduce risk by permitting the closeout and netting of transactions with the same
counterparty upon occurrence of certain events. In
8
addition, the Corporation reduces credit risk by obtaining collateral based on
individual assessments of counterparties. The determination of the need for and
the levels of collateral will vary depending on the Corporation's credit risk
rating of the counterparty. Generally, the Corporation accepts collateral in the
form of cash, U.S. Treasury securities and other marketable securities. At March
31, 2002, the Corporation held $10.5 billion of collateral on derivative assets
of $5.1 billion related to transactions where it was deemed appropriate to
obtain collateral from the counterparty.
A portion of the derivative activity involves exchange-traded instruments.
Because exchange-traded instruments conform to standard terms and are subject to
policies set by the exchange involved, including counterparty approval, margin
requirements and security deposit requirements, management believes the credit
risk is minimal.
The following table presents the notional or contract and credit risk
amounts at March 31, 2002 and December 31, 2001 of the Corporation's derivative
asset positions held for trading and hedging purposes. These derivative
positions are primarily executed in the over-the-counter market. The credit risk
amounts presented in the following table do not consider the value of any
collateral held but take into consideration the effects of legally enforceable
master netting agreements.
Derivative Assets/(1)/
----------------------------------------------------------------------------
March 31, 2002 December 31, 2001
--------------------------------------------
Contract/ Credit Contract/ Credit
(Dollars in millions) Notional Risk Notional Risk
----------------------------------------------------------------------------
Interest rate contracts
Swaps $5,397,196 $ 8,186 $5,267,608 $ 9,550
Futures and forwards 2,061,455 75 1,663,109 67
Written options 665,406 -- 678,242 --
Purchased options 682,052 2,716 704,159 2,165
Foreign exchange contracts
Swaps 149,536 1,641 140,778 2,274
Spot, futures and forwards 664,438 1,577 654,026 2,496
Written options 56,886 -- 57,963 --
Purchased options 55,570 383 55,050 496
Equity contracts
Swaps 13,686 480 14,504 562
Futures and forwards 60,455 74 46,970 44
Written options 22,257 -- 21,009 --
Purchased options 27,360 2,163 28,902 2,511
Commodity contracts
Swaps 9,692 871 6,600 1,152
Futures and forwards 3,116 -- 2,176 --
Written options 10,476 -- 8,231 --
Purchased options 10,385 296 8,219 199
Credit derivatives 64,440 654 57,182 631
----------------------------------------------------------------------------
Net replacement cost $19,116 $22,147
============================================================================
/(1)/ Includes both long and short derivative positions.
The average fair value of derivative assets for the three months ended
March 31, 2002 and 2001 was $21.6 billion and $17.2 billion, respectively. The
average fair value of derivative liabilities for the three months ended March
31, 2002 and 2001 was $14.4 billion and $21.0 billion, respectively.
Asset and Liability Management (ALM) Activities
Interest rate contracts and foreign exchange contracts are utilized in the
Corporation's ALM process. The Corporation maintains an overall interest rate
risk management strategy that incorporates the use of interest rate contracts to
minimize significant unplanned fluctuations in earnings that are caused by
interest rate volatility. The
9
Corporation's goal is to manage interest rate sensitivity so that movements in
interest rates do not adversely affect net interest income. As a result of
interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate
or depreciate in market value. Gains or losses on the derivative instruments
that are linked to the hedged fixed-rate assets and liabilities are expected to
substantially offset this unrealized appreciation or depreciation. Interest
income and interest expense on hedged variable-rate assets and liabilities,
respectively, increases or decreases as a result of interest rate fluctuations.
Gains and losses on the derivative instruments that are linked to these hedged
assets and liabilities are expected to substantially offset this variability in
earnings.
Interest rate contracts, which are generally non-leveraged generic interest
rate and basis swaps, options and futures, allow the Corporation to effectively
manage its interest rate risk position. Non-leveraged generic interest rate
swaps involve the exchange of fixed-rate and variable-rate interest payments
based on the contractual underlying notional amount. Basis swaps involve the
exchange of interest payments based on the contractual underlying notional
amounts, where both the pay rate and the receive rate are floating rates based
on different indices. Option products primarily consist of caps, floors,
swaptions and options on index futures contracts. Futures contracts used for ALM
activities are primarily index futures providing for cash payments based upon
the movements of an underlying rate index.
The Corporation uses foreign currency contracts to manage the foreign
exchange risk associated with certain foreign-denominated assets and
liabilities, as well as the Corporation's equity investments in foreign
subsidiaries. Foreign exchange contracts, which include spot, futures and
forward contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price on an agreed-upon
settlement date. Foreign exchange option contracts are similar to interest rate
option contracts except that they are based on currencies rather than interest
rates. Exposure to loss on these contracts will increase or decrease over their
respective lives as currency exchange and interest rates fluctuate.
The Corporation uses its derivatives designated for hedging activities as
either fair value hedges, cash flow hedges, or hedges of net investments in
foreign operations.
Fair Value Hedges
The Corporation uses various types of interest rate and foreign currency
exchange rate derivative contracts to protect against changes in the fair value
of its fixed-rate assets and liabilities due to fluctuations in interest rates
and exchange rates. For the three months ended March 31, 2002 and 2001, there
were no significant gains or losses recognized which represented the ineffective
portion and excluded component in assessing hedge effectiveness of fair value
hedges.
Cash Flow Hedges
The Corporation also uses various types of interest rate and foreign
currency exchange rate derivative contracts to protect against changes in cash
flows of its variable-rate assets and liabilities and anticipated transactions.
For the three months ended March 31, 2002 and 2001, the Corporation recognized
in the Consolidated Statement of Income a net gain of $9 million and a net loss
of $8 million (included in mortgage banking income), respectively, which
represented the ineffective portion and excluded component in assessing hedge
effectiveness of cash flow hedges. At March 31, 2002 and December 31, 2001, the
Corporation has determined that there were no hedging positions where it was
probable that certain forecasted transactions may not occur within the
originally designated time period.
For cash flow hedges, gains and losses on derivative contracts reclassified
from accumulated other comprehensive income to current period earnings are
included in the line item in the Consolidated Statement of Income in which the
hedged item is recorded and in the same period the hedged item affects earnings.
Deferred net gains on derivative instruments of approximately $242 million
included in accumulated other comprehensive income at March 31, 2002 are
expected to be reclassified into earnings during the next twelve months. These
net gains reclassified into earnings are expected to increase income or reduce
expense on the hedged items.
10
The maximum term over which the Corporation is hedging its exposure to the
variability of future cash flows for all forecasted transactions (excluding
interest payments on variable-rate debt) is thirty years with an associated
notional amount of $281 million. The weighted-average term over which the
Corporation is hedging its exposure to this variability in cash flows is 4.04
years.
Hedges of Net Investments in Foreign Operations
The Corporation uses forward exchange contracts, currency swaps and
nonderivative instruments that provide an economic hedge on its net investments
in foreign operations against adverse movements in foreign currency exchange
rates. For the three months ended March 31, 2002 and 2001, net losses of $2
million and net gains of $93 million, respectively, related to these derivatives
and nonderivative instruments were recorded as a component of the foreign
currency translation adjustment in other comprehensive income. These net losses
and gains were largely offset by gains and losses in the Corporation's net
investments in foreign operations. For the three months ended March 31, 2002,
the Corporation recognized in the Consolidated Statement of Income a net loss of
$10 million (included in net interest income) which represented the excluded
component in assessing effectiveness of hedges of net investments in foreign
operations. For the same period in 2001, the Corporation had no excluded
component of net investment hedges.
Note Four - Loans and Leases
Loans and leases at March 31, 2002 and December 31, 2001 were:
---------------------------------------------------------------------------
March 31, 2002 December 31, 2001
---------------------------------------
(Dollars in millions) Amount Percent Amount Percent
---------------------------------------------------------------------------
Commercial - domestic $114,486 34.6% $118,205 35.9%
Commercial - foreign 21,311 6.4 23,039 7.0
Commercial real estate - domestic 21,471 6.5 22,271 6.8
Commercial real estate - foreign 379 0.1 383 0.1
---------------------------------------------------------------------------
Total commercial 157,647 47.6 163,898 49.8
---------------------------------------------------------------------------
Residential mortgage 88,272 26.6 78,203 23.8
Home equity lines 22,109 6.7 22,107 6.7
Direct/Indirect consumer 36,349 11.0 37,638 11.5
Consumer finance 5,219 1.6 5,331 1.6
Bankcard 19,535 5.9 19,884 6.0
Foreign consumer 2,079 0.6 2,092 0.6
---------------------------------------------------------------------------
Total consumer 173,563 52.4 165,255 50.2
---------------------------------------------------------------------------
Total loans and leases $331,210 100.0% $329,153 100.0%
===========================================================================
11
The following table summarizes the changes in the allowance for credit
losses for the three months ended March 31, 2002 and 2001:
--------------------------------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------
Balance, January 1 $ 6,875 $6,838
--------------------------------------------------------------------------
Loans and leases charged off (1,069) (918)
Recoveries of loans and leases previously charged off 229 146
--------------------------------------------------------------------------
Net charge-offs (840) (772)
--------------------------------------------------------------------------
Provision for credit losses 840 835
Other, net (6) (1)
--------------------------------------------------------------------------
Balance, March 31 $ 6,869 $6,900
==========================================================================
The following table presents the recorded investment in specific loans that
were considered individually impaired in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," (SFAS 114) at March 31, 2002 and December 31, 2001:
----------------------------------------------------------------------
(Dollars in millions) March 31, 2002 December 31, 2001
----------------------------------------------------------------------
Commercial - domestic $3,022 $3,138
Commercial - foreign 583 501
Commercial real estate - domestic 205 240
Commercial real estate - foreign 2 --
----------------------------------------------------------------------
Total impaired loans $3,812 $3,879
======================================================================
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. Once a loan has been identified as individually
impaired, management measures impairment in accordance with SFAS 114.
Individually impaired loans are measured based on the present value of payments
expected to be received, observable market prices or the estimated fair value of
the collateral for loans that are solely dependent on the collateral for
repayment. 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 March 31, 2002 and December 31, 2001, nonperforming loans, including
certain loans which were considered impaired, totaled $4.6 billion and $4.5
billion, respectively. Included in other assets was $304 million and $1.0
billion of loans held for sale which would have been classified as nonperforming
had they been included in loans at March 31, 2002 and December 31, 2001,
respectively. Foreclosed properties amounted to $391 million and $402 million at
March 31, 2002 and December 31, 2001, respectively.
Note Five - Goodwill and Other Intangibles
In accordance with SFAS 142, no goodwill amortization was recorded for the
three months ended March 31, 2002. Goodwill amortization expense for the three
months ended March 31, 2001 was $168 million. Net income for the three months
ended March 31, 2001 was $1.870 billion or $1.16 per share ($1.15 per share
diluted). Net income adjusted to exclude goodwill amortization expense would
have been $2.029 billion or $1.26 per share ($1.25 per share diluted) for the
three months ended March 31, 2001. The impact of goodwill amortization on net
income in the first quarter of 2001 was $159 million or $0.10 per share. See
Note One of the consolidated financial statements for further details on
goodwill.
12
At March 31, 2002, the gross carrying value and accumulated amortization
related to core deposits and other intangibles was $2.2 billion and $994
million, respectively. At December 31, 2001, the gross carrying value and
accumulated amortization related to core deposits and other intangibles was $2.2
billion and $931 million, respectively. Amortization expense on core deposits
and other intangibles was $55 million for the three months ended both March 31,
2002 and 2001. The Corporation estimates that aggregate amortization expense
will be $219 million for 2002, $216 million for 2003, $209 million for 2004,
$203 million for 2005 and $201 million for 2006.
Note Six - Short-Term Borrowings, Long-Term Debt and Trust Preferred Securities
In the first quarter of 2002, Bank of America Corporation issued $2.2
billion in senior and subordinated long-term debt, domestically and
internationally, with maturities ranging from 2005 to 2032. The $2.2 billion was
converted from fixed rates ranging from 4.32 percent to 6.90 percent to floating
rates through interest rate swaps at spreads ranging from 44 basis points below
to 55 basis points over three-month London InterBank Offered Rate (LIBOR).
At March 31, 2002, Bank of America Corporation was authorized to issue
approximately $8.9 billion of additional corporate debt and other securities
under its existing shelf registration statements.
Bank of America Corporation has a 300 billion yen-denominated
(approximately U.S. $3 billion) shelf registration in Japan to be used
exclusively for primary offerings to non-United States residents. In addition,
Bank of America Corporation allocated $2 billion of a 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. Bank of America
Corporation had $420 million outstanding under these programs at both March 31,
2002 and December 31, 2001.
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 $416 million at March 31, 2002
compared to $2.5 billion at December 31, 2001. 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 $2.9 billion at March
31, 2002 compared to $4.5 billion at December 31, 2001. In the first quarter of
2002, Bank of America N.A. issued a $131 million senior long-term bank note at a
3.66 percent fixed rate to mature in 2003.
Bank of America Corporation and Bank of America, N.A. maintain a joint Euro
medium-term note program to offer up to $25.0 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 $6.3 billion at March 31, 2002 and December 31, 2001. Bank of America,
N.A.'s notes outstanding under this program totaled $1.3 billion at March 31,
2002 compared to $1.4 billion at December 31, 2001. At March 31, 2002, Bank of
America Corporation and Bank of America, N.A. were authorized to issue
approximately $8.7 billion each. At March 31, 2002 and December 31, 2001, $1.5
billion and $2.0 billion, respectively, were outstanding under the former
BankAmerica Corporation Euro medium-term note program. No additional debt
securities will be offered under that program.
At March 31, 2002, Bank of America Oregon, N.A. and Bank of America
Georgia, N.A. maintained $6.0 billion and $2.3 billion in Federal Home Loan Bank
advances from Home Loan Banks in Seattle, Washington and Atlanta, Georgia,
respectively.
In the first quarter of 2002, BAC Capital Trust II, a wholly-owned grantor
trust of Bank of America Corporation, issued $900 million of trust preferred
securities. The annual dividend rate is 7 percent and is paid quarterly on
February 1, May 1, August 1 and November 1 of each year, commencing May 1, 2002.
13
Bank of America Corporation redeemed the 7.84 percent Trust Originated
Preferred Securities issued by NB Capital Trust I and the 7.75 percent Trust
Originated Preferred Securities issued by BankAmerica Capital I on March 15,
2002 with a redemption price of $25 per security plus accrued and unpaid
distributions up to but excluding the redemption date of March 15, 2002.
Note Seven - Commitments and Contingencies
In the normal course of business, the Corporation enters into a number of
off-balance sheet commitments. These commitments expose the Corporation to
varying degrees of credit and market risk and are subject to the same credit and
risk limitation reviews as those recorded on the balance sheet.
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters
of credit (SBLCs) and commercial letters of credit to meet the financing needs
of its customers. The unfunded commitments shown below have been reduced by cash
held by the Corporation and amounts participated to other financial
institutions. For each of these types of instruments, the Corporation's maximum
exposure to credit loss is represented by the contractual amount of these
instruments. Many of the commitments are collateralized and most are expected to
expire without being drawn upon; therefore, the total commitment amounts do not
necessarily represent risk of loss or future cash requirements. The following
table summarizes outstanding unfunded commitments to extend credit at March 31,
2002 and December 31, 2001:
---------------------------------------------------------------------------
March 31 December 31
(Dollars in millions) 2002 2001
---------------------------------------------------------------------------
Credit card commitments $ 76,745 $ 73,644
Other loan commitments 214,557 221,529
Standby letters of credit and financial guarantees 31,573 32,416
Commercial letters of credit 3,442 3,581
---------------------------------------------------------------------------
Total $326,317 $331,170
===========================================================================
Commitments to extend credit are legally binding, generally have specified
rates and maturities and are for specified purposes. Certain commitments have
adverse change clauses which help to protect the Corporation against
deterioration in the borrowers' ability to pay. At March 31, 2002 and December
31, 2001, there were no unfunded commitments to any industry or foreign country
greater than 10 percent of total unfunded commitments to extend credit. Credit
card lines are unsecured commitments, which are reviewed at least annually by
management. Upon evaluation of the customers' creditworthiness, the Corporation
has the right to terminate or change the terms of the credit card lines. SBLCs
and financial guarantees are issued to support the debt obligations of
customers. If an SBLC or financial guarantee is drawn upon, the Corporation
looks to its customer for payment. Commercial letters of credit, issued
primarily to facilitate customer trade finance activities, are collateralized by
the underlying goods being shipped by the customer and are generally short-term.
The Corporation manages the credit risk on unfunded commitments by subjecting
these commitments to the same credit approval and monitoring processes used for
on-balance sheet loans.
When-Issued Securities
When-issued securities are commitments to purchase or sell securities
during the time period between the announcement of a securities offering and the
issuance of those securities. Changes in market price between commitment date
and issuance are reflected in trading account profits. At March 31, 2002, the
Corporation had commitments to purchase and sell when-issued securities of $65.7
billion and $55.7 billion, respectively. At December 31, 2001, the Corporation
had commitments to purchase and sell when-issued securities of $45.0 billion and
$39.6 billion, respectively.
14
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, claims for
substantial monetary 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.
In view of the inherent difficulty of predicting the outcome of such
matters, the Corporation cannot state what the eventual outcome of pending
matters will be; however, based on current knowledge, management does not
believe that liabilities arising from pending litigation, if any, will have a
material adverse effect on the consolidated financial position, operations or
liquidity of the Corporation.
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. ("D.E. Shaw")
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 (the "Proxy Statement"), falsely stated
that the merger between NationsBank Corporation (NationsBank) and BankAmerica
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
(the "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. A former NationsBank stockholder who
opted out of the NationsBank shareholder Class also commenced an action in the
Missouri federal court (the "Opt-Out Action") asserting claims substantially
similar to the claims related to D.E. Shaw set forth in the consolidated action.
Similar class actions have been filed in California state courts. Plaintiffs in
one such class action, brought on behalf of California residents who owned
BankAmerica stock, claim that the Proxy Statement falsely stated that the merger
would be one of equals. Plaintiffs in that matter have been included in the
federal action as part of the BankAmerica shareholder Class and will not be
proceeding in California state court. Other California state court class actions
were consolidated, but have not been certified as class actions. The Missouri
federal court enjoined prosecution of those consolidated cases as a class
action. The plaintiffs who were enjoined appealed to the United States Court of
Appeals for the Eighth Circuit, which upheld the district court's injunction.
Those plaintiffs sought review in the United States Supreme Court, which was
denied.
In February of 2002, the Corporation reached an agreement, subject to
judicial approval, to settle the Class actions. The proposed settlement provides
for payment of $333 million to the NationsBank Classes and $157 million to the
BankAmerica Classes. The Court has preliminarily approved the settlement, has
directed that notice of the settlement be given to the classes, and has
scheduled a hearing on May 31, 2002 to determine whether to approve the
settlement and dismiss the Class actions. The Corporation agreed to the proposed
settlement without admitting liability. The proposed settlement will be paid
from existing litigation reserves and insurance and will not have an impact on
the Corporation's financial results. On March 15, 2002, the Missouri federal
court dismissed the Opt-Out Action with prejudice following a settlement.
On July 30, 2001, the Securities and Exchange Commission issued a
cease-and-desist order finding violations of Section 13(a) of the Securities
Exchange Act of 1934 and Rules 13a-1, 13a-11, 13a-13 and 12b-20 promulgated
thereunder, with respect to BankAmerica's accounting for, and the disclosures
relating to, the D.E. Shaw relationship. The Corporation consented to the order
without admitting or denying the findings. In the Matter of BankAmerica Corp.,
Exch. Act Rel. No. 44613, Acctg & Audit. Enf. Rel. No. 1249, Admin. Proc. No.
3-10541.
15
Note Eight - Shareholders' Equity and Earnings Per Common Share
The Corporation sells put options on its common stock to independent third
parties. The put option program was designed to partially offset the cost of
share repurchases. The put options give the holders the right to sell shares of
the Corporation's common stock to the Corporation on certain dates at specified
prices. The put option contracts allow the Corporation to determine the method
of settlement, and the premiums received are reflected as a component of other
shareholders' equity. At March 31, 2002, there were four million put options
outstanding with exercise prices ranging from $61.82 per share to $61.86 per
share, which expire from September 2002 to February 2003. The closing market
price of the Corporation's common stock at March 31, 2002 was $68.02 per share.
At December 31, 2001, there were two million put options outstanding with
exercise prices ranging from $61.82 per share to $61.84 per share, all of which
expire in September 2002.
Pre-tax gains (losses) recorded in other comprehensive income were $(83)
million and $1.7 billion for the three months ended March 31, 2002 and 2001,
respectively. Pre-tax reclassification adjustments to net income of $131 million
and $115 million were recorded for the three months ended March 31, 2002 and
2001, respectively. The related income tax expense was $295 million and $573
million for the three months ended March 31, 2002 and 2001, respectively.
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 is dilutive,
the associated preferred dividends are added back to net income available to
common shareholders. 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 effects of convertible preferred stock and stock options are
excluded from the computation of diluted earnings per common share in periods in
which the effect would be antidilutive.
For the three months ended March 31, 2002 and 2001, options to purchase 35
million and 114 million shares, respectively, were outstanding but not included
in the computation of earnings per share because they were antidilutive.
16
The calculation of earnings per common share and diluted earnings per
common share for the three months ended March 31, 2002 and 2001 is presented
below:
--------------------------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------
(Dollars in millions, except per share information; shares in thousands) 2002 2001
--------------------------------------------------------------------------------------------------
Earnings per common share
Net income $ 2,179 $ 1,870
Preferred stock dividends (1) (1)
--------------------------------------------------------------------------------------------------
Net income available to common shareholders $ 2,178 $ 1,869
--------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,543,471 1,608,890
--------------------------------------------------------------------------------------------------
Earnings per common share $ 1.41 $ 1.16
==================================================================================================
Diluted earnings per common share
Net income available to common shareholders $ 2,178 $ 1,869
Preferred stock dividends 1 1
--------------------------------------------------------------------------------------------------
Net income available to common shareholders and assumed
conversions $ 2,179 $ 1,870
--------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,543,471 1,608,890
--------------------------------------------------------------------------------------------------
Incremental shares from assumed conversions:
Convertible preferred stock 2,486 2,804
Stock options 35,891 19,405
--------------------------------------------------------------------------------------------------
Dilutive potential common shares 38,377 22,209
--------------------------------------------------------------------------------------------------
Total diluted average common shares issued and outstanding 1,581,848 1,631,099
--------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.38 $ 1.15
==================================================================================================
Note Nine - Business Segment Information
The Corporation reports the results of its operations through four business
segments: Consumer and Commercial Banking, Asset Management, Global Corporate
and Investment Banking and Equity Investments. Certain operating segments have
been aggregated into a single business segment. A customer-centered strategic
approach is changing the way the Corporation focuses on its business. In
addition to traditional financial reporting, the Corporation has begun using
customer segment-based financial operating information.
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 investment, fiduciary and comprehensive credit expertise;
asset management services to institutional clients, high-net-worth individuals
and retail customers; and investment, securities and financial planning services
to affluent and high-net-worth individuals. Global Corporate and Investment
Banking provides capital raising solutions, advisory services, derivatives
capabilities, equity and debt sales and trading as well as traditional bank
deposit and loan products, cash management and payment services to large
corporations and institutional markets. Equity Investments includes Principal
Investing which makes both direct and indirect equity investments in a wide
variety of companies at all stages of the business cycle. Equity Investments
also includes the Corporation's strategic technology and alliances investment
portfolio.
Corporate Other consists primarily of gains and losses associated with
managing the balance sheet of the Corporation, certain consumer finance and
commercial lending businesses being liquidated and certain residential mortgages
originated by the mortgage group or otherwise acquired and held for
asset/liability management purposes.
The following table includes results of operations and average total assets
for the three months ended March 31, 2002 and 2001, and goodwill balances at
March 31, 2002 and December 31, 2001, for each business segment. Certain prior
period amounts have been reclassified between segments to conform to the current
period presentation.
17
Business Segments
--------------------------------------------------------------------------------
For the three months ended March 31
Consumer and
Total Corporation Commercial Banking /(1)/ Asset Management /(1)/
-----------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------
Net interest income /(2)/ $ 5,247 $ 4,721 $ 3,513 $ 3,109 $ 188 $ 171
Noninterest income /(3)/ 3,440 3,780 1,974 1,886 414 438
---------------------------------------------------------------------------------------------------------------
Total revenue 8,687 8,501 5,487 4,995 602 609
Provision for credit losses 840 835 430 330 26 8
Gains (losses) on sales of securities 44 (8) 25 -- -- --
Amortization of intangibles /(4)/ 55 223 44 159 1 14
Other noninterest expense 4,439 4,431 2,758 2,582 354 381
---------------------------------------------------------------------------------------------------------------
Income before income taxes 3,397 3,004 2,280 1,924 221 206
Income tax expense 1,218 1,134 862 754 79 78
---------------------------------------------------------------------------------------------------------------
Net income $ 2,179 $ 1,870 $ 1,418 $ 1,170 $ 142 $ 128
===============================================================================================================
Average total assets $637,678 $648,698 $299,526 $283,752 $26,110 $26,584
===============================================================================================================
Goodwill, beginning balance $ 10,854 $ 7,726 $ 943
===============================================================================================================
Goodwill, ending balance $ 10,950 $ 7,726 $ 1,053
===============================================================================================================
For the three months ended March 31
Global Corporate and
Investment Banking /(1)/ Equity Investments /(1)/ Corporate Other
-----------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------
Net interest income /(2)/ $ 1,217 $ 1,038 $ (40) $ (41) $ 369 $ 444
Noninterest income /(3)/ 1,109 1,413 16 143 (73) (100)
---------------------------------------------------------------------------------------------------------------
Total revenue 2,326 2,451 (24) 102 296 344
Provision for credit losses 261 244 -- -- 123 253
Gains (losses) on sales of securities (24) (8) -- -- 43 --
Amortization of intangibles /(4)/ 8 35 1 3 1 12
Other noninterest expense 1,266 1,305 27 47 34 116
---------------------------------------------------------------------------------------------------------------
Income before income taxes 767 859 (52) 52 181 (37)
Income tax expense 264 306 (20) 19 33 (23)
---------------------------------------------------------------------------------------------------------------
Net income $ 503 $ 553 $ (32) $ 33 $ 148 $ (14)
===============================================================================================================
Average total assets $229,958 $232,367 $6,159 $6,719 $75,925 $99,276
===============================================================================================================
Goodwill, beginning balance $ 2,051 $ 134
===============================================================================================================
Goodwill, ending balance $ 2,037 $ 134
===============================================================================================================
/(1)/ There were no material intersegment revenues among the segments.
/(2)/ Net interest income is presented on a taxable-equivalent basis.
/(3)/ Noninterest income included the $83 million SFAS 133 transition adjustment
net loss which was recorded in trading account profits in the first quarter
of 2001. The components of the transition adjustment by segment were a gain
of $4 million for Consumer and Commercial Banking, a gain of $19 million
for Global Corporate and Investment Banking and a loss of $106 million for
Corporate Other.
/(4)/ The Corporation adopted SFAS 142 on January 1, 2002. Accordingly, no
goodwill amortization was recorded in 2002.
18
A reconciliation of the four business segments' net income to consolidated
net income follows:
--------------------------------------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
--------------------------------------------------------------------------------
Segments' net income $2,031 $1,884
Adjustments, net of taxes:
Earnings associated with unassigned capital 96 51
Asset/liability management mortgage portfolio 60 67
Liquidating businesses 10 (2)
SFAS 133 transition adjustment net loss -- (68)
Provision for credit losses in excess of net charge-offs -- (41)
Gains on sales of securities 28 --
Other (46) (21)
--------------------------------------------------------------------------------
Consolidated net income $2,179 $1,870
================================================================================
The adjustments presented in the table above include consolidated income
and expense amounts not specifically allocated to individual business segments.
19
--------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
--------------------------------------------------------------------------------
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 Bank of America
Corporation (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 2001 Annual Report. 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 general 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 level of
nonperforming assets, charge-offs and provision expense can be affected by
local, regional and international economic and market conditions, including the
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. The Corporation is
also exposed to potential litigation liabilities, including costs, expenses,
settlements and judgments, that may adversely affect the Corporation. 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: 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 is headquartered in Charlotte, North Carolina. The
Corporation operates in 21 states and the District of Columbia and has offices
located in 34 countries. The Corporation provides a diversified range of banking
and certain nonbanking financial services and products both domestically and
internationally through four business segments: Consumer and Commercial Banking,
Asset Management, Global Corporate and Investment Banking and Equity
Investments. A customer-centered strategic approach is changing the way the
Corporation focuses on its business. In addition to existing financial
reporting, the Corporation has begun using customer segment-based financial
operating information. At March 31, 2002, the Corporation had $620 billion in
assets and approximately 137,000 full-time equivalent employees. Refer to Table
One for selected financial data for the three months ended March 31, 2002 and
2001.
Key performance highlights for the three months ended March 31, 2002 compared to
the same period in 2001:
.. Net income totaled $2.2 billion, or $1.38 per common share (diluted),
compared to $1.9 billion, or $1.15 per common share (diluted). The return
on average common shareholders' equity was 18.64 percent. Shareholder value
added (SVA) increased $153 million to $832 million. As a result of the
adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002, the Corporation no longer
amortizes goodwill. Excluding goodwill amortization in 2001, net income and
earnings per share would have been $2.0 billion and $1.25 per common share
(diluted).
.. Total revenue includes net interest income on a taxable-equivalent basis
and noninterest income. Total revenue was $8.7 billion, an increase of $186
million.
. Net interest income increased $526 million to $5.2 billion. The
increase was primarily due to changes in interest rates, investment
portfolio repositioning and higher levels of core funding, partially
offset by the securitization of the subprime real estate loan
portfolio and reduced commercial loan levels. Average core deposits
grew to $321.7 billion, a $24.1 billion increase. The net interest
yield was 3.85 percent, a 46 basis point increase.
. Noninterest income was $3.4 billion, a $340 million decrease. Consumer
and Commercial Banking experienced a $52 million, or six percent,
increase in service charges driven by higher corporate service
charges. Card income remained relatively flat at $576 million as the
increase in debit card was offset by a decline in credit card income.
Mortgage banking income increased $71 million, or 59 percent, led by
continued strength in profit margins and sales volumes. Trading
account profits in Consumer Products reflected the unfavorable
mark-to-market adjustments on certain mortgage banking assets and the
related derivative instruments. Income from investment and brokerage
services was flat in the Asset Management segment largely due to lower
asset management fees reflecting lower market valuations, partially
offset by an increase in consumer brokerage fees. The noninterest
income component of trading-related revenue within Global Corporate
and Investment Banking decreased $353 million, primarily due to
declines in fixed income and equities and equity derivative products.
Investment banking income remained relatively flat, as growth in
syndications and securities underwriting was offset by declines in
other investment banking income and advisory services. Equity
Investments had equity investment gains of $17 million, reflecting a
sharp decline of $124 million.
.. The provision for credit losses remained essentially flat at $840 million.
Net charge-offs were $840 million, or 1.04 percent of average loans and
leases, an increase of 23 basis points. The increase in net charge-offs of
$68 million was primarily due to an increase in bankcard charge-offs,
partially offset by higher commercial loan recoveries as well as a decrease
in consumer finance charge-offs due to the exit of the subprime real estate
lending business.
.. Nonperforming assets were $5.0 billion, or 1.51 percent of loans, leases
and foreclosed properties at March 31, 2002, an $84 million increase from
December 31, 2001. Nonperforming assets continued to be affected by the
21
weakened economic environment. The allowance for credit losses totaled $6.9
billion, or 2.07 percent of total loans and leases, at March 31, 2002 and
remained flat compared to December 31, 2001.
.. Noninterest expense was $4.5 billion, compared to $4.7 billion in 2001.
Excluding goodwill amortization of $168 million in 2001, noninterest
expense would have remained essentially unchanged in 2002 compared to the
prior year. Increases in personnel, other general operating and data
processing expenses were offset by reductions in equipment and professional
fees expenses.
22
Table One
Selected Financial Data/(1)/
--------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------
(Dollars in millions, except per share information) 2002 2001
---------------------------------------------------------------------------------------------
Income statement
Net interest income $ 5,153 $ 4,639
Net interest income (taxable-equivalent basis) 5,247 4,721
Noninterest income 3,440 3,780
Total revenue 8,593 8,419
Total revenue (taxable-equivalent basis) 8,687 8,501
Provision for credit losses 840 835
Gains (losses) on sales of securities 44 (8)
Noninterest expense 4,494 4,654
Income before income taxes 3,303 2,922
Income tax expense 1,124 1,052
Net income 2,179 1,870
Average common shares issued and outstanding (in thousands) 1,543,471 1,608,890
Average diluted common shares issued and outstanding (in thousands) 1,581,848 1,631,099
---------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.39% 1.17%
Return on average common shareholders' equity 18.64 15.86
Total equity to total assets (period-end) 7.77 8.02
Total average equity to total average assets 7.44 7.38
Efficiency ratio 51.74 54.73
Net interest yield 3.85 3.39
Dividend payout ratio 42.48 48.14
Shareholder value added $ 832 $ 679
---------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.41 $ 1.16
Diluted earnings 1.38 1.15
Cash dividends paid 0.60 0.56
Book value 31.15 30.47
---------------------------------------------------------------------------------------------
Average balance sheet
Total loans and leases $ 327,801 $ 387,889
Total assets 637,678 648,698
Core deposits 321,744 297,624
Total deposits 364,403 355,618
Common shareholders' equity 47,392 47,794
Total shareholders' equity 47,456 47,866
---------------------------------------------------------------------------------------------
Risk-based capital ratios (period-end)
Tier 1 capital 8.55% 7.65%
Total capital 13.02 11.84
Leverage ratio 6.72 6.41
---------------------------------------------------------------------------------------------
Market price per share of common stock
Closing $ 68.02 $ 54.75
High 69.61 55.94
Low 57.51 45.00
=============================================================================================
/(1)/ As a result of the adoption of SFAS 142 on January 1, 2002, the
Corporation no longer amortizes goodwill. Goodwill amortization expense for
the three months ended March 31, 2001 was $168 million. Excluding goodwill
amortization in 2001, net income and earnings per share would have been
$2,029 and $1.25 per share (diluted), respectively.
23
Summary of Significant Accounting Policies
The Corporation's accounting policies are fundamental to understanding
management's discussion and analysis of results of operations and financial
condition. Many of the Corporation's accounting policies require significant
judgment regarding valuation of assets and liabilities and/or significant
interpretation of the specific accounting guidance. The Corporation's
significant accounting policies are discussed in detail in Note One of the
consolidated financial statements on pages 82 to 87 of the Corporation's 2001
Annual Report. The following is a summary of the more judgmental and complex
accounting policies of the Corporation.
Many of the Corporation's assets and liabilities are recorded using various
valuation techniques that require significant judgment as to recoverability. The
collectablity of loans is reflected through the Corporation's estimate of the
allowance for credit losses. The Corporation performs periodic and systematic
detailed reviews of its lending portfolio to assess overall collectibility. In
addition, certain assets and liabilities are reflected at their estimated fair
value in the consolidated financial statements. Such amounts are based on either
quoted market prices or estimated values derived by the Corporation utilizing
dealer quotes, market comparisons or internally generated modeling techniques.
The Corporation's internal models generally involve present value of cash flow
techniques. The Corporation adopted SFAS 142 during the first quarter of 2002. A
discounted cash flow model was used to determine the fair value of its reporting
units as required by the Standard. Cash flow estimates require judgement and the
Corporation believes that assumptions used in determining the cash flows are
consistent with assumptions marketplace participants would use in estimates of
their fair value. The various valuation techniques are discussed in greater
detail elsewhere in management's discussion and analysis and in Note One of the
consolidated financial statements on pages 82 to 87 of the Corporation's 2001
Annual Report.
There are other complex accounting standards that require the Corporation
to employ significant judgment in interpreting and applying certain of the
principles prescribed by those standards. These judgments include, but are not
limited to, the determination of whether a financial instrument or other
contract meets the definition of a derivative in accordance with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and the applicable hedge deferral criteria,
the accounting for the transfer of financial assets and extinguishments of
liabilities in accordance with Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 140), and the determination of when
certain special purpose vehicles should be consolidated in the Corporation's
balance sheet and statement of income. For a more complete discussion of these
policies, see Note One of the consolidated financial statements on pages 82 to
87 of the Corporation's 2001 Annual Report.
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.
Business Segment Operations
The Corporation provides a diversified range of banking and nonbanking
financial services and products through its various subsidiaries. The
Corporation manages its operations through four business segments: Consumer and
Commercial Banking, Asset Management, Global Corporate and Investment Banking
and Equity Investments. Certain operating segments have been aggregated into a
single business segment. A customer-centered strategic approach is changing the
way the Corporation focuses on its businesses. In addition to traditional
financial reporting, the Corporation has begun using customer segment-based
financial operating information. Additional information on customer segments can
be found in the Customer Segments section beginning on page 35.
The business segments summarized in Table Two are primarily managed with a
focus on various performance measures including total revenue, net income,
shareholder value added (SVA), return on average equity and efficiency. Total
revenue includes net interest income on a taxable-equivalent basis and
noninterest income. The net interest income of the business segments reflects
the results of a funds transfer pricing process which matches assets and
liabilities with similar interest rate sensitivity and maturity characteristics
and reflects the allocation of net interest income related to the Corporation's
overall asset and liability management activities on a proportionate basis. SVA
is a performance measure that is aligned with the Corporation's growth strategy
orientation and
24
strengthens the Corporation's focus on generating long-term growth and
shareholder value. SVA is defined as cash basis operating earnings less a charge
for the use of capital. Cash basis earnings excludes amortization of goodwill
prior to 2002 and amortization of other intangibles. 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). Equity is allocated to each business segment
based on an assessment of its inherent risk.
See Note Nine of the consolidated financial statements for additional
business segment information, a reconciliation to consolidated amounts and
information on Corporate Other. Additional information on noninterest income can
be found in the "Noninterest Income" section beginning on page 39. Certain prior
period amounts have been reclassified between segments and their components
(presented after Table Two) to conform to the current period presentation.
Table Two
Business Segment Summary /(1)/
--------------------------------------------------------------------------------
For the three months ended March 31
Consumer and
Total Corporation Commercial Banking /(2)/ Asset Management /(2)/
-----------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------
Net interest income /(3)/ $ 5,247 $ 4,721 $ 3,513 $ 3,109 $ 188 $ 171
Noninterest income /(4)/ 3,440 3,780 1,974 1,886 414 438
----------------------------------------------------------------------------------------------------
Total revenue 8,687 8,501 5,487 4,995 602 609
Provision for credit losses 840 835 430 330 26 8
Net income 2,179 1,870 1,418 1,170 142 128
Shareholder value added 832 679 905 754 75 77
Net interest yield 3.85% 3.39% 5.19% 4.90% 3.07% 2.75%
Return on average equity 18.6 15.9 30.6 24.4 24.9 23.5
Efficiency ratio 51.7 54.7 51.1 54.9 58.9 64.7
Average:
Total loans and leases $327,801 $387,889 $183,882 $176,652 $24,171 $23,994
Total assets 637,678 648,698 299,526 283,752 26,110 26,584
Total deposits 364,403 355,618 276,662 259,735 11,837 11,813
====================================================================================================
For the three months ended March 31
Global Corporate and
Investment Banking /(2)/ Equity Investments /(2)/ Corporate Other
-----------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------
Net interest income /(3)/ $ 1,217 $ 1,038 $ (40) $ (41) $ 369 $ 444
Noninterest income /(4)/ 1,109 1,413 16 143 (73) (100)
-----------------------------------------------------------------------------------------------------
Total revenue 2,326 2,451 (24) 102 296 344
Provision for credit losses 261 244 -- -- 123 253
Net income 503 553 (32) 33 148 (14)
Shareholder value added 172 181 (93) (31) (227) (302)
Net interest yield 2.59% 2.15% n/m n/m n/m n/m
Return on average equity 17.8 16.3 (6.2)% 5.9% n/m n/m
Efficiency ratio 54.8 54.7 n/m n/m n/m n/m
Average:
Total loans and leases $ 65,196 $ 91,570 $ 427 $ 504 $54,125 $95,169
Total assets 229,958 232,367 6,159 6,719 75,925 99,276
Total deposits 63,212 65,927 -- 37 12,692 18,106
=====================================================================================================
n/m = not meaningful
/(1)/ The Corporation adopted SFAS 142 on January 1, 2002; therefore, goodwill
amortization expense was not recorded in 2002.
/(2)/ There were no material intersegment revenues among the segments.
/(3)/ Net interest income is presented on a taxable-equivalent basis.
/(4)/ Noninterest income in the first quarter of 2001 included the $83 million
SFAS 133 transition adjustment net loss which was included in trading
account profits. The components of the transition adjustment by segment
were a gain of $4 million for Consumer and Commercial Banking, a gain of
$19 million for Global Corporate and Investment Banking and a loss of $106
million for Corporate Other.
25
Consumer and Commercial Banking
Consumer and Commercial Banking provides a wide array of products and
services to individuals, small businesses and middle market companies through
multiple delivery channels.
Consumer and Commercial Banking
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $3,513 $3,109
Noninterest income 1,974 1,886
------------------------------------------------
Total revenue 5,487 4,995
Provision for credit losses 430 330
Net income 1,418 1,170
Shareholder value added 905 754
Efficiency ratio 51.1% 54.9%
------------------------------------------------
.. Total revenue increased $492 million, or 10 percent, for the three months
ended March 31, 2002 compared to the same period in 2001.
. Net interest income increased $404 million, or 13 percent, due to a
favorable shift in loan mix, overall loan and deposit growth and the
Corporation's overall asset and liability management.
. Noninterest income increased $88 million, or five percent, primarily
driven by increased service charges. Card income was relatively flat
as the increase in debit card was offset by a decline in credit card
income. Mortgage banking income increased $71 million, or 59 percent,
led by continued strength in profit margins and sales volume. Trading
account profits reflected the unfavorable mark-to-market adjustment on
certain mortgage banking assets and the related derivative
instruments.
.. Net income for the three months ended March 31, 2002 rose $248 million, or
21 percent, primarily due to the increase in revenue, partially offset by
increases in the provision for credit losses and noninterest expense.
. The provision for credit losses increased $100 million, or 30 percent,
primarily driven by higher charge-offs in the bankcard loan
portfolios.
. The increase in noninterest expense was primarily due to increases in
processing and support costs, which included an increase in debit card
processing expense related to higher purchase volume, overhead expense
and revenue-related incentive compensation. These increases were
partially offset by the elimination of goodwill amortization expense.
Goodwill amortization expense in the first quarter of 2001 was $113
million.
.. Shareholder value added increased $151 million over the prior year as a
result of the increase in net income and lower capital as a result of the
Corporation's decision to reduce commercial loan levels in specific
industries.
The major components of Consumer and Commercial Banking are Banking
Regions, Consumer Products and Commercial Banking.
Banking Regions
Banking Regions serves consumer households in 21 states and the District of
Columbia and overseas through its network of 4,246 banking centers, 13,161 ATMs,
telephone and Internet channels on www.bankofamerica.com.
26
Banking Regions provides a wide array of products and services, including
deposit products such as checking, money market savings accounts, time deposits
and IRAs, debit card products and credit products such as home equity, mortgage
and personal auto loans. Banking Regions also includes small business banking
providing treasury management, credit services, community investment, check
card, e-commerce and brokerage services to nearly two million small business
relationships across the franchise.
Banking Regions
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $2,215 $2,049
Noninterest income 962 906
------------------------------------------------
Total revenue 3,177 2,955
Provision for credit losses 58 70
Net income 748 605
Shareholder value added 457 400
Efficiency ratio 60.6% 63.4%
================================================
.. Total revenue for the three months ended March 31, 2002 increased $222
million, or eight percent, with increases in both net interest income and
noninterest income.
. Loan growth, primarily in residential mortgages, and deposit growth as
well as the Corporation's overall asset and liability management had a
positive effect on net interest income.
. Noninterest income increased $56 million, or six percent, primarily
due to an increase in debit card income and corporate service charges.
Debit card income increased $24 million, or 18 percent, driven by a
higher number of active debit cards and a 14 percent increase in
purchase volume from increased penetration and activation rates.
Corporate service charges increased $21 million, or 24 percent, as
customers opted to pay service charges rather than maintain additional
deposit balances in the lower rate environment as well as higher
treasury management fees due to the lower rate environment.
.. Net income increased $143 million, or 24 percent, for the three months
ended March 31, 2002, primarily attributable to the increase in revenue
discussed above, partially offset by an increase in noninterest expense.
. Noninterest expense increased $52 million, or three percent, primarily
due to an increase in processing support costs, which included an
increase in debit card processing expense related to higher purchase
volume, and overhead. These increases were offset by the elimination
of goodwill amortization expense. Goodwill amortization expense for
the first quarter of 2001 was $93 million.
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, lending and investing to develop low-
and moderate-income communities, student lending and certain insurance services.
Consumer Products also provides retail finance and floorplan programs to marine,
RV and auto dealerships.
27
Consumer Products
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $ 699 $ 436
Noninterest income 776 788
------------------------------------------------
Total revenue 1,475 1,224
Provision for credit losses 294 181
Net income 410 323
Shareholder value added 314 237
Efficiency ratio 36.7% 42.9%
================================================
.. Total revenue for the three months ended March 31, 2002 increased $251
million, or 21 percent, due to an increase in net interest income,
partially offset by a slight decrease in noninterest income.
. Net interest income increased $263 million, or 60 percent, primarily
due to growth in bankcard receivables and the Corporation's overall
asset and liability management. End of period managed consumer card
outstandings increased 15 percent from a year ago, primarily driven by
the continued strength in new account volume, the leveraging of the
Corporation's franchise to open new accounts with existing customers
and the reduction of voluntary attrition partly due to efforts aimed
at increasing customer satisfaction.
. Noninterest income decreased $12 million, or two percent, primarily
due to the decline in credit card income. Credit card income decreased
$21 million, or five percent, due to lower late fees and interchange
fees and the impact of a smaller securitized portfolio. Mortgage
banking income increased $71 million, or 59 percent, led by continued
strength in profit margins and sales volume. Trading account profits
reflected the unfavorable mark-to-market adjustment on certain
mortgage banking assets and the related derivative instruments.
.. The $87 million, or 27 percent, increase in net income for the three months
ended March 31, 2002 was primarily due to the increase in revenue,
partially offset by an increase in the provision for credit losses and a
slight increase in noninterest expense.
. The provision for credit losses increased 63 percent to $294 million
primarily due to higher net charge-offs in the bankcard loan
portfolio. The increase in bankcard charge-offs was driven by
portfolio growth, an increase in personal bankruptcy filings and a
weaker economic environment.
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. In the
first quarter of 2002, certain commercial lending businesses being liquidated
were transferred from Commercial Banking to Corporate Other.
28
Commercial Banking
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $599 $624
Noninterest income 236 192
------------------------------------------------
Total revenue 835 816
Provision for credit losses 78 79
Net income 260 242
Shareholder value added 134 117
Efficiency ratio 40.2% 41.9%
================================================
.. Total revenue for the three months ended March 31, 2002 increased $19
million to $835 million as an increase in noninterest income was partially
offset by a decline in net interest income.
. Net interest income declined $25 million, or four percent, primarily
due to the Corporation's decision to reduce commercial loan levels in
specific industries, partially offset by the Corporation's overall
asset and liability management.
. The $44 million, or 23 percent, increase in noninterest income was
primarily attributable to higher corporate service charges as
customers opted to pay service charges rather than carry excess
deposit balances in the lower rate environment.
.. The $18 million, or 8 percent, increase in net income was primarily driven
by the increase in revenue.
.. Shareholder value added increased $17 million due to an increase in net
income and a lower capital charge as a result of reductions in commercial
loan levels.
Asset Management
Asset Management includes the Private Bank, Banc of America Capital
Management and the Individual Investor Group. The Private Bank's goal is to
assist individuals and families in building and preserving their wealth by
providing investment, fiduciary and comprehensive credit expertise to
high-net-worth clients. Banc of America Capital Management is an asset-gathering
and asset management organization serving the needs of institutional clients,
high-net-worth individuals and retail customers. Banc of America Capital
Management manages money and distribution channels, manufactures investment
products, offers institutional separate accounts and wrap programs and provides
advice to clients through asset allocation expertise and software. The
Individual Investor Group, which is comprised of Private Client Services and
Banc of America Investment Services, Inc., provides investment, securities and
financial planning services to affluent and high-net-worth individuals. Private
Client Services focuses on high-net-worth individuals. Banc of America
Investment Services, Inc. includes both the full-service network of investment
professionals and an extensive on-line investor service.
One of the Corporation's strategies is to focus on and grow the asset
management business. Recent initiatives include new investment platforms that
broaden the Corporation's capabilities to maximize market opportunity for its
clients. The Corporation continues to enhance the financial planning tools used
to assist clients with their financial goals.
29
Client assets at March 31, 2002 and 2001 were:
Client Assets
-----------------------------------------
March 31
---------------
(Dollars in billions) 2002 2001
-----------------------------------------
Assets under management $314.9 $286.9
Client brokerage assets 96.6 97.3
Assets in custody 46.0 49.5
-----------------------------------------
Total client assets $457.5 $433.7
=========================================
Assets under management typically generate fees based on a percentage of
their value. Assets of the Nations Funds family of mutual funds increased $34
billion to $151 billion at March 31, 2002 compared to a year ago, primarily
driven by an increase in money market funds in the declining equity market
environment. Growth in total assets under management of $28 billion, or 10
percent, was primarily driven by the growth in money market funds. Client
brokerage assets, a source of commission revenue, were relatively flat at $97
billion compared to the prior year. Assets in custody, which generate custodial
fees, declined slightly.
Asset Management
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $188 $171
Noninterest income 414 438
------------------------------------------------
Total revenue 602 609
Provision for credit losses 26 8
Net income 142 128
Shareholder value added 75 77
Efficiency ratio 58.9% 64.7%
================================================
.. Total revenue remained flat for the three months ended March 31, 2002, as
the increase in net interest income was offset by a decline in noninterest
income.
. Net interest income increased $17 million, or 10 percent, primarily
due to the Corporation's overall asset and liability management.
. Noninterest income decreased $24 million, or six percent, primarily
due to a decline in investment and brokerage services. The decrease in
investment and brokerage services income was primarily due to lower
asset management fees reflecting lower market valuations, partially
offset by an increase in consumer brokerage fees.
.. Net income increased $14 million, or 11 percent, for the three months ended
March 31, 2002, primarily due to decreased noninterest expense, partially
offset by an $18 million increase in the provision for credit losses.
Reductions in personnel expenses and amortization expense due to the
elimination of goodwill were the main drivers of the $40 million decrease
in noninterest expense. The impact of goodwill amortization to net income
in the first quarter of 2001 was $12 million.
30
Global Corporate and Investment Banking
Global Corporate and Investment Banking provides a broad array of financial
services such as investment banking, capital markets, trade finance, treasury
management, lending, leasing and financial advisory services to domestic and
international corporations, financial institutions and government entities.
Clients are supported through offices in 34 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, structured finance and trade services.
Global Corporate and Investment Banking
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $1,217 $1,038
Noninterest income 1,109 1,413
------------------------------------------------
Total revenue 2,326 2,451
Provision for credit losses 261 244
Net income 503 553
Shareholder value added 172 181
Efficiency ratio 54.8% 54.7%
================================================
.. For the three months ended March 31, 2002, total revenue decreased $125
million, or five percent, due to a decline in noninterest income, partially
offset by an increase in net interest income.
. Net interest income increased $179 million, or 17 percent, primarily a
result of higher trading-related activities and the Corporation's
overall asset and liability management, partially offset by lower
commercial loan levels.
. Noninterest income decreased $304 million, or 22 percent, primarily
due to a sharp decline in trading account profits, partially offset by
increases in investment and brokerage services and corporate service
charges.
.. Net income decreased $50 million, or nine percent, for the three months
ended March 31, 2002 as the decline in revenue was partially offset by a
decrease in noninterest expense.
. A $66 million, or five percent, decrease in noninterest expense was
primarily due to a reduction in revenue-related incentive compensation
as well as the elimination of goodwill amortization. The impact of
goodwill amortization expense in the first quarter of 2001 was $29
million.
.. Shareholder value added declined $9 million to $172 million as a result of
the decrease in net income, partially offset by lower capital due to
reductions in loan levels.
Global Corporate and Investment Banking offers clients a comprehensive
range of global capabilities through three components: Global Investment
Banking, Global Credit Products and Global Treasury Services.
Global Investment Banking
Global Investment Banking includes the Corporation's investment banking
activities and risk management products. Through a separate subsidiary, Banc of
America Securities LLC, Global Investment Banking 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
31
services for other securities broker/dealers and prime-brokerage services. Debt
and equity securities research, loan syndications, mergers and acquisitions
advisory services and private placements are also provided through Banc of
America Securities LLC.
In addition, Global Investment Banking provides risk management solutions
for our global customer base using interest rate, equity, credit and commodity
derivatives, foreign exchange, fixed income 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 Investment
Banking 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.
Global Investment Banking
------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
------------------------------------------------
Net interest income $ 486 $ 377
Noninterest income 857 1,112
------------------------------------------------
Total revenue 1,343 1,489
Provision for credit losses 19 --
Net income 275 354
Shareholder value added 174 241
Efficiency ratio 65.8% 62.6%
------------------------------------------------
.. Total revenue declined $146 million, or 10 percent, for the three months
ended March 31, 2002 due to the decline in noninterest income, partially
offset by an increase in net interest income.
. Net interest income grew $109 million, or 29 percent, primarily as a
result of higher trading-related activities.
. Noninterest income declined $255 million, or 23 percent, primarily due
to the decline in trading account profits, partially offset by an
increase in investment and brokerage services. Trading account profits
decreased 46 percent, or $324 million, primarily due to declines in
fixed income and equity products. These declines were due to a
slowdown in market activity and a lack of volatility in the market.
Investment banking income decreased slightly to $328 million as
increases in syndications and securities underwriting were offset by
declines in other investment banking income and advisory fees.
.. Net income decreased $79 million, or 22 percent, for the three months ended
March 31, 2002 as the decline in revenue was partially offset by a decrease
in noninterest expense.
. The $48 million, or five percent, decrease in noninterest expense was
primarily due to reductions in revenue-related incentive compensation
and the elimination of goodwill amortization. Goodwill amortization
expense in the first quarter of 2001 was $15 million.
Global Credit Products
Global Credit Products provides credit and lending services and includes
the corporate industry-focused portfolio, leasing and project finance.
32
Global Credit Products
-------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
-------------------------------------------------
Net interest income $ 508 $ 506
Noninterest income 40 111
-------------------------------------------------
Total revenue 548 617
Provision for credit losses 243 247
Net income 120 143
Shareholder value added (96) (104)
Efficiency ratio 23.0% 24.2%
=================================================
.. Total revenue decreased $69 million, or 11 percent, for the three months
ended March 31, 2002 compared to the same period in 2001.
. Net interest income remained essentially flat as an increase due to
the Corporation's overall asset and liability management was offset by
a decline in loan levels.
. Noninterest income declined $71 million, or 64 percent, primarily due
to declines in trading account profits and other income.
.. Net income declined $23 million, or 16 percent, primarily due to the
decrease in revenue, partially offset by a decrease in noninterest expense.
. Noninterest expense decreased $25 million, or 16 percent, primarily
due to the elimination of goodwill amortization and reductions in
personnel expense. Goodwill amortization expense in the first quarter
of 2001 was $11 million.
.. Shareholder value added increased $8 million to $(96) million as a decline
in capital due to a reduction in loan levels was partially offset by the
decrease in net income.
Global Treasury Services
Global Treasury Services provides the technology, strategies and integrated
solutions to help financial institutions, government agencies and public and
private companies manage their operations and cash flows on a local, regional,
national and global level.
Global Treasury Services
-------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
-------------------------------------------------
Net interest income $ 223 $ 155
Noninterest income 212 190
-------------------------------------------------
Total revenue 435 345
Provision for credit losses (1) (3)
Net income 108 56
Shareholder value added 94 44
Efficiency ratio 61.0% 74.7%
=================================================
33
.. Revenue increased $90 million, or 26 percent, with increases in both net
interest income and noninterest income for the three months ended March 31,
2002.
. Net interest income increased $68 million, or 44 percent, primarily
due to the Corporation's overall asset and liability management.
. Noninterest income increased $22 million, or 12 percent, due to an
increase in corporate service charges as customers chose to pay
service charges rather than maintain additional deposit balances in
the lower rate environment.
.. Net income increased $52 million, or 92 percent, for the three months ended
March 31, 2002 driven primarily by the growth in revenue.
Equity Investments
Equity Investments includes Principal Investing, which is comprised of a
diversified portfolio of investments in 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.
Equity Investments
-------------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
-------------------------------------------------
Net interest income $(40) $(41)
Noninterest income 16 143
-------------------------------------------------
Total revenue (24) 102
Provision for credit losses -- --
Net income (loss) (32) 33
Shareholder value added (93) (31)
Efficiency ratio n/m n/m
=================================================
n/m = not meaningful
.. For the three months ended March 31, 2002, both revenue and net income
decreased substantially primarily due to lower equity investment gains.
. Net interest income consists primarily of the funding cost associated
with the carrying value of investments.
. Equity investment gains decreased $124 million to $17 million,
substantially all of which was included in Principal Investing. The
decrease was the result of a $140 million gain in the strategic
investments portfolio in the first quarter of 2001 related to the sale
of an interest in the Star Systems ATM network. Principal Investing
recorded cash gains of $150 million and fair value adjustment gains of
$8 million, offset by impairment charges of $140 million.
34
Customer Segments
Our customer-centered strategic approach is changing the way the
Corporation focuses on its businesses. In addition to traditional financial
reporting, the Corporation has begun using customer segment-based financial
operating information. In changing its approach to a customer-centered strategic
focus, the Corporation has reviewed its customer base and developed customer
segments based on the specific needs of our customers.
The customer-based segments include: Consumer, Premier, Private, Small
Business, Commercial, Corporate and Equity Investments. The Corporate and Equity
Investments segments are comparable with the traditional line of business
segments Global Corporate and Investment Banking and Equity Investments.
Additional discussions of these two segments is found beginning on pages 40 and
41.
The Consumer segment serves individual customers whose financial services
needs can be fulfilled by traditional banking services, systems and delivery
processes. Within the consumer segment, customers are identified as prime
customers if they are new customers or existing one-product customers. Plus
customers represent the other subsegment that includes other customers that have
expanded their relationships with us to include multiple products. Net income
for the Consumer segment was $748 million and $616 million for the three months
ended March 31, 2002 and 2001, respectively. The Premier segment serves clients
who have the capacity to build and preserve significant wealth. Premier clients
often require tailored solutions that fit their unique challenges. Accordingly,
Premier clients are assigned an experienced client manager who delivers the
resources for proactive planning and personalized solutions. Net income for the
Premier segment increased $38 million to $138 million for the three months ended
March 31, 2002 compared to March 31, 2001. The Private segment focuses on
building and preserving the wealth of affluent and high-net-worth individuals
and families by providing clients with investment, fiduciary and comprehensive
banking and credit expertise. Net income for the Private segment remained flat
at $112 million for the three months ended March 31, 2002 compared to a year
ago.
The Small Business segment provides services to business clients that are
best served through the Corporation's vast network of local access points such
as banking centers, business client managers and business lending centers and
call centers. In many cases, small business customers also have personal
relationships with us. Net income for the Small Business segment was $224
million and $197 million for the three months ended March 31, 2002 and 2001,
respectively. The Commercial segment is focused on delivering innovative
solutions to middle market companies that are maturing in their businesses and
require more innovative services. These innovative solutions include traditional
banking services as well as treasury and trade services, asset-based lending,
capital markets and investment banking services and asset management services.
Net income for the Commercial segment increased $65 million to $338 million for
the three months ended March 31, 2002 compared to the same period in 2001.
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 is presented in Table Four.
As reported, net interest income on a taxable-equivalent basis increased
$526 million to $5.2 billion for the three months ended March 31, 2002 compared
to the same period in 2001. Management also reviews "core net interest income,"
which adjusts reported net interest income for the impact of trading-related
activities and loans originated by the Corporation and sold into revolving
securitizations (which consist primarily of bankcard receivables) which will
return to the balance sheet at the end of the securitization. For purposes of
internal analysis, management combines trading-related net interest income with
trading account profits, as discussed in the
35
"Noninterest Income" section beginning on page 39, as trading strategies are
typically evaluated based on total revenue. Noninterest income, rather than net
interest income, is recorded for assets that have been securitized as the
Corporation takes on the role of servicer and records servicing income and gains
or losses on securitizations, where appropriate.
Table Three below provides a reconciliation of net interest income on a
taxable-equivalent basis presented in Table Four to core net interest income for
the three months ended March 31, 2002 and 2001:
Table Three
Net Interest Income
--------------------------------------------------------------------------------
Three Months Ended
March 31
-------------------- Increase/
(Dollars in millions) 2002 2001 (Decrease)
--------------------------------------------------------------------------------
Net interest income
As reported/(1)/ $ 5,247 $ 4,721 11.14%
Less: Trading-related net interest income (435) (362)
Add: Impact of revolving securitizations 157 179
--------------------------------------------------------------------------------
Core net interest income $ 4,969 $ 4,538 9.50%
--------------------------------------------------------------------------------
Average earning assets
As reported $ 549,111 $561,427 (2.19)%
Less: Trading-related earning assets (113,389) (96,458)
Add: Impact of revolving securitizations 8,452 10,706
--------------------------------------------------------------------------------
Core average earning assets $ 444,174 $475,675 (6.62)%
--------------------------------------------------------------------------------
Net interest yield on earning assets/(1,2)/
As reported 3.85% 3.39% 46 bp
Add: Impact of trading-related activities 0.60 0.39 21
Add: Impact of revolving securitizations 0.06 0.06 --
--------------------------------------------------------------------------------
Core net interest yield on earning assets 4.51% 3.84% 67 bp
================================================================================
/(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 increased $431
million for the three months ended March 31, 2002 compared to the same period in
2001. This increase was driven by changes in interest rates, the effect of
portfolio repositioning and higher levels of core funding, partially offset by
the securitization of the subprime real estate loans and reduced commercial loan
levels. The higher levels of core funding reflected a $24.1 billion, or eight
percent, increase in average core deposits.
Core average earning assets decreased $31.5 billion for the three months
ended March 31, 2002 compared to the same period in 2001, primarily as a result
of exiting unprofitable commercial loan relationships. Average managed consumer
loans decreased 11 percent and average managed commercial loans decreased 20
percent. Average consumer finance loans decreased reflecting the exit of the
subprime real estate lending business. The subprime real estate loan portfolio
was transferred to loans held for sale in other assets in the third quarter of
2001 and subsequently securitized and held in the securities portfolio by the
Corporation in the fourth quarter of 2001. This securitization was the primary
driver of the increase in average securities.
The core net interest yield increased 67 basis points for the three months
ended March 31, 2002 compared to the same period in 2001, mainly due to the
effects of changes in interest rates and portfolio repositioning, the reduction
in unprofitable commercial loan relationships and higher levels of core funding,
partially offset by the securitization of subprime real estate loans.
36
Table Four
Quarterly Average Balances and Interest Rates - Taxable-Equivalent Basis
------------------------------------------------------------------------------------------------------------------------
First Quarter 2002 Fourth Quarter 2001
------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in millions) Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $ 10,242 $ 61 2.43% $7,255 $ 64 3.47%
Federal funds sold and securities purchased under
agreements to resell 44,682 215 1.94 38,825 253 2.60
Trading account assets 70,613 888 5.06 67,535 920 5.43
Securities/(1)/ 73,542 963 5.24 71,454 1,090 6.10
Loans and leases/(2)/:
Commercial - domestic 116,160 1,978 6.90 121,399 2,138 6.99
Commercial - foreign 21,917 226 4.17 23,789 278 4.63
Commercial real estate - domestic 22,251 275 5.01 23,051 316 5.45
Commercial real estate - foreign 389 4 4.00 375 4 4.49
------------------------------------------------------------------------------------------------------------------------
Total commercial 160,717 2,483 6.26 168,614 2,736 6.44
------------------------------------------------------------------------------------------------------------------------
Residential mortgage 81,104 1,389 6.88 78,366 1,385 7.05
Home equity lines 22,010 294 5.42 22,227 340 6.07
Direct/Indirect consumer 37,218 701 7.63 38,074 752 7.83
Consumer finance 5,276 104 7.87 5,324 127 9.55
Bankcard 19,383 490 10.26 18,656 498 10.58
Foreign consumer 2,093 19 3.71 2,093 21 4.02
------------------------------------------------------------------------------------------------------------------------
Total consumer 167,084 2,997 7.24 164,740 3,123 7.54
------------------------------------------------------------------------------------------------------------------------
Total loans and leases 327,801 5,480 6.76 333,354 5,859 6.99
------------------------------------------------------------------------------------------------------------------------
Other earning assets 22,231 358 6.52 36,782 707 7.67
------------------------------------------------------------------------------------------------------------------------
Total earning assets/(3)/ 549,111 7,965 5.86 555,205 8,893 6.37
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 22,037 23,182
Other assets, less allowance for credit losses 66,530 73,410
------------------------------------------------------------------------------------------------------------------------
Total assets $637,678 $651,797
========================================================================================================================
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $20,716 33 0.64 $20,132 42 0.83
NOW and money market deposit accounts 127,218 335 1.07 121,758 426 1.39
Consumer CDs and IRAs 69,359 730 4.27 71,895 898 4.96
Negotiable CDs, public funds and other time deposits 4,671 32 2.82 5,196 44 3.39
------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 221,964 1,130 2.06 218,981 1,410 2.56
------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits/(4)/:
Banks located in foreign countries 15,464 107 2.79 20,771 170 3.22
Governments and official institutions 2,904 14 1.96 2,965 20 2.74
Time, savings and other 19,620 93 1.93 21,858 113 2.06
------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 37,988 214 2.29 45,594 303 2.63
------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 259,952 1,344 2.10 264,575 1,713 2.57
------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 86,870 477 2.23 87,291 700 3.18
Trading account liabilities 31,066 285 3.72 29,921 268 3.55
Long-term debt and trust preferred securities 67,694 612 3.62 68,141 707 4.15
------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/(3)/ 445,582 2,718 2.47 449,928 3,388 2.99
------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 104,451 103,596
Other liabilities 40,189 49,357
Shareholders' equity 47,456 48,916
------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $637,678 $651,797
========================================================================================================================
Net interest spread 3.39 3.38
Impact of noninterest-bearing sources 0.46 0.57
------------------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $5,247 3.85% $5,505 3.95%
========================================================================================================================
/(1)/ The average balance and yield on securities are based on the average of
historical amortized cost balances.
/(2)/ Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
/(3)/ Interest income also includes the impact of interest rate risk management
contracts, which increased interest income on the underlying assets $560 in
the first quarter of 2002 and $473, $284, $194 and $27 in the fourth,
third, second and first quarters of 2001, respectively. These amounts were
substantially offset by corresponding decreases in the income earned on the
underlying assets. Interest expense includes the impact of interest rate
risk management contracts, which (increased ) decreased interest expense on
the underlying liabilities $55 in the first quarter of 2002 and $(40), $31,
$49 and $23 in the fourth, third, second and first quarters of 2001,
respectively. These amounts were substantially offset by corresponding
decreases or increases in the interest paid on the underlying liabilities.
For further information on interest rate contracts, see "Asset and
Liability Management Activities" beginning on page 64.
/(4)/ Primarily consists of time deposits in denominations of $100,000 or more.
37
Third Quarter 2001 Second Quarter 2001 First Quarter 2001
-------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------------------------------------------------------------------------------------------
$ 5,881 $ 71 4.84% $ 7,085 $ 81 4.58% $ 6,675 $ 102 6.17%
36,133 321 3.54 33,859 405 4.79 31,903 435 5.48
68,258 937 5.46 67,311 944 5.62 62,491 852 5.49
58,930 902 6.12 55,719 909 6.53 55,221 860 6.26
129,673 2,343 7.17 139,096 2,585 7.45 144,404 2,813 7.90
25,267 353 5.54 27,449 421 6.14 29,540 515 7.06
24,132 395 6.50 25,293 459 7.28 25,989 530 8.27
366 5 5.78 352 5 6.64 300 6 7.82
-------------------------------------------------------------------------------------------
179,438 3,096 6.85 192,190 3,470 7.24 200,233 3,864 7.82
-------------------------------------------------------------------------------------------
80,526 1,457 7.22 84,346 1,546 7.34 82,710 1,532 7.43
22,115 394 7.06 21,958 424 7.75 21,744 467 8.71
39,481 753 7.56 40,117 736 7.35 40,461 784 7.86
16,358 359 8.77 26,843 608 9.06 25,947 589 9.08
17,632 493 11.11 15,755 445 11.32 14,464 443 12.41
2,176 28 5.28 2,291 35 6.20 2,330 43 7.54
-------------------------------------------------------------------------------------------
178,288 3,484 7.78 191,310 3,794 7.94 187,656 3,858 8.29
-------------------------------------------------------------------------------------------
357,726 6,580 7.31 383,500 7,264 7.59 387,889 7,722 8.05
-------------------------------------------------------------------------------------------
30,180 597 7.89 20,154 409 8.11 17,248 352 8.28
-------------------------------------------------------------------------------------------
557,108 9,408 6.72 567,628 10,012 7.07 561,427 10,323 7.42
-------------------------------------------------------------------------------------------
20,753 23,232 23,020
64,323 64,697 64,251
-------------------------------------------------------------------------------------------
$642,184 $655,557 $648,698
===========================================================================================
$20,076 53 1.04 $20,222 57 1.14 $ 20,406 61 1.21
116,638 588 2.00 113,031 676 2.40 107,015 808 3.06
73,465 918 4.95 74,777 969 5.20 77,772 1,068 5.57
5,085 57 4.44 6,005 81 5.37 7,137 108 6.16
-------------------------------------------------------------------------------------------
215,264 1,616 2.98 214,035 1,783 3.34 212,330 2,045 3.91
-------------------------------------------------------------------------------------------
24,097 257 4.22 24,395 294 4.82 24,358 332 5.53
3,533 35 3.90 3,983 45 4.53 3,993 52 5.27
23,847 189 3.16 23,545 241 4.13 22,506 284 5.11
-------------------------------------------------------------------------------------------
51,477 481 3.71 51,923 580 4.49 50,857 668 5.32
-------------------------------------------------------------------------------------------
266,741 2,097 3.12 265,958 2,363 3.57 263,187 2,713 4.18
-------------------------------------------------------------------------------------------
89,042 869 3.87 98,898 1,221 4.95 94,792 1,377 5.89
30,913 285 3.66 30,710 312 4.07 28,407 290 4.14
67,267 867 5.15 69,416 999 5.76 73,752 1,222 6.63
-------------------------------------------------------------------------------------------
453,963 4,118 3.61 464,982 4,895 4.22 460,138 5,602 4.92
-------------------------------------------------------------------------------------------
96,587 97,390 92,431
42,432 44,476 48,263
49,202 48,709 47,866
------------------------------------------------------------------------------------------
$642,184 $655,557 $648,698
==========================================================================================
3.11 2.85 2.50
0.67 0.76 0.89
------------------------------------------------------------------------------------------
$5,290 3.78% $5,117 3.61% $4,721 3.39%
==========================================================================================
38
Noninterest Income
As presented in Table Five, noninterest income decreased $340 million to
$3.4 billion for the three months ended March 31, 2002 from the comparable 2001
period. The decrease in noninterest income reflects sharp declines in trading
account profits and equity investment gains partially offset by increases in
mortgage banking income, service charges and investment and brokerage services.
Table Five
Noninterest Income
------------------------------------------------------------------------------------
Three Months Ended
March 31 Increase/(Decrease)
--------------------------------------
(Dollars in millions) 2002 2001 Amount Percent
------------------------------------------------------------------------------------
Consumer service charges $ 692 $ 694 $ (2) (0.3)%
Corporate service charges 567 499 68 13.6
------------------------------------------------------------------------------------
Total service charges 1,259 1,193 66 5.5
------------------------------------------------------------------------------------
Consumer investment and brokerage services 381 379 2 0.5
Corporate investment and brokerage services 170 136 34 25.0
------------------------------------------------------------------------------------
Total investment and brokerage services 551 515 36 7.0
------------------------------------------------------------------------------------
Mortgage banking income 192 121 71 58.7
Investment banking income 341 346 (5) (1.4)
Equity investment gains 26 147 (121) (82.3)
Card income 576 573 3 0.5
Trading account profits/(1)/ 345 699 (354) (50.6)
Other income 150 186 (36) (19.4)
------------------------------------------------------------------------------------
Total $3,440 $3,780 $(340) (9.0)%
====================================================================================
/(1)/ Trading account profits in the first quarter of 2001 included the $83
million SFAS 133 transition adjustment net loss.
The following section discusses the noninterest income results of the
Corporation's four business segments. For additional business segment
information, see "Business Segment Operations" beginning on page 24.
Consumer and Commercial Banking
.. Noninterest income for Consumer and Commercial Banking increased $88
million to $2.0 billion for the three months ended March 31, 2002 from the
comparable 2001 period, primarily driven by increased service charges.
. Service charges include deposit account service charges, non-deposit
service charges and fees, and bankers' acceptances and letters of
credit fees. Service charges increased $52 million to $957 million for
the three months ended March 31, 2002 due to an increase in corporate
service charges. Corporate service charges increased $53 million as
corporate customers chose to pay higher fees rather than maintain
excess deposit balances in the lower rate environment. Consumer
service charges remained flat at $681 million.
. Card income includes interchange income, credit and debit card fees
and merchant discount fees. Card income increased $3 million to $576
million for the three months ended March 31, 2002 as the increase in
debit card income was partially offset by a decline in credit card
income. The $24 million, or 18 percent, increase in debit card income
was driven by a higher number of active debit cards from increased
penetration and activation rates and increased purchase volume. The
$21 million, or five percent, decrease in credit card income was
primarily due to lower late fees and interchange fees and the impact
of a smaller securitized portfolio compared to a year ago. Although
consumer credit card outstandings increased, purchase volume remained
relatively flat. Card income includes activity from the securitized
portfolio of $49 million and $58 million for the three months ended
March 31, 2002 and 2001, respectively. This amount represents residual
income, which consists of revenues from the securitized credit card
portfolio offset by charge-offs and interest expense paid to the
bondholders.
39
. Mortgage banking revenue was $179 million for the three months ended
March 31, 2002 and was comprised of mortgage banking income of $192
million and trading account profits of $(13) million. The 59 percent
increase in mortgage banking income was driven by continued strength
in profit margins and sales volumes. Trading account profits reflected
the unfavorable mark-to-market adjustments on certain mortgage banking
assets and the related derivative instruments. The average portfolio
of mortgage loans serviced decreased $24 billion to $313 billion for
the three months ended March 31, 2002 compared to the same period in
2001. Total production of first mortgage loans originated through the
Corporation increased $2.5 billion to $17.8 billion for the three
months ended March 31, 2002, reflecting an increase in refinancings as
a result of declining interest rates offset by our decision to exit
the correspondent loan origination channel. First mortgage loan
origination volume was composed of approximately $12.9 billion of
retail loans and $4.9 billion of wholesale loans for the three months
ended March 31, 2002. Retail first mortgage origination volume
increased to 73 percent of total volume for the three months ended
March 31, 2002 from 45 percent in the comparable 2001 period, driven
by the Corporation's strategic decision to exit the low margin
correspondent loan origination channel in the second quarter of 2001.
Asset Management
.. Noninterest income for Asset Management decreased $24 million to $414
million for the three months ended March 31, 2002 compared to the same
period in 2001. The decrease was primarily attributable to a decline in
investment and brokerage services income.
. Income from investment and brokerage services includes personal and
institutional asset management fees and brokerage income. Income from
investment and brokerage services decreased $8 million to $384 million
for the three months ended March 31, 2002. This decrease was largely
due to lower asset management fees reflecting lower market valuations,
partially offset by an increase in consumer brokerage fees.
Global Corporate and Investment Banking
.. Noninterest income for Global Corporate and Investment Banking decreased
$304 million to $1.1 billion for the three months ended March 31, 2002
compared to the same period in 2001. The decrease was primarily due to a
sharp decline in trading account profits, partially offset by increases in
investment and brokerage services and corporate service charges.
. Corporate service charges increased $15 million to $284 million for
the three months ended March 31, 2002, primarily driven by corporate
customers opting to pay service charges rather than maintain
additional deposit balances in the lower rate environment.
. Investment and brokerage services increased $39 million to $149
million, primarily due to higher trading volumes with the growth of
the London trading operations and increased mutual fund fees as more
investors chose to purchase these investments.
. Trading account profits, as reported in the Consolidated Statement of
Income, does not include the net interest income recognized on
interest-earning and interest-bearing trading positions or the related
funding charge or benefit. Trading account profits as well as
trading-related net interest income ("trading-related revenue") are
presented in the following table as they are both considered in
evaluating the overall profitability of the Corporation's trading
positions.
Trading-related revenue decreased $280 million to $793 million
for the three months ended March 31, 2002, as the $353 million
decrease in trading account profits was partially offset by a $73
million increase in the net interest margin. The decrease was
primarily due to a decline in revenue from equity and equity
derivative products of $204 million to $126 million. This decline was
attributable to a slowdown in market activity and reduced volatility
in the market. Revenue from fixed income decreased $29 million to $247
million primarily due to declines in emerging markets and the adverse
impact of credit spreads on hedges of the loan portfolio. Revenue from
commodities contracts decreased $29 million to $23 million, primarily
attributable to the prior year's volatility in the natural gas market.
Foreign exchange revenue decreased $18
40
million to $129 million due to less activity in the market. Revenue
from interest rate contracts remained flat at $268 million. Trading
account profits for the first quarter of 2001 included a $19 million
transition adjustment gain resulting from the adoption of SFAS 133.
Trading-related Revenue in Global Corporate and Investment Banking
-----------------------------------------------------------------
Three Months Ended
March 31
----------------------
(Dollars in millions) 2002 2001
-----------------------------------------------------------------
Trading account profits $358 $ 711
Trading-related net interest income 435 362
-----------------------------------------------------------------
Total trading-related revenue $793 $1,073
-----------------------------------------------------------------
Trading-related revenue by product
Foreign exchange $129 $ 147
Interest rate 268 268
Fixed income 247 276
Equities and equity derivatives 126 330
Commodities 23 52
-----------------------------------------------------------------
Total trading-related revenue $793 $1,073
=================================================================
. Investment banking income reflects increases in syndications and
securities underwriting that were more than offset by declines in
other investment banking income and advisory fees. Syndication fees
increased $14 million due to an unusually slow start in the prior
year. Securities underwriting fees increased $6 million due to growth
in high grade and other originations, which was offset by lower equity
underwriting. A sluggish market for advisory services drove a decline
in fees of $7 million for the three months ended March 31, 2002.
Investment banking income by major activity follows:
-----------------------------------------------
Three Months Ended
March 31
------------------
(Dollars in millions) 2002 2001
-----------------------------------------------
Investment banking income
Securities underwriting $194 $188
Syndications 68 54
Advisory services 58 65
Other 8 26
-----------------------------------------------
Total $328 $333
===============================================
Equity Investments
.. Noninterest income for Equity Investments decreased $127 million to $16
million for the three months ended March 31, 2002 compared to the same
period in 2001. This decrease resulted from a sharp decline in equity
investment gains driven by weak equity markets.
. Equity investment gains decreased $124 million to $17 million,
primarily all of which was included in Principal Investing. The
decrease was the result of a $140 million gain in the strategic
investments portfolio in the first quarter of 2001 related to the sale
of an interest in the Star Systems ATM network. Principal Investing
recorded cash gains of $150 million and fair value adjustment gains of
$8 million, offset by impairment charges of $140 million.
41
Provision for Credit Losses
The provision for credit losses totaled $840 million for the three months
ended March 31, 2002 compared to $835 million for the same period in 2001. Total
net charge-offs were $840 million for the three months ended March 31, 2002
compared to $772 million for the same period in 2001. Commercial net charge-offs
decreased $22 million to $433 million, primarily due to higher recoveries.
Consumer net charge-offs increased $90 million to $407 million, primarily due to
an increase in bankcard net charge-offs, partially offset by lower consumer
finance charges resulting from the exit of the subprime real estate lending
business. The $116 million increase in bankcard net charge-offs was attributable
to growth in outstandings, an increase in personal bankruptcy filings and a
weaker economic environment.
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 49.
Noninterest Expense
As presented in Table Six, the Corporation's noninterest expense decreased
$160 million to $4.5 billion for the three months ended March 31, 2002 compared
to the same period in 2001. This decrease in noninterest expense was driven by
the elimination of goodwill amortization expense, lower professional fees and
equipment expense, partially offset by higher personnel and other general
operating expense.
Table Six
Noninterest Expense
-------------------------------------------------------------------------
Three Months Ended
March 31 Increase/(Decrease)
---------------------------------------
(Dollars in millions) 2002 2001 Amount Percent
-------------------------------------------------------------------------
Personnel $2,446 $2,401 $ 45 1.9%
Occupancy 432 433 (1) (0.2)
Equipment 262 291 (29) (10.0)
Marketing 170 177 (7) (4.0)
Professional fees 91 126 (35) (27.8)
Amortization of intangibles 55 223 (168) (75.3)
Data processing 205 190 15 7.9
Telecommunications 119 119 -- --
Other general operating 590 545 45 8.3
General administrative and other 124 149 (25) (16.8)
-------------------------------------------------------------------------
Total $4,494 $4,654 $(160) (3.4)%
========================================================================
.. Personnel expense increased $45 million to $2.4 billion for the three
months ended March 31, 2002, primarily due to increased employee benefits
costs and salary expense, partially offset by lower revenue-related
incentive compensation. At March 31, 2002, the Corporation had
approximately 137,000 full-time equivalent employees compared to
approximately 144,000 at March 31, 2001.
.. Equipment expense decreased $29 million to $262 million for the three
months ended March 31, 2002, primarily due to reduced maintenance costs
offset by an increase in rental expense.
.. Professional fees decreased $35 million to $91 million for the three months
ended March 31, 2002, primarily due to reduced consulting and other
professional fees reflecting the increased use of in-house personnel for
our customer satisfaction and productivity initiatives.
42
.. Amortization of intangibles decreased $168 million to $55 million for the
three months ended March 31, 2002, due to the adoption of SFAS 142, which
eliminated the amortization of goodwill. The amortization expense of $55
million is related to core deposits and other intangibles.
.. Data processing expense increased $15 million to $205 million for the three
months ended March 31, 2002, primarily due to higher outsourced processing
expense, higher item processing and check clearing expenses, offset by
lower software maintenance fees.
Income Taxes
The Corporation's income tax expense for the three months ended March 31,
2002 was $1.1 billion for an effective tax rate of 34.0 percent compared to $1.1
billion for an effective tax rate of 36.0 for the same period in 2001. The
decrease in the effective tax rate primarily resulted from the adoption of SFAS
142 on January 1, 2002 which eliminates the amortization of goodwill, the
majority of which was not deductible for federal or state income tax purposes.
Exit Charges
On August 15, 2001, the Corporation announced that it was exiting its auto
leasing and subprime real estate lending businesses. As a result of this
strategic decision, the Corporation recorded pre-tax exit charges in the third
quarter of 2001 of $1.7 billion ($1.3 billion after-tax) consisting of provision
for credit losses of $395 million and noninterest expense of $1.3 billion.
Business exit costs within noninterest expense consisted of the write-off of
goodwill of $685 million, auto lease residual charges of $400 million, real
estate servicing asset charges of $145 million and other transaction costs of
$75 million.
During the fourth quarter of 2001, $17.5 billion of subprime loans were
securitized and retained in the available-for-sale securities portfolio.
Approximately $193 million of subprime real estate loans remain in loans held
for sale included in other assets at March 31,2002. The run off of the auto
lease portfolio is occurring as expected. At the exit date, the auto lease
portfolio was approximately 495,000 units with total residual exposure of $6.8
billion. At March 31, 2002, approximately 356,000 units remained with a residual
exposure of $4.8 billion.
Balance Sheet Review
The Corporation utilizes an integrated approach in managing its balance
sheet. Management believes it has positioned the Corporation's balance sheet to
be neutral against an anticipated rising rate environment with a flattening of
the yield curve.
The following summary discusses various aspects of both on- and off-balance
sheet positions at March 31, 2002 and December 31, 2001 and certain average
balances for the three months ended March 31, 2002 and 2001.
Cash and Cash Equivalents
At March 31, 2002, cash and cash equivalents were $22.4 billion, a decrease
of $4.4 billion from December 31, 2001. During the three months ended March 31,
2002, net cash provided by operating activities was $11.3 billion, net cash used
in investing activities was $5.0 billion and net cash used in financing
activities was $10.6 billion. For further information on cash flows, see the
Consolidated Statement of Cash Flows of the consolidated financial statements.
43
Securities
The securities portfolio is integral to the Corporation's balance sheet
management activities. The decision to purchase or sell securities is based upon
the current assessment of economic and financial conditions, including the
interest rate environment, liquidity requirements and on- and off-balance sheet
positions.
The average securities portfolio for the three months ended March 31, 2002
increased $18.3 billion to $73.5 billion, primarily due to an increase in
mortgage-backed securities, partially offset by reductions in U.S. Treasury
securities and agency debentures. As a percentage of total uses of funds, the
average securities portfolio increased by three percent to 12 percent for the
three months ended March 31, 2002.
The securities portfolio at March 31, 2002 included available-for-sale
securities totaling $74.3 billion compared to $84.5 billion at December 31,
2001. The decrease in available-for-sale securities was concentrated in the
mortgage-backed securities portfolio and was driven by the sale of the
securities that had been held in the portfolio subsequent to the securitization
of subprime real estate loans in the fourth quarter of 2001. The estimated
average duration of the available-for-sale securities portfolio was 3.79 years
at March 31, 2002 compared to 3.34 years at December 31, 2001.
The valuation allowance for available-for-sale and marketable equity
securities is included in shareholders' equity. At March 31, 2002, the valuation
allowance reflected net unrealized losses of $483 million, net of related income
taxes of $308 million. At December 31, 2001, the valuation allowance consisted
of net unrealized losses of $480 million, net of related income taxes of $311
million.
Held-to-maturity securities totaled $1.0 billion at both March 31, 2002 and
December 31, 2001. At March 31, 2002 and December 31, 2001, the market value of
the Corporation's held-to-maturity securities reflected pre-tax net unrealized
losses of $34 million and $40 million, respectively.
Gains on sales of securities were $44 million for the three months ended
March 31, 2002 compared to losses on sales of securities of $8 million for the
same period in 2001. The gains on sales of securities in 2002 were a consequence
of portfolio repositioning in connection with the Corporation's interest rate
risk management strategy.
Loans and Leases
The Corporation originates loans both for funding on the balance sheet and
for distribution. As part of the Global Corporate and Investment Banking
business segment's originate-to-distribute strategy, only approximately 10
percent of the syndicated loans that it originates are retained on the balance
sheet. The Corporation also originates to distribute immediately into the
secondary market approximately 70 to 80 percent of the residential mortgages
originated by the mortgage group. In addition, in connection with its balance
sheet management activities, the Corporation will from time to time sell loans
which were originated and had been subsequently held on the balance sheet.
As presented in Table Four, average loans and leases, the Corporation's
primary use of funds, decreased $60.1 billion to $327.8 billion for the three
months ended March 31, 2002 compared to the same period in 2001. This decline
was primarily due to a decrease in commercial loans as the Corporation continued
efforts to exit less profitable relationships that do not meet its SVA targets
as well as a decline in consumer finance loans as a result of the Corporation
exiting the subprime real estate lending business. The Corporation also reviews
loans on a managed basis, which includes on-balance sheet loans and leases as
well as securitized loans originated by the Corporation for which the
securitization was designed for the loan balances to return to the Corporation
at the end of the securitization, principally bankcard receivables. Average
managed loans and leases decreased $62.3 billion to $336.4 billion for the three
months ended March 31, 2002 compared to the same period in 2001, with decreases
in both the commercial and consumer loan portfolios.
Average managed commercial loans decreased $40.3 billion, or 20 percent, to
$162.1 billion for the three months ended March 31, 2002 compared to the same
period in 2001. The commercial - domestic portfolio decreased $29.0 billion to
$117.6 billion, reflecting aggressive paydowns precipitated by falling interest
rates and
44
continuing efforts to exit relationships that do not meet the Corporation's SVA
targets. The commercial - foreign portfolio declined $7.6 billion to $21.9
billion primarily due to paydowns on customer balances. The commercial real
estate - domestic portfolio declined $3.7 billion to $22.3 billion primarily due
to run-off in the portfolio.
Average managed consumer loans decreased $22.0 billion to $174.3 billion
for the three months ended March 31, 2002 compared to the same period in 2001.
Average managed consumer finance loans decreased $20.7 billion to $5.3 billion
reflecting the exit of the subprime real estate lending business. Average
managed direct/indirect consumer loans decreased $3.2 billion to $37.2 billion
due to run-off of the discontinued auto leasing business. Average managed
residential mortgages decreased $1.6 billion to $81.1 billion primarily as a
result of loan sales and loan securitizations, partially offset by increased
banking center loan originations. Average managed home equity lines increased
slightly to $22.0 billion from $21.7 billion a year ago. Average managed
bankcard loans increased $3.5 billion, or 15 percent, to $26.5 billion due to
continued strength in new account volume and slower balance paydowns.
Deposits
Table Four provides information on the average amounts of deposits and the
rates paid by deposit category. Through the Corporation's diverse retail banking
network, deposits remain the primary source of funds for the Corporation.
Average deposits increased $8.8 billion to $364.4 billion for the three months
ended March 31, 2002 due to a $9.6 billion increase in average domestic
interest-bearing deposits and a $12.0 billion increase in average total
noninterest-bearing deposits, partially offset by a $12.9 billion decrease in
average foreign interest-bearing deposits. Average core deposits, which exclude
negotiable CDs, public funds, other domestic time deposits and foreign
interest-bearing deposits, increased $24.1 billion to $321.7 billion for the
three months ended March 31, 2002. The increase in average core deposits was
primarily driven by an increase in money market savings accounts and
noninterest-bearing deposits, partially offset by a decline in CDs. The increase
in money market savings accounts was driven by the Corporation's deposit pricing
initiative to offer more competitive money market savings rates as well as by
consumers moving assets into deposit products with greater liquidity during the
economic slowdown. As a percentage of total sources of funds, average core
deposits increased by four percent to 50 percent for the three months ended
March 31, 2002. At March 31, 2002 and December 31, 2001, core deposits exceeded
loans and leases.
Short-Term Borrowings
The Corporation uses short-term borrowings as a funding source and in its
management of interest rate risk. For the three months ended March 31, 2002,
total average short-term borrowings were $86.9 billion compared to $94.8 billion
for the same period in 2001. This decline was primarily due to decreases in
short-term notes payable and commercial paper driven by lower funding needs
offset slightly by increases in repurchase agreements.
Long-Term Debt and Trust Preferred Securities
Long-term debt decreased $2.5 billion to $60.0 billion at March 31, 2002,
from $62.5 billion at December 31, 2001. The overall decline in long-term debt
reflected a decline in average assets, but was partially offset by additional
issuances to maintain liquidity, repay maturing debt and fund share repurchases.
During the first quarter of 2002, the Corporation issued, domestically and
internationally, $2.6 billion in long-term senior and subordinated debt, a $2.2
billion decrease from $4.8 billion during the same period in 2001. See Note Six
of the consolidated financial statements for further details on long-term debt.
Subsequent to March 31, 2002, the Corporation issued $1.4 billion of
long-term senior and subordinated debt, with maturities ranging from 2003 to
2027.
In the first quarter of 2002, BAC Capital Trust II, a wholly-owned grantor
trust of Bank of America Corporation, issued $900 million of trust preferred
securities. The annual dividend rate is 7 percent and is paid quarterly on
February 1, May 1, August 1 and November 1 of each year, commencing May 1, 2002.
45
Bank of America Corporation redeemed the 7.84 percent Trust Originated
Preferred Securities issued by NB Capital Trust I and the 7.75 percent Trust
Originated Preferred Securities issued by BankAmerica Capital I on March 15,
2002 with a redemption price of $25 per security plus accrued and unpaid
distributions up to but excluding the redemption date of March 15, 2002.
Credit Extension Commitments
Many of the Corporation's lending relationships, including those with
commercial and consumer customers, contain both funded and unfunded elements.
The unfunded component of these commitments is not recorded on the Corporation's
balance sheet unless and until a loan is closed. The Corporation includes
unfunded commitments in the determination of its regulatory capital ratios.
These commitments are more fully discussed in Note Seven of the consolidated
financial statements. The following table summarizes the total unfunded credit
extension, or off-balance sheet, commitment amounts by expiration date.
--------------------------------------------------------------------------------------------------------------------------
Expires after Expires after
Expires in 1 year 3 years
1 year through through Expires after
(Dollars in millions) or less 3 years 5 years 5 years Total
--------------------------------------------------------------------------------------------------------------------------
Credit extension commitments
Credit card commitments $ 76,745 $ -- $ -- $ -- $ 76,745
Other loan commitments /(1)/ 93,468 45,594 32,863 42,632 214,557
Standby letters of credit and financial guarantees 20,557 6,395 749 3,872 31,573
Commercial letters of credit 2,954 143 75 270 3,442
--------------------------------------------------------------------------------------------------------------------------
Total credit extension commitments $193,724 $52,132 $33,687 $46,774 $326,317
==========================================================================================================================
/(1)/ Other loan commitments include equity commitments primarily related to
obligations to fund existing venture capital equity investments.
Off-Balance Sheet Financing Entity Commitments
In the normal course of business, the Corporation also supports its
customers' financing needs through facilitating their access to the commercial
paper markets. These markets provide an attractive, lower cost financing
alternative for the Corporation's customers. These customers sell assets, such
as high-grade trade or other receivables or leases, to a commercial paper
financing entity, which in turn issues high-grade short-term commercial paper
that is collateralized by such assets. The Corporation facilitates these
transactions and bills and collects fees from the financing entity for the
services it provides including administration, trust services and marketing the
commercial paper. In addition, the Corporation receives fees for providing
liquidity and standby letters of credit or similar loss protection commitments
to the financing entities. The Corporation manages its credit risk on these
commitments by subjecting them to normal underwriting and risk management
processes. At March 31, 2002 and December 31, 2001, the Corporation had
off-balance sheet liquidity commitments and standby letters of credit and other
financial guarantees to these financing entities of $33.9 billion and $36.1
billion, respectively. Substantially all of these liquidity commitments and
standby letters of credit and other financial guarantees mature within one year.
These amounts are included in total credit extension commitments in the table
above. Revenues earned from fees associated with these financing entities were
approximately $72 million and $58 million for the three months ended March 31,
2002 and 2001, respectively.
In addition, to preserve its own liquidity and control its capital
position, the Corporation from time to time will seek alternative funding
sources. To accomplish this, the Corporation will sell or fund assets using an
off-balance sheet financing entity, which in turn issues collateralized
commercial paper or structured notes to third-party market participants. The
Corporation may provide liquidity and standby letters of credit or similar loss
protection commitments to the financing entity, or it may enter into a
derivative contract with the entity whereby the Corporation assumes certain
market risk. Similar to that discussed above, the Corporation receives fees for
the services it provides to the financing entity, and it manages any market risk
on commitments or derivatives through normal underwriting and risk management
processes. Derivative activity related to these financing entities is included
in Note Three of the consolidated financial statements. At March 31, 2002 and
December 31, 2001, the
46
Corporation had off-balance sheet liquidity commitments and standby letters of
credit and other financial guarantees to these financing entities of $4.5
billion and $4.3 billion, respectively. Substantially all of these liquidity
commitments and standby letters of credit and other financial guarantees mature
within one year. These amounts are included in total credit extension
commitments in the table above. Revenues earned from fees associated with these
financing entities were $19 million and $20 million for the three months ended
March 31, 2002 and 2001, respectively.
Because the Corporation provides liquidity and credit support to commercial
paper and off-balance sheet financing entities, the Corporation's credit ratings
and changes thereto will affect the borrowing cost and liquidity of these
entities. In addition, significant changes in counterparty asset valuation and
credit standing may also affect the liquidity of the commercial paper issuance.
Further, disruption in the commercial paper markets may result in the
Corporation having to fund under these commitments and letters of credit
discussed above. These risks, along with all other credit and liquidity risks,
are managed by the Corporation within its policies and practices.
Capital Resources and Capital Management
Shareholders' equity at March 31, 2002 was $48.2 billion compared to $48.5
billion at December 31, 2001, a decrease of $351 million. The decrease was
primarily due to $2.0 billion in repurchases of common stock and $508 million of
net losses on derivatives in other comprehensive income, offset by $1.3 billion
of net earnings (net income less dividends) and $817 million of common stock
issued under employee plans.
On December 11, 2001, the Corporation's Board of Directors (the Board)
authorized a new stock repurchase program of up to 130 million shares of the
Corporation's common stock at an aggregate cost of up to $10.0 billion. At March
31, 2002, the remaining buyback authority for common stock under the 2001
program totaled $8.2 billion, or 101 million shares. The 2000 stock repurchase
plan was completed in the first quarter of 2002. During the three months ended
March 31, 2002, the Corporation repurchased approximately 31 million shares of
its common stock in open market repurchases and under accelerated repurchase
programs at an average per-share price of $62.64, which reduced shareholders'
equity by $2.0 billion and increased earnings per share by approximately $0.02
for the three months ended March 31, 2002. These repurchases were partially
offset by the issuance of common stock under employee plans, resulting in a net
repurchase of 15 million shares, which reduced shareholders' equity by $1.1
billion. During the three months ended March 31, 2001, the Corporation
repurchased approximately 14 million shares of its common stock in open market
repurchases at an average per-share price of $51.32, which reduced shareholders'
equity by $739 million. These repurchases were partially offset by the issuance
of common stock under employee plans, resulting in a net repurchase of 12
million shares, which reduced shareholders' equity by $685 million. The
Corporation anticipates it will continue to repurchase shares at least equal to
shares issued under its various stock option plans.
Presented below are the regulatory risk-based capital ratios, actual
capital amounts and minimum required capital amounts for the Corporation and
Bank of America, N.A. at March 31, 2002 and December 31, 2001. The Corporation
and all of its banking subsidiaries were classified as well-capitalized at March
31, 2002 and December 31, 2001:
-----------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
-----------------------------------------------------------------
Actual Minimum Actual Minimum
--------------- ---------------
(Dollars in millions) Ratio Amount Required/(1)/ Ratio Amount Required/(1)/
-----------------------------------------------------------------------------------------------
Tier 1 Capital
Bank of America Corporation 8.55% $42,079 $19,691 8.30% $41,972 $20,243
Bank of America, N.A. 8.90 39,206 17,617 9.25 42,161 18,225
Total Capital
Bank of America Corporation 13.02 64,110 39,381 12.67 64,118 40,487
Bank of America, N.A. 12.27 54,050 35,235 12.55 57,192 36,450
Leverage
Bank of America Corporation 6.72 42,079 25,035 6.56 41,972 25,604
Bank of America, N.A. 7.35 39,206 21,326 7.59 42,161 22,233
===============================================================================================
/(1)/ Dollar amount required to meet guidelines for adequately capitalized
institutions.
47
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. At March 31, 2002 and December 31, 2001, the Corporation
had no subordinated debt that qualified as Tier 3 capital.
At March 31, 2002, 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.
Risk Management Overview
The Corporation's goal in managing risk is to produce appropriate
risk-adjusted returns, reduce the volatility in earnings and increase
shareholder value. The Corporation has an established governance structure and
risk management approach in place that it believes reaches that goal. Processes
are designed to align the Corporation's measures for business success with the
measures for risk, return and growth. Further, these processes enable the
Corporation to better communicate with its associates the corporate appetite for
risk, manage sources of earnings volatility and manage appropriate capital
levels.
The Corporation manages risk by adherence to the following key principles:
. Emphasize that individual decision-making and accountability are
the cornerstone.
. Include risk assessments in all business units.
. Ensure that appropriate limits, policies, procedures and measures
are in place.
. Independently test, verify and evaluate controls.
. Identify and minimize the sources of earnings volatility.
. Use SVA as a key financial measure to evaluate businesses and to
direct capital.
Each of these key principles contributes to a more risk/return focused
culture. Importantly, the Corporation believes SVA leads to better risk/return
decisioning and to a lower risk profile. Reinforcing the cost of capital among
the Corporation's business segments creates critical assessments of the
Corporation's uses of capital. Equity allocated to each business is based on an
assessment of its specific credit, market and operational risk.
The goal of the governance structure is to enable management to actively
balance risk and return.
. The Chief Financial Officer has oversight responsibility for the
soundness of the Corporation's capitalization and earnings.
. The Chief Risk Officer has enterprise-wide oversight of market,
credit and operational risks.
. The business unit leaders have responsibility for meeting
corporate performance objectives within the boundaries of their
allocated risk position.
The Corporation manages day-to-day risk-taking through three senior
executive committees. The Risk and Capital Committee determines the corporate
objectives for each performance measure, allocates capital, sets
48
aggregate risk levels and plans the use of capital. It also coordinates two
committees responsible for market and credit risk. The Asset and Liability
Committee reviews aggregate balance sheet exposures, including trading
positions, recommends balance sheet capital allocations and recommends changes
in the market risk profile. The Credit Risk Committee reviews business asset
quality, portfolio management results and various concentration risks and limits
including geographic, product, industry and borrower.
The Board of Directors (the Board) addresses risk in three ways. The
Finance Committee, appointed by the Board, oversees both market and credit risk
through reports from the Asset and Liability Committee and the Credit Risk
Committee. The Asset Quality Committee of the Board also reviews credit risk.
The Audit Committee of the Board reviews the scope and coverage of the external
audit and internal audit activities.
Oversight by senior management and the Board builds on the cornerstone of
the Corporation's corporate governance: individual decision-making and
accountability. The Corporation's corporate governance is designed so that
individuals at all levels are delegated appropriate authority, take appropriate
action and are accountable for actions taken. Wherever practical,
decision-making authority is delegated as close to the customer as possible.
The following sections, Credit Risk Management and Credit Portfolio Review,
Market Risk Management and Liquidity Risk Management, provide specific
information on the Corporation's processes and current risk assessment in each
area.
Credit Risk Management and Credit Portfolio Review
In conducting business activities, the Corporation is exposed to the risk
that borrowers or counterparties may default on their obligations to the
Corporation. This exposure exists in both on- and off-balance sheet
relationships. Credit risk arises through the extension of loans and leases,
certain securities, off-balance sheet letters of credit and financial
guarantees, unfunded loan commitments and through counterparty exposure on
trading and capital markets transactions. To manage both on- and off-balance
sheet credit risk, the Risk Management group, which reports to the Chief Risk
Officer, establishes policies and procedures and communicates, implements and
monitors their application throughout the Corporation.
The Corporation uses statistical techniques and modeling to estimate both
expected losses and unexpected losses for each segment of the portfolio. The
expected loss drives the periodic credit cost charged to earnings for customer
profitability and certain levels of management reporting, and the unexpected
loss estimate drives the capital allocation to each business unit. Both the
expected loss and unexpected loss are incorporated into each business unit's SVA
measurement. As a result, the overall credit risk profile of each business unit
is an important factor in assessing its performance.
The Corporation's overall objective in managing credit risk is to minimize
the adverse impact of any single event or set of occurrences. To achieve this
objective, the Risk Management group works with other areas of the Corporation
that conduct activities involving credit risk to maintain a credit risk profile
that is diverse in terms of product type, industry, geographic, borrower and
counterparty concentration.
The Corporation manages credit exposure to individual borrowers and
counterparties on an aggregate basis including loans and leases, securities,
letters of credit, bankers' acceptances, derivatives and unfunded commitments.
The creditworthiness of individual borrowers or counterparties is determined by
experienced personnel, and limits are established for the total credit exposure
to any one borrower or counterparty. Credit limits are subject to varying levels
of approval by senior line personnel and credit risk management. Usage against
these limits is monitored on a continuous basis.
The approving credit officer assigns borrowers or counterparties an initial
risk rating which is based primarily on an analysis of each borrower's financial
capacity in conjunction with industry and economic trends. Risk ratings are
periodically subject to review and validation by the independent credit review
group. Approvals are made based upon the perceived level of inherent credit risk
specific to the transaction and the counterparty and are reviewed for
appropriateness by senior line and credit risk personnel. Credits are monitored
continuously by line and credit risk management personnel for deterioration in a
borrower's or counterparty's financial condition which would impact
49
the ability of the borrower or counterparty to perform under the contract. Risk
ratings are adjusted as necessary, and the Corporation seeks to reduce exposure
in such situations where appropriate. Where its strategy is to reduce risk, the
Corporation first evaluates the collateral and feasibility of netting prior to
making a decision on out-right sale or purchase of credit protection. The
Corporation uses credit derivatives, including synthetic collateralized loan
obligations (CLO), to reduce credit risk of its lending activities. The credit
derivatives include single name credit default swaps with a notional amount of
$6.2 billion and $4.7 billion at March 31, 2002 and December 31, 2001,
respectively. Synthetic CLOs provide basket risk protection for specifically
designated pools of loans, net of a first loss sharing component and a maximum
recovery limit. The notional amount of the Corporation's reference portfolio
under the basket protection was $10.0 billion at both March 31, 2002 and
December 31, 2001.
The Corporation also manages exposure to a single borrower, industry,
product-type, country or other concentration through syndications of credits,
credit derivatives, participations, loan sales and securitizations. Through the
Global Corporate and Investment Banking segment, the Corporation is a major
participant in the syndications market. In a syndicated facility, each
participating lender funds only its portion of the syndicated facility, thereby
limiting its exposure to the borrower. The Corporation's strategy remains one of
origination for distribution. Additionally, the SVA discipline discourages the
retention of loan assets that do not generate a positive return above the cost
of risk-adjusted capital.
For consumer lending, credit scoring systems are utilized to determine the
relative risk of new underwritings and provide standards for extensions of
credit. Consumer portfolio credit risk is managed primarily using statistical
techniques, which correlate borrower payment experience with other borrower
behavior to predict portfolio performance. Statistical models are also employed
in payment collection strategies.
In some credit situations, the Corporation obtains collateral to support
credit extensions and commitments. Generally, such collateral is in the form of
real and/or personal property, cash on deposit or other liquid instruments. In
certain circumstances, the Corporation obtains real property as security for
some loans that are made on the general creditworthiness of the borrower and
whose proceeds were not used for real estate-related purposes.
An independent Credit Review group provides executive management, the Board
of Directors and the Credit Risk Committee with an evaluation of the risk rating
process and the effectiveness of the credit management process. The group
conducts ongoing reviews of credit activities and portfolios through
transactional and process reviews, re-examining risk assessments for credit
exposures on a regular basis and overall compliance with policy.
Loans and Leases Portfolio Review
The Corporation's loans and leases portfolio totaled $331.2 billion and
$329.2 billion at March 31, 2002 and December 31, 2001, respectively. In
addition, there were off-balance sheet commitments to fund loans, which totaled
$291.3 billion and $295.2 billion at March 31, 2002 and December 31, 2001,
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 loans and leases, nonperforming assets and net
charge-offs by category. Additional information on the Corporation's commercial
real estate, industry and foreign exposure can be found in the Concentrations of
Credit Risk section beginning on page 56.
50
Table Seven
Loans and Leases, Nonperforming Assets and Net Charge-offs
---------------------------------------------------------------------------------------------------------
Loans and Leases Nonperforming Assets/(1)/
-------------------------------------------------------------------
March 31 December 31 March 31 December 31
2002 2001 2002 2001
-------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Amount
---------------------------------------------------------------------------------------------------------
Commercial - domestic $114,486 34.6% $118,205 35.9% $3,207 $3,123
Commercial - foreign 21,311 6.4 23,039 7.0 583 461
Commercial real estate - domestic 21,471 6.5 22,271 6.8 216 240
Commercial real estate - foreign 379 0.1 383 0.1 2 3
---------------------------------------------------------------------------------------------------------
Total commercial 157,647 47.6 163,898 49.8 4,008 3,827
---------------------------------------------------------------------------------------------------------
Residential mortgage 88,272 26.6 78,203 23.8 477 556
Home equity lines 22,109 6.7 22,107 6.7 73 80
Direct/Indirect consumer 36,349 11.0 37,638 11.5 26 27
Consumer finance 5,219 1.6 5,331 1.6 8 9
Bankcard 19,535 5.9 19,884 6.0 -- --
Foreign consumer 2,079 0.6 2,092 0.6 9 7
---------------------------------------------------------------------------------------------------------
Total consumer 173,563 52.4 165,255 50.2 593 679
---------------------------------------------------------------------------------------------------------
Total nonperforming loans 4,601 4,506
---------------------------------------------------------------------------------------------------------
Foreclosed properties 391 402
---------------------------------------------------------------------------------------------------------
Total $331,210 100.0% $329,153 100.0% $4,992 $4,908
=========================================================================================================
Nonperforming assets as a percentage of:
Total assets 0.81% 0.79%
Loans, leases and foreclosed properties 1.51 1.49
Nonperforming loans as a percentage of loans and leases 1.39 1.37
Loans past due 90 days or more and still accruing interest $ 662 $ 680
=========================================================================================================
-------------------------------------------------------------------------------------
Net Charge-offs/(2)/
-----------------------------------
Three Months Ended March 31
-----------------------------------
2002 2001
-----------------------------------
(Dollars in millions) Amount Percent Amount Percent
-------------------------------------------------------------------------------------
Commercial - domestic $370 1.29% $415 1.17%
Commercial - foreign 49 0.90 34 0.46
Commercial real estate - domestic 14 0.25 6 0.09
-------------------------------------------------------------------------------------
Total commercial 433 1.09 455 0.92
-------------------------------------------------------------------------------------
Residential mortgage 11 0.05 6 0.03
Home equity lines 8 0.15 6 0.11
Direct/Indirect consumer 95 1.03 75 0.76
Consumer finance 44 3.38 93 1.45
Bankcard 241 5.05 125 3.51
Other consumer - domestic 7 n/m 11 n/m
Foreign consumer 1 0.16 1 0.19
-------------------------------------------------------------------------------------
Total consumer 407 0.99 317 0.68
-------------------------------------------------------------------------------------
Total net charge-offs $840 1.04% $772 0.81%
=====================================================================================
Managed bankcard net charge-offs and ratios/(3)/ $355 5.43% $248 4.37%
=====================================================================================
n/m = not meaningful
/(1)/Balance does not include $304 million and $1.0 billion of loans held for
sale, included in other assets at March 31, 2002 and December 31, 2001,
respectively, which would have been classified as nonperforming had they
been included in loans. The Corporation had approximately $17 million and
$48 million of troubled debt restructured loans at March 31, 2002 and
December 31, 2001, respectively, which were accruing interest and were not
included in nonperforming assets.
/(2)/Percentage amounts are calculated as annualized net charge-offs divided by
average oustanding loans and leases during the period for each loan
category.
/(3)/ Includes both on-balance sheet and securitized loans.
51
Commercial Portfolio
At March 31, 2002 and December 31, 2001, total commercial loans outstanding
totaled $157.6 billion and $163.9 billion, respectively. Domestic commercial
loans, including commercial real estate, accounted for 86 percent of total
commercial loans at March 31, 2002 and December 31, 2001.
Commercial - domestic loans outstanding totaled $114.5 billion and $118.2
billion at March 31, 2002 and December 31, 2001, respectively. The Corporation
had commercial - domestic loan net charge-offs of $370 million for the three
months ended March 31, 2002, compared to $415 million for the three months ended
March 31, 2001. Net charge-offs decreased primarily as a result of higher
recoveries in the first quarter of 2002. Nonperforming commercial - domestic
loans were $3.2 billion, or 2.80 percent of commercial - domestic loans, at
March 31, 2002, compared to $3.1 billion, or 2.64 percent, at December 31, 2001.
Commercial - domestic loans past due 90 days or more and still accruing interest
were $167 million at March 31, 2002, compared to $175 million at December 31,
2001.
Commercial - foreign loans outstanding totaled $21.3 billion and $23.0
billion at March 31, 2002 and December 31, 2001, respectively. The Corporation
had commercial - foreign loan net charge-offs for the three months ended March
31, 2002 of $49 million compared to $34 million for the three months ended March
31, 2001. Nonperforming commercial - foreign loans were $583 million, or 2.74
percent of commercial - foreign loans, at March 31, 2002, compared to $461
million, or 2.00 percent, at December 31, 2001. The increase in nonperforming
commercial - foreign loans was concentrated in Argentina. Commercial - foreign
loans past due 90 days or more and still accruing interest were $7 million at
March 31, 2002, compared to $6 million at December 31, 2001. For additional
information, see the International Exposure discussion beginning on page 58.
Commercial real estate - domestic loans totaled $21.5 billion and $22.3
billion at March 31, 2002 and December 31, 2001, respectively. Net charge-offs
were $14 million and $6 million for the three months ended March 31, 2002 and
2001, respectively. Nonperforming commercial real estate - domestic loans were
$216 million, or 1.01 percent of commercial real estate - domestic loans, at
March 31, 2002, compared to $240 million, or 1.08 percent, at December 31, 2001.
At March 31, 2002, commercial real estate - domestic loans past due 90 days or
more and still accruing interest were $14 million compared to $40 million at
December 31, 2001. Table Ten displays commercial real estate loans, including
the portion of such loans which were nonperforming, foreclosed properties and
other real estate credit exposures by geographic region and property type.
Table Eleven presents aggregate commercial loan and lease exposures by
certain significant industries.
Consumer Portfolio
At March 31, 2002 and December 31, 2001, total consumer loans outstanding
totaled $173.6 billion and $165.3 billion, respectively. Approximately 67
percent and 65 percent of these loans were secured by first and second mortgages
on residential real estate at March 31, 2002 and December 31, 2001,
respectively.
Residential mortgage loans increased to $88.3 billion at March 31, 2002,
compared to $78.2 billion at December 31, 2001. Net charge-offs on residential
mortgage loans were $11 million and $6 million for the three months ended March
31, 2002 and 2001, respectively. Nonperforming residential mortgage loans were
$477 million, or 0.54 percent of residential mortgage loans, at March 31, 2002,
compared to $556 million, or 0.71 percent, at December 31, 2001. This decrease
was primarily due to the sale of nonperforming residential mortgage loans during
the first quarter of 2002.
Home equity lines remained unchanged at $22.1 billion at March 31, 2002
compared to December 31, 2001. Net charge-offs on home equity lines were $8
million and $6 million for the three months ended March 31, 2002 and 2001,
respectively. Nonperforming home equity lines were $73 million, or 0.33 percent
of home equity lines, at March 31, 2002, compared to $80 million, or 0.36
percent, at December 31, 2001.
Consumer finance loans outstanding totaled $5.2 billion and $5.3 billion at
March 31, 2002 and December 31, 2001, respectively. Net charge-offs on consumer
finance loans were $44 million and $93 million for the three months ended March
31, 2002 and 2001, respectively. The decrease in charge-offs was due to the exit
of the
52
subprime real estate lending business in the third quarter of 2001. Consumer
finance nonperforming loans were $8 million, or 0.15 percent of consumer finance
loans, at March 31, 2002, compared to $9 million, or 0.17 percent, at December
31, 2001. At March 31, 2002, consumer finance loans past due 90 days or more and
still accruing interest were $15 million compared to $24 million at December 31,
2001.
Bankcard end of period receivables totaled $19.5 billion at March 31, 2002,
compared to $19.9 billion at December 31, 2001. Net charge-offs on bankcard
receivables were $241 million and $125 million for the three months ended March
31, 2002 and 2001, respectively. Managed bankcard net charge-offs increased $107
million to $355 million, while the managed net charge-off ratio increased 106
basis points to 5.43 percent for the three months ended March 31, 2002 compared
to a year ago. The increase in net charge-offs was primarily a result of growth
in the portfolio outstandings, an increase in personal bankruptcy filings and a
weaker economic environment. Bankcard loans past due 90 days or more and still
accruing interest were $370 million, or 1.90 percent of bankcard receivables, at
March 31, 2002, compared to $332 million, or 1.67 percent, at December 31, 2001.
Other consumer loans, which include direct and indirect consumer and
foreign consumer loans, were $38.4 and $39.7 billion at March 31, 2002 and
December 31, 2001, respectively. Direct and indirect consumer loan net
charge-offs were $95 million and $75 million for the three months ended March
31, 2002 and 2001, respectively. Foreign consumer loan net charge-offs were $1
million for the three months ended both March 31, 2002 and 2001.
Excluding bankcard, total consumer loans past due 90 days or more and still
accruing interest were $104 million at March 31, 2002, compared to $127 million
at December 31, 2001.
Nonperforming Assets
As presented in Table Seven, nonperforming assets increased to $5.0
billion, or 1.51 percent of loans, leases and foreclosed properties, at March
31, 2002 from $4.9 billion, or 1.49 percent, at December 31, 2001. Nonperforming
loans increased to $4.6 billion, or 1.39 percent of loans and leases, at March
31, 2002 from $4.5 billion, or 1.37 percent, at December 31, 2001. Nonperforming
assets continued to be affected by the weakened economic environment. Foreclosed
properties totaled $391 million at March 31, 2002, compared to $402 million at
December 31, 2001. Sales of nonperforming assets in the first quarter of 2002
totaled $267 million, comprised of $79 million of nonperforming commercial
loans, $105 million of nonperforming consumer loans and $83 million of
foreclosed properties.
Table Eight presents the additions to and reductions in nonperforming
assets in the commercial and consumer portfolios during the most recent five
quarters.
53
Table Eight
Nonperforming Assets Activity
----------------------------------------------------------------------------------------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
(Dollars in millions) 2002 2001 2001 2001 2001
----------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 4,908 $ 4,523 $ 6,195 $ 5,897 $5,457
---------------------------------------------------------------------------------------------------------------------------------
Commercial
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 1,373 1,345 761 1,376 1,315
Advances on loans 24 106 32 33 26
---------------------------------------------------------------------------------------------------------------------------------
Total commercial additions 1,397 1,451 793 1,409 1,341
---------------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (570) (300) (635) (732) (398)
Returns to performing status (33) (82) (86) (19) (126)
Charge-offs/(1)/ (538) (784) (513) (525) (467)
---------------------------------------------------------------------------------------------------------------------------------
Total commercial reductions (1,141) (1,166) (1,234) (1,276) (991)
---------------------------------------------------------------------------------------------------------------------------------
Total commercial net additions to (reductions in) nonperforming 256 285 (441) 133 350
assets
---------------------------------------------------------------------------------------------------------------------------------
Consumer
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 375 374 694 836 819
---------------------------------------------------------------------------------------------------------------------------------
Total consumer additions 375 374 694 836 819
---------------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (318) (174) (413) (159) (135)
Returns to performing status (265) (181) (256) (440) (483)
Charge-offs/(1)/ (29) (22) (69) (69) (101)
Transfers (to) from assets held for sale /(2, 3)/ 65 103 (1,187) (3) (10)
---------------------------------------------------------------------------------------------------------------------------------
Total consumer reductions (547) (274) (1,925) (671) (729)
---------------------------------------------------------------------------------------------------------------------------------
Total consumer net additions to (reductions in) nonperforming (172) 100 (1,231) 165 90
assets
---------------------------------------------------------------------------------------------------------------------------------
Total net additions to (reductions in) nonperforming assets 84 385 (1,672) 298 440
---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 4,992 $ 4,908 $ 4,523 $ 6,195 $5,897
=================================================================================================================================
(1) Certain loan products, including commercial bankcard, consumer bankcard and
other unsecured loans, are not classified as nonperforming; therefore, the
charge-offs on these loans are not included above.
(2) Transfers from assets held for sale include assets held for sale that were
foreclosed and transferred to foreclosed properties.
(3) In the third quarter of 2001, the transfer to assets held for sale was
primarily related to the exit of the subprime real estate lending business.
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 focused collection strategies and a
proactive approach to managing overall problem assets expedites the disposition,
collection and renegotiation of nonperforming and other lower-quality assets.
During 2001, the Corporation realigned its operations that manage certain
distressed assets through the funding of Banc of America Strategic Solutions,
Inc. (SSI), a wholly-owned subsidiary. The purpose of this subsidiary is to
provide a more effective means of problem asset resolution and to coordinate
exit strategies, including bulk sales, collateralized debt obligations and other
resolutions of domestic commercial distressed assets. The assets and liabilities
transferred to SSI were consolidated with the Corporation at March 31, 2002 and
December 31, 2001. The Corporation expects to aggressively manage credit risk
and to exit problem credits where practical.
The Corporation's investment in specific loans that were considered to be
impaired at March 31, 2002 was $3.8 billion compared to $3.9 billion at December
31, 2001. Commercial - domestic impaired loans decreased $116 million to $3.0
billion at March 31, 2002 compared to December 31, 2001. Commercial - foreign
impaired loans increased $82 million to $583 million. Commercial real estate -
domestic impaired loans decreased $35 million to $205 million.
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its
lending portfolios to identify inherent risks and to assess the overall
collectibility of those portfolios. The allowance on certain homogeneous loan
portfolios, which generally consist of consumer loans, is based on aggregated
portfolio segment evaluations generally by loan type. For these segments, the
Corporation utilizes loss forecast models which consider a variety of
54
factors including, but not limited to, historical loss experience, anticipated
defaults or foreclosures based on portfolio trends, delinquencies and credit
scores, and expected loss factors by loan type. The commercial portfolios are
reviewed on an individual facility basis and segregated by risk according to the
Corporation's internal risk rating scale. These risk classifications, in
conjunction with an analysis of historical loss experience, current economic
conditions and performance trends within specific portfolio segments and any
other pertinent information (including individual valuations on nonperforming
loans in accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan"), result in the estimation of
an allowance for credit losses by risk classification. 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 credit losses in each lending category based on the
results of the Corporation's detail review process described above. The assigned
portion continues to be weighted toward the commercial loan portfolio, which
reflected a higher level of nonperforming loans and the potential for higher
individual losses. The remaining or 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 allowances 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.
Additions to the allowance for credit losses are made by charges to the
provision for credit losses. Credit exposures deemed to be uncollectible are
charged against the allowance for credit losses. Recoveries of previously
charged off amounts are credited to the allowance for credit losses.
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 collectibility,
management believes that the allowance for credit losses is appropriate given
its analysis of estimated incurred credit losses at March 31, 2002. Table Nine
presents the activity in the allowance for credit losses for the three months
ended March 31, 2002 and 2001.
55
Table Nine
Allowance for Credit Losses
---------------------------------------------------------------------------------------------------------
Three Months Ended
March 31
--------------------
(Dollars in millions) 2002 2001
---------------------------------------------------------------------------------------------------------
Balance, January 1 $ 6,875 $ 6,838
---------------------------------------------------------------------------------------------------------
Loans and leases charged off
Commercial - domestic (467) (447)
Commercial - foreign (74) (39)
Commercial real estate - domestic (15) (8)
---------------------------------------------------------------------------------------------------------
Total commercial (556) (494)
---------------------------------------------------------------------------------------------------------
Residential mortgage (14) (9)
Home equity lines (11) (8)
Direct/Indirect consumer (151) (116)
Consumer finance (51) (129)
Bankcard (271) (143)
Other consumer - domestic (14) (18)
Foreign consumer (1) (1)
---------------------------------------------------------------------------------------------------------
Total consumer (513) (424)
---------------------------------------------------------------------------------------------------------
Total loans and leases charged off (1,069) (918)
---------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off
Commercial - domestic 97 32
Commercial - foreign 25 5
Commercial real estate - domestic 1 2
---------------------------------------------------------------------------------------------------------
Total commercial 123 39
---------------------------------------------------------------------------------------------------------
Residential mortgage 3 3
Home equity lines 3 2
Direct/Indirect consumer 56 41
Consumer finance 7 36
Bankcard 30 18
Other consumer - domestic 7 7
---------------------------------------------------------------------------------------------------------
Total consumer 106 107
---------------------------------------------------------------------------------------------------------
Total recoveries of loans and leases previously charged off 229 146
---------------------------------------------------------------------------------------------------------
Net charge-offs (840) (772)
---------------------------------------------------------------------------------------------------------
Provisions for credit losses 840 835
Other, net (6) (1)
---------------------------------------------------------------------------------------------------------
Balance, March 31 $ 6,869 $ 6,900
=========================================================================================================
Loans and leases outstanding at March 31 $331,210 $382,677
Allowance for credit losses as a percentage of loans and leases outstanding at
March 31 2.07% 1.80%
Average loans and leases outstanding during the period $327,801 $387,889
Annualized net charge-offs as a percentage of average outstanding loans and
leases during the period 1.04% .81%
Allowance for credit losses as a percentage of nonperforming loans at March 31 149.29 122.78
Ratio of the allowance for credit losses at March 31 to annualized net charge-offs 2.02 2.20
=========================================================================================================
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 Ten, Eleven and Twelve.
The Corporation maintains a diverse commercial loan portfolio, representing
48 percent of total loans and
56
leases at March 31, 2002. The largest concentration is in commercial real
estate, which represents seven percent of total loans and leases at March 31,
2002. The exposures presented in Table Ten represent 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 exposures included in the table do 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 exposures presented do not include commercial
loans secured by owner-occupied real estate, except where the borrower is a real
estate developer.
Table Ten
Commercial Real Estate Loans, Foreclosed Properties and Other Real Estate Credit
Exposure
--------------------------------------------------------------------------------------------
March 31, 2002
Loans Other
--------------------------- Foreclosed Credit
(Dollars in millions) Outstanding Nonperforming Properties/(1)/ Exposure/(2)/
--------------------------------------------------------------------------------------------
By Geographic Region/(3)/
California $ 5,055 $ 61 $ 9 $1,077
Southwest 3,202 35 5 853
Florida 2,499 32 4 521
Northwest 2,293 14 -- 243
Geographically diversified 1,667 -- -- 414
Midwest 1,599 24 24 808
Carolinas 1,477 6 1 394
Mid-Atlantic 1,307 22 1 455
Midsouth 1,283 8 1 481
Northeast 621 10 16 639
Other states 468 4 83 18
Non-US 379 2 -- 2
--------------------------------------------------------------------------------------------
Total $21,850 $218 $144 $5,905
============================================================================================
By Property Type
Office buildings $ 4,359 $ 23 -- $ 1019
Apartments 3,923 20 -- 1704
Residential 3,183 29 -- 266
Shopping centers/retail 2,730 13 15 1212
Industrial/warehouse 1,941 23 14 271
Land and land development 1,463 12 7 240
Hotels/motels 1,051 25 14 188
Multiple use 717 2 -- 187
Miscellaneous commercial 277 8 1 40
Unsecured 254 -- -- 272
Other 1,573 61 93 504
Non-US 379 2 -- 2
--------------------------------------------------------------------------------------------
Total $21,850 $218 $144 $5,905
============================================================================================
(1) Foreclosed properties includes commercial real estate loans only.
(2) Other credit exposures include letters of credit and loans held for sale.
(3) Distribution based on geographic location of collateral.
Table Eleven presents the ten largest industries included in the commercial
loan and lease portfolio at March 31, 2002 and the respective balances at
December 31, 2001. Total commercial loans outstanding, excluding commercial real
estate loans, comprised 41 percent and 43 percent of total loans and leases at
March 31, 2002 and December 31, 2001, respectively. No commercial industry
concentration was greater than three percent of total loans and leases at March
31, 2002.
57
Table Eleven
Significant Industry Loans and Leases /(1)/
-----------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
------------------------------------------------------------------
Percent of Total Percent of Total
(Dollars in millions) Outstanding Loans and Leases Outstanding Loans and Leases
-----------------------------------------------------------------------------------------------------
Transportation $ 9,791 3.0% $ 10,350 3.1%
Business services 7,153 2.2 7,569 2.3
Equipment and general manufacturing 6,373 1.9 6,648 2.0
Media 6,305 1.9 6,704 2.0
Agribusiness 5,925 1.8 6,390 1.9
Autos 5,160 1.6 5,290 1.6
Healthcare and pharmaceuticals 5,157 1.6 5,444 1.7
Telecommunications 4,442 1.3 4,882 1.5
Education and government 4,348 1.3 4,198 1.3
Retail 4,283 1.3 4,450 1.4
Other 76,860 23.2 79,319 24.1
-----------------------------------------------------------------------------------------------------
Total $135,797 41.0% $141,244 42.9%
=====================================================================================================
/(1)/ Includes only non-real estate commercial loans and leases.
International Exposure
Through its credit and market risk management activities, the Corporation
has been devoting particular attention to those countries that have been
negatively impacted by global economic pressure in all three regions where the
Corporation has exposure: Asia, Europe, and Latin America.
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 Twelve sets forth selected
regional foreign exposure at March 31, 2002 and is based on the Federal
Financial Institutions Examination Council's (FFIEC) instructions for periodic
reporting of foreign exposure. The countries selected represent those that are
considered as having higher credit and foreign exchange risk. At March 31, 2002,
the Corporation's total exposure to these select countries was $18.5 billion, a
decrease of $2.8 billion from December 31, 2001, primarily due to reductions in
exposure to Japan and to most other countries in Asia and Latin America.
During 2001, Argentina began to experience significant economic turmoil and
deterioration. In response to this and as part of the Corporation's ongoing,
normal risk management process, the Corporation has reduced its credit exposure
to Argentina. At March 31, 2002, the Corporation had $664 million of credit and
other exposure in Argentina. Of this amount, $442 million represented
traditional credit exposure (loans, letters of credit, etc.) predominantly to
Argentine subsidiaries of foreign multinational companies. The Argentine
government has defaulted on its bonds, and the resulting economic turmoil in the
country has caused many companies to experience difficulty in servicing their
debt. At March 31, 2002, the Corporation's credit exposure related to Argentine
government bonds was approximately $90 million. Nonperforming assets related to
Argentina increased $120 million to $160 million during the first quarter of
2002. Due to the volatility of the situation, management continues to assess its
credit exposure to Argentina but believes the Corporation has adequate reserves
against any losses related to its exposure.
58
Table Twelve
Selected Regional Foreign Exposure
------------------------------------------------------------------------------------------
Derivatives
(Net
Loans Positive Securities/
and Loan Other Mark-to- Other
(Dollars in millions) Commitments Financing/(1)/ Market) Investments/(2)/
------------------------------------------------------------------------------------------
Region/Country
Asia
China $ 79 2 13 61
Hong Kong 146 75 39 89
India 638 58 45 36
Indonesia 151 -- 13 18
Japan 517 55 295 195
Korea (South) 244 356 17 6
Malaysia 33 5 -- 15
Pakistan 11 -- -- 1
Philippines 83 32 9 37
Singapore 191 9 55 4
Taiwan 269 94 33 --
Thailand 34 7 18 21
Other 3 18 -- --
------------------------------------------------------------------------------------------
Total $2,399 $ 711 $537 $ 483
------------------------------------------------------------------------------------------
Central and Eastern Europe
Russian Federation $ -- -- -- --
Turkey 32 17 1 19
Other 36 16 6 307
------------------------------------------------------------------------------------------
Total $ 68 $ 33 $ 7 $ 326
------------------------------------------------------------------------------------------
Latin America
Argentina $ 362 53 65 44
Brazil 455 396 140 198
Chile 157 10 14 3
Colombia 92 6 10 5
Mexico 1,141 265 94 496
Venezuela 121 6 6 107
Other 133 58 8 52
------------------------------------------------------------------------------------------
Total $2,461 $ 794 $337 $ 905
------------------------------------------------------------------------------------------
Total $4,928 $1,538 $881 $1,714
==========================================================================================
-----------------------------------------------------------------------------------
Total Increase/
Total Gross Binding (Decrease
Cross- Local Exposure from
border Country March 31, December 31,
(Dollars in millions) Exposure/(3)/ Exposure/(4)/ 2002 2001
-----------------------------------------------------------------------------------
Region/Country
Asia
China $ 155 $ 79 $ 234 $ (41)
Hong Kong 349 3,662 4,011 (244)
India 777 982 1,759 (21)
Indonesia 182 13 195 (80)
Japan 1,062 744 1,806 (1,439)
Korea (South) 623 597 1,220 10
Malaysia 53 252 305 (41)
Pakistan 12 -- 12 (7)
Philippines 161 60 221 (101)
Singapore 259 1,030 1,289 (109)
Taiwan 396 552 948 35
Thailand 80 244 324 (64)
Other 21 70 91 (29)
----------------------------------------------------------------------------------
Total $4,130 $8,285 $12,415 $(2,131)
----------------------------------------------------------------------------------
Central and Eastern Europe
Russian Federation $ -- $ 14 $ 14 $ 14
Turkey 69 -- 69 (58)
Other 365 37 402 136
----------------------------------------------------------------------------------
Total $ 434 $ 51 $ 485 $ 92
----------------------------------------------------------------------------------
Latin America
Argentina $ 524 $ 140 $ 664 $ (81)
Brazil 1,189 811 2,000 (474)
Chile 184 11 195 (54)
Colombia 113 -- 113 (26)
Mexico 1,996 179 2,175 (52)
Venezuela 240 -- 240 (1)
Other 251 -- 251 (45)
----------------------------------------------------------------------------------
Total $4,497 $1,141 $ 5,638 $ (733)
----------------------------------------------------------------------------------
Total $9,061 $9,477 $18,538 $(2,772)
==================================================================================
/(1)/ Includes acceptances, standby letters of credit, commercial letters of
credit and formal guarantees.
/(2)/ Amounts outstanding in the table above for Philippines, Argentina, Mexico,
Venezuela and Latin America Other have been reduced by $10 million, $81
million, $416 million, $101 million and $31 million, respectively, at March
31, 2002, and $10 million, $0, $436 million, $105 million and $32 million,
respectively, at December 31, 2001. Such amounts represent the fair value
of U.S. Treasury securities held as collateral outside the country of
exposure.
/(3)/ Cross-border exposure includes amounts payable to the Corporation by
residents of countries other than the one in which the credit is booked,
regardless of the currency in which the claim is denominated, consistent
with FFIEC reporting rules.
/(4)/ Gross local country exposure includes amounts payable to the Corporation
by residents of countries in which the credit is booked, regardless of the
currency in which the claim is denominated. Management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
Market Risk Management
Overview
The Corporation is exposed to market risk as a consequence of the normal
course of conducting its business activities. Examples of these business
activities include securities market making, underwriting, proprietary trading
and asset/liability management in interest rate, foreign exchange, equity,
commodity and credit markets, along with any associated derivative products.
Market risk is the potential of loss arising from adverse changes in market
rates, prices and liquidity. 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.
59
Trading Portfolio
The Board delegates responsibility for the day-to-day management of market
risk to the Finance Committee. The Finance Committee has structured a system of
independent checks, balances and reporting in order to ensure that the Board's
disposition toward market risk is not compromised.
One of the objectives of the Risk Management group is to provide senior
management with independent, timely assessments of the bottom line impacts of
market risks facing the Corporation and to monitor those impacts against trading
limits. Risk Management monitors the changing aggregate position of the
Corporation and projects the profit and loss levels that would result from both
normal and extreme market moves. In addition, Risk Management is responsible for
ensuring that appropriate policies and procedures that conform to the Board's
risk preferences are in place and enforced. These policies and procedures
encompass the limit process, risk reporting, new product review and model
review.
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 positions and mortgage banking assets. 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 in the market
place.
[Graphic]
Histogram of Daily Market Risk-Related Revenue
Twelve Months Ended March 31, 2002
Daily Market Risk-Related Revenue Number
(Dollars in millions) of Days
--------------------------------------------
Less than $(10) 14
$(10) to $ 0 20
$ 0 to $10 53
$ 10 to $20 81
$ 20 to $30 53
$ 30 to $40 17
$ 40 to $50 7
Greater than $50 4
Market risk-related revenue includes trading account profits and
trading-related net interest income, which encompass both proprietary trading
and customer-related activities. During 2002, the Corporation has continued its
efforts to build on its client franchise and reduce the proportion of
proprietary trading revenue to total revenue. The results of these efforts can
be seen in the histogram above. During the twelve months ended March 31, 2002,
the Corporation recorded positive daily market risk-related revenue for 215 of
249 trading days. Furthermore, of the 34 days that showed negative revenue, only
14 days were greater than $10 million.
60
Value at Risk
Value at Risk (VAR) is the key measure of market risk for the Corporation.
VAR represents an estimation of the maximum amount that the Corporation has
placed at risk of loss, with a 99 percent degree of confidence, in the course of
its risk taking activities. VAR's purpose is to quantify the amount of capital
required to absorb potential losses from adverse market movements based on the
model's assumptions. Given the 99 percent confidence interval captured by VAR,
market risk-related revenue or losses would be expected to exceed VAR measures
approximately once every 100 trading days, or two to three times each year. The
VAR model does not measure the magnitude of the excess gain or loss, but
produces a confidence level that gains or losses will be within predicted
ranges. Since the third quarter of 2000, the Corporation has been migrating its
trading books to a historical simulation approach. This approach utilizes
historical market conditions that existed over the last three years to derive
estimates of trading risk and provides for the natural aggregation of trading
risks across different groups. The effects of correlation and diversification
are embedded in these calculations. The completion of the migration is expected
to take place during the first half of 2002. While the transition is taking
place, the square root of the sum of squares method is used to aggregate and
correlate risk.
VAR modeling on trading is subject to numerous limitations. In addition,
the Corporation recognizes that there are numerous assumptions and estimates
associated with modeling and actual results could differ from these assumptions
and estimates. The Corporation mitigates these uncertainties through close
monitoring and by examining and updating assumptions on an ongoing basis. The
continual trading risk management process considers the impact of unanticipated
risk exposure and updates assumptions to reduce loss exposure.
As the following graph shows, during the twelve months ended March 31,
2002, actual market risk-related revenue exceeded VAR measures five days out of
249 total trading days. During the same period, actual market risk-related
losses exceeded VAR measures one day out of 249 total trading days. This
occurred immediately following the events of September 11, 2001 due to extreme
market conditions.
61
Trading Risk and Return
Daily VAR and Market Risk-Related Revenue
[Graphic]
Line graph representation of Daily Market Risk-Related Revenue and VAR for the
twelve months ended March 31, 2002. During the period, the daily market
risk-related revenue ranged from $(58) million to $66 million. Over the same
period, VAR ranged from $30 million to 70 million.
The following table summarizes the VAR in the Corporation's trading
portfolios for the twelve months ended March 31, 2002 and 2001:
Table Thirteen
Trading Activities Market Risk
-----------------------------------------------------------------------------------------------------------
Twelve Months Ended March 31
---------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR /(1)/ VAR /(2)/ VAR /(2)/ VAR /(1)/ VAR /(2)/ VAR /(2)/
-----------------------------------------------------------------------------------------------------------
Foreign exchange $ 6.0 $11.2 $ 1.5 $ 9.9 $18.5 $ 5.0
Interest rate 32.9 47.0 17.3 28.1 46.2 16.3
Fixed income 11.4 17.3 6.5 8.5 16.4 3.0
Real estate/mortgage/(3)/ 33.1 61.6 14.4 14.4 43.4 2.5
Equities and equity derivatives 15.6 25.1 10.9 23.9 41.5 5.5
Commodities 5.8 10.9 1.3 2.3 5.2 0.5
Total trading portfolio 52.1 69.9 29.7 44.9 59.6 25.1
===========================================================================================================
/(1)/ The average VAR for the total portfolio is less than the sum of the VARs
of the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
/(2)/ The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may
have occurred on different trading days.
/(3)/ The real estate/mortgage business is included in the fixed income category
in the Trading-Related Revenue table in Note Two of the consolidated
financial statements.
62
Total trading portfolio VAR increased during the twelve months ended March
31, 2002 relative to the twelve months ended March 31, 2001. This increase was
primarily due to the addition of mortgage banking assets to the VAR calculation
for the real estate/mortgage portfolio in the first quarter of 2001.
The migration of trading books to a historical simulation approach has
resulted in a lower VAR in equities and foreign exchange and a higher VAR in
commodities. VAR was not restated for previous quarters.
The following table summarizes the quarterly VAR in the Corporation's
trading portfolios for the most recent four quarters:
Table Fourteen
Quarterly Trading Activities Market Risk
-----------------------------------------------------------------------------------------------------------
First Quarter 2002 Fourth Quarter 2001
---------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR /(1)/ VAR /(2)/ VAR /(2)/ VAR /(1)/ VAR /(2)/ VAR /(2)/
-----------------------------------------------------------------------------------------------------------
Foreign exchange $ 3.3 $ 6.4 $ 1.5 $ 5.2 $10.4 $ 1.9
Interest rate 26.3 38.9 17.3 31.9 39.4 24.4
Fixed Income 7.9 10.4 6.5 13.9 17.3 8.8
Real estate/mortgage/(3)/ 33.4 61.6 14.4 24.7 39.0 15.2
Equities and equity derivatives 14.2 18.2 10.9 13.9 16.5 11.4
Commodities 8.2 10.6 6.2 7.8 10.9 5.7
Total trading portfolio 47.9 69.8 29.7 46.0 57.0 35.8
===========================================================================================================
-----------------------------------------------------------------------------------------------------------
Third Quarter 2001 Second Quarter 2001
---------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR /(1)/ VAR /(2)/ VAR /(2)/ VAR /(1)/ VAR /(2)/ VAR /(2)/
-----------------------------------------------------------------------------------------------------------
Foreign exchange $ 7.6 $11.2 $ 5.2 $ 8.0 $11.0 $ 5.5
Interest rate 34.4 47.0 23.0 38.8 43.5 32.6
Fixed Income 13.0 15.8 10.3 10.7 16.9 6.6
Real estate/mortgage/(3)/ 32.9 41.5 23.2 41.2 55.5 28.6
Equities and equity derivatives 16.2 19.1 12.7 18.1 25.1 13.5
Commodities 4.8 8.2 1.5 2.7 5.7 1.3
Total trading portfolio 53.1 63.3 45.4 61.3 69.9 55.2
===========================================================================================================
/(1)/ The average VAR for the total portfolio is less than the sum of the VARs
of the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
/(2)/ The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may
have occurred on different trading days.
/(3)/ The real estate/mortgage business is included in the fixed income category
in the Trading-Related Revenue table in Note Two of the consolidated
financial statements.
Stress Testing
In order to determine the sensitivity of the Corporation's capital to the
impact of historically large market moves with low probability, stress scenarios
are run against the trading portfolios. This stress testing should verify that,
even under extreme market moves, the Corporation will preserve its capital. The
scenarios for each product are large standard deviation movements in the
relevant markets that are based on significant historical or hypothetical
events. These results are calculated daily and reported as part of the regular
reporting process.
In addition, specific stress scenarios are run regularly which represent
extreme hypothetical, but plausible, events that would be of concern given the
Corporation's current portfolio. Examples of these specific stress scenarios
include calculating the effects on the overall portfolio of an extreme Federal
Reserve Board tightening or easing of interest rates, a severe credit
deterioration in the U.S., and a recession in Japan and the corresponding ripple
effects globally.
Non-Exchange Traded Commodity Contracts at Fair Value
The use of non-exchange traded or over-the-counter commodity contracts
provides the Corporation with the ability to adapt to the varied requirements of
a wide customer base while efficiently mitigating its market risk. Non-exchange
traded commodity contracts are stated at fair value, which is generally based on
dealer price estimates. These contracts are primarily oil and gas commodities
contracts.
The fair value of contracts outstanding for asset positions and liability
positions, net of the effect of legally enforceable master netting agreements,
at March 31, 2002 were $1.5 billion and $1.3 billion, respectively. The fair
value of contracts outstanding for asset positions and liability positions, net
of the effect of legally enforceable master netting agreements, at December 31,
2001 were $1.3 billion and $1.0 billion, respectively.
The Corporation controls and manages its commodity risk through the use of
VAR limits. See Tables Thirteen and Fourteen for further details.
63
Asset and Liability Management Activities
Non-Trading Portfolio
The Corporation's Asset and Liability Management (ALM) process, managed
through the Asset and Liability Subcommittee of the Finance Committee, is used
to manage interest rate risk through structuring balance sheet portfolios and
identifying and linking derivative positions to specific hedged assets and
liabilities. Interest rate risk represents the only material market risk
exposure to the Corporation's non-trading financial instruments.
To effectively measure and manage interest rate risk, the Corporation uses
sophisticated computer simulations that determine the impact on net interest
income of numerous interest rate scenarios, balance sheet trends and strategies.
These simulations cover the following financial instruments: short-term
financial instruments, securities, loans, deposits, borrowings and ALM
derivative instruments. These simulations incorporate assumptions about balance
sheet dynamics such as loan and deposit growth and pricing, changes in funding
mix and asset and liability repricing and maturity characteristics. Simulations
are run under various interest rate scenarios to determine the impact on net
income and capital. From these scenarios, interest rate risk is quantified and
appropriate strategies are developed and implemented. The overall interest rate
risk position and strategies are reviewed on an ongoing basis by senior
management. Additionally, duration and market value sensitivity measures are
selectively utilized where they provide added value to the overall interest rate
risk management process.
The Corporation specifically reviews the impact on net interest income of
parallel and non-parallel shifts in the yield curve over different time
horizons. At March 31, 2002, the Federal Funds rate was 1.75 percent. The
Corporation has positioned its ALM portfolio to be neutral against an
anticipated rising rate environment with a flattening yield curve. As a result,
the interest rate risk position of the Corporation was relatively neutral to
parallel shifts upward in the yield curve as the impact on net interest income
of a 100 basis point parallel shift, up over either two months (rapid) or twelve
months (gradual) would be slightly favorable, but less than one percent. While
further material declines in interest rates are unlikely, the impact on net
interest income of a rapid 100 basis point parallel shift down would be negative
three percent.
Interest Rate and Foreign Exchange Contracts
Risk management interest rate contracts and foreign exchange contracts are
utilized in the Corporation's ALM process. The Corporation maintains an overall
interest rate risk management strategy that incorporates the use of interest
rate contracts to minimize significant unplanned fluctuations in earnings that
are caused by interest rate volatility. The Corporation's goal is to manage
interest rate sensitivity so that movements in interest rates do not adversely
affect net interest income. As a result of interest rate fluctuations, hedged
fixed-rate assets and liabilities appreciate or depreciate in market value.
Gains or losses on the derivative instruments that are linked to the hedged
fixed-rate assets and liabilities are expected to substantially offset this
unrealized appreciation or depreciation. Interest income on hedged variable-rate
assets, primarily variable rate commercial loans, and interest expense on hedged
variable rate liabilities, primarily short-term time deposits, increases or
decreases as a result of interest rate fluctuations. Gains and losses on the
derivative instruments that are linked to these hedged assets and liabilities
are expected to substantially offset this variability in earnings. See Note
Three of the consolidated financial statements for additional information on the
Corporation's hedging activities.
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
with foreign-denominated assets and liabilities as well as the Corporation's
equity investments in foreign subsidiaries. Table Fifteen reflects the notional
amounts, fair value, weighted average receive and pay rates, expected maturity
and estimated duration of the Corporation's ALM derivatives at March 31, 2002
and December 31, 2001. Fair values will change in the future primarily based on
movements in one-, three- and six-month LIBOR rates. 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 positions should not be viewed in isolation.
Consistent with the Corporation's strategy of managing interest rate
sensitivity, the net receive fixed interest rate swap notional position declined
by $23.3 billion to $19.8 billion at March 31, 2002. Option products in the
64
Corporation's ALM process may include from time to time option collars or spread
strategies, which involve the buying and selling of options on the same
underlying security or interest rate index. These strategies may involve caps,
floors and options on index futures contracts.
The amount of unamortized net realized deferred gains associated with
closed ALM swaps was $754 million and $966 million at March 31, 2002 and
December 31, 2001, respectively. The amount of unamortized net realized deferred
gains associated with closed ALM options was $165 million and $114 million at
March 31, 2002 and December 31, 2001, respectively. The amount of unamortized
net realized deferred losses associated with closed ALM futures and forward
contracts was $1 million and $9 million at March 31, 2002 and December 31, 2001,
respectively. There were no unamortized net realized deferred gains or losses
associated with closed foreign exchange contracts at March 31, 2002 and December
31, 2001. Of these unamortized net realized deferred gains, $644 million and
$1.0 billion was included in accumulated other comprehensive income at March 31,
2002 and December 31, 2001, respectively.
Table Fifteen
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
March 31, 2002
Expected Maturity Average
-----------------------------------------------------------------------
(Dollars in millions, average Fair After Estimated
estimated duration in Years) Value Total 2002 2003 2004 2005 2006 2006 Duration
------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $(403) 4.33
Notional amount $88,121 $ 1,354 $ 258 $ 216 $23,350 $13,121 $ 49,822
Weighted average receive rate 5.40% 7.09% 8.36% 6.99% $ 4.84% 5.20% 5.64%
Total pay fixed swaps 341 2.77
Notional amount $68,348 $ 787 $29,094 $13,795 $ 2,646 $ 78 $21,948
Weighted average pay rate 4.25% 6.97% 3.23% 3.88% $ 6.77% $ 5.46% $ 5.44%
Basis swaps (4)
Notional amount $15,700 $ - $ - $ 9,000 500 $4,400 $ 1,800
-----
Total swaps (66)
------------------------------------------------------------------------------------------------------------------------------
Option products 58
Notional amount $ 1,000 $ 1,000
------------------------------------------------------------------------------------------------------------------------------
Total open interest rate contracts (8)
------------------------------------------------------------------------------------------------------------------------------
Closed interest rate contracts/(1)/ 918
------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract position 910
------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (316)
Notional amount $ 4,933 $ 317 $ 213 $ 566 $147 $1,498 $2,192
------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $594
==============================================================================================================================
--------------------------------------------------------------------------------------------------------------------------
December 31, 2001
Expected Maturity Average
-----------------------------------------------------------------------
(Dollars in millions, average Fair After Estimated
estimated duration in Years) Value Total 2002 2003 2004 2005 2006 2006 Duration
------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $ 784 4.68
Notional amount $64,472 $ 1,510 $ 266 $10,746 8,341 $9,608 $34,001
Weighted average receive rate 5.74% 7.04% 8.27% 5.31% $ 5.79% $ 5.37% 5.89%
Total pay fixed swaps (322) 2.26
Notional amount $21,445 $11,422 $4,319 $ 122 $2,664 $ 60 $ 2,858
Weighted average pay rate 3.97% 2.61% 4.21% 6.09% 6.77% 5.83% 6.34%
Basis swaps
Notional amount $15,700 $ - $ - $ 9,000 500 $4,400 $ 1,800
-----
Total swaps 462
-------------------------------------------------------------------------------------------------------------------------------
Option products 105
Notional amount $ 7,000 $ - $7,000
-------------------------------------------------------------------------------------------------------------------------------
Total open interest rate contracts 567
-------------------------------------------------------------------------------------------------------------------------------
Closed interest rate contracts/(1)/ 1,071
-------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract
position 1,638
-------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (285)
Notional amount $ 6,968 $ 465 $ 283 $ 576 $1,180 $2,335 $ 2,129
------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $ 1,353
==============================================================================================================================
/(1)/ Represents the unamortized net realized deferred gains associated with
closed contracts. As a result, no notional amount is reflected for expected
maturity.
65
In conducting its mortgage production activities, the Corporation is
exposed to interest rate risk for the periods between the loan commitment date
and the date the loan is delivered to the secondary market. 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 $16.3 billion at March 31, 2002 with associated net
unrealized losses of $48 million. At December 31, 2001, the notional amount of
such contracts was $27.8 billion with associated net unrealized gains of $69
million. These contracts have an average expected maturity of less than 90 days.
The Corporation manages risk associated with the impact of changes in
prepayment rates on certain mortgage banking assets using various financial
instruments including purchased options and swaps. The notional amounts of such
contracts at March 31, 2002 and December 31, 2001 were $76.0 billion and $65.1
billion, respectively. The related net unrealized loss was $127 million at March
31, 2002, and the related net unrealized gain was $301 million at December 31,
2001. These amounts are included in the Derivative Assets table in Note Three of
the consolidated financial statements.
Liquidity Risk Management
The Corporation manages liquidity risk and the potential for loss by
assessing all on- and off-balance sheet funding demands and alternatives.
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. Funding
requirements are impacted by loan repayments and originations, liability
settlements and issuances, off-balance sheet funding commitments (including
commercial and consumer loans) and the level of asset securitizations utilized
by the Corporation. The Corporation also complies with various regulatory
guidelines regarding required liquidity levels and periodically monitors its
liquidity position in light of the changing economic environment and customer
activity. Based on these periodic assessments, the Corporation will alter, as
deemed appropriate, its assets and liabilities and off-balance sheet positions.
The Corporation currently maintains various shelf registrations with the
Securities and Exchange Commission, whereby additional short-term and long-term
debt may be issued. See Note Six of the consolidated financial statements for
additional information.
The Corporation employs various liquidity modeling techniques and metrics.
A commonly used measure of banking liquidity is the loan-to-deposit ratio. The
Corporation's loan-to-core deposit ratio was 99 percent at both March 31, 2002
and December 31, 2001. In addition, average short-term borrowings decreased $7.9
billion, or eight percent, for the three months ended March 31, 2002 compared to
the same period in 2001.
Recently Issued Accounting Pronouncements
See Note One of the consolidated financial statements for information on
recently issued pronouncements.
66
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 59 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, claims for substantial monetary 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.
In view of the inherent difficulty of predicting the outcome
of such matters, the Corporation cannot state what the
eventual outcome of pending matters will be; however, based
on current knowledge, Management does not believe that
liabilities arising from pending litigation, if any, will
have a material adverse effect on the consolidated financial
position, operations or liquidity of the Corporation.
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. ("D.E. Shaw") 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 (the "Proxy Statement"), falsely stated
that the merger between NationsBank Corporation
(NationsBank) and BankAmerica 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 (the "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. A former NationsBank
stockholder who opted out of the NationsBank shareholder
Class also commenced an action in the Missouri federal court
(the "Opt-Out Action") asserting claims substantially
similar to the claims related to D.E. Shaw set forth in the
consolidated action. Similar class actions have been filed
in California state courts. Plaintiffs in one such class
action, brought on behalf of California residents who owned
BankAmerica stock, claim that the Proxy Statement falsely
stated that the merger would be one of equals. Plaintiffs in
that matter have been included in the federal action as part
of the BankAmerica shareholder Class and will not be
proceeding in California state court. Other California state
court class actions were consolidated, but have not been
certified as class actions. The Missouri federal court
enjoined prosecution of those consolidated cases as a class
action. The plaintiffs who were enjoined appealed to the
United States Court of Appeals for the Eighth Circuit, which
upheld the district court's injunction. Those plaintiffs
sought review in the United States Supreme Court, which was
denied.
67
In February of 2002, the Corporation reached an agreement,
subject to judicial approval, to settle the Class actions.
The proposed settlement provides for payment of $333 million
to the NationsBank Classes and $157 million to the
BankAmerica Classes. The Court has preliminarily approved
the settlement, has directed that notice of the settlement
be given to the classes, and has scheduled a hearing on May
31, 2002 to determine whether to approve the settlement and
dismiss the Class actions. The Corporation agreed to the
proposed settlement without admitting liability. The
proposed settlement will be paid from existing litigation
reserves and insurance and will not have an impact on the
Corporation's financial results. On March 15, 2002, the
Missouri federal court dismissed the Opt-Out Action with
prejudice following a settlement.
On July 30, 2001, the Securities and Exchange Commission
issued a cease-and-desist order finding violations of
Section 13(a) of the Securities Exchange Act of 1934 and
Rules 13a-1, 13a-11, 13a-13 and 12b-20 promulgated
thereunder, with respect to BankAmerica's accounting for,
and the disclosures relating to, the D.E. Shaw relationship.
The Corporation consented to the order without admitting or
denying the findings. In the Matter of BankAmerica Corp.,
Exch. Act Rel. No. 44613, Acctg & Audit. Enf. Rel. No. 1249,
Admin. Proc. No. 3-10541.
Item 2. Changes in As part of its share repurchase program, during the first
Securities and Use quarter of 2002, the Corporation sold put options to
of Proceeds purchase an aggregate of two million shares of Common Stock.
These put options were sold to an independent third party
for an aggregate purchase price of $14 million. The put
options have an exercise price of $61.86 per share and
expiration dates in February 2003. The put option contracts
allow the Corporation to determine the method of settlement.
Each of these transactions was exempt from registration
under Section 4(2) of the Securities Act of 1933, as
amended.
At March 31, 2002, the Corporation had four million put
options outstanding with exercise prices ranging from $61.82
per share to $61.86 per share and expiration dates ranging
from September 2002 to February 2003.
Item 6. Exhibits a) Exhibits
and Reports on --------
Form 8-K Exhibit 11 - Earnings Per Share Computation - included in
Note Eight of the consolidated financial
statements
Exhibit 12 - Ratio of Earnings to Fixed Charges and
Preferred Dividends
b) Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed by the
Corporation during the quarter ended March 31, 2002:
Current Report on Form 8-K dated and filed January 22, 2002,
Items 5, 7 and 9.
Current Report on Form 8-K dated January 24, 2002 and filed
January 31, 2002, Items 5 and 7.
Current Report on Form 8-K dated January 25, 2002 and filed
January 31, 2002, Items 5 and 7.
Current Report on Form 8-K dated February 8, 2002 and filed
February 11, 2002, Items 5 and 7.
68
--------------------------------------------------------------------------------
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: May 15, 2002 /s/ Marc D. Oken
------------ -----------------------------
MARC D. OKEN
Executive Vice President and
Principal Financial Executive
(Duly Authorized Officer and
Chief Accounting Officer)
69
Bank of America Corporation
Form 10-Q
Index to Exhibits
--------------------------------------------------------------------------------
Exhibit Description
------- -----------
11 Earnings Per Share Computation - included in Note Eight of the
consolidated financial statements
12 Ratio of Earnings to Fixed Charges and Preferred Dividends
70