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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 September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State of incorporation:
Delaware
IRS Employer Identification Number:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(888) 279-3457
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
On October 31, 2001, there were 1,573,317,669 shares of Bank of America
Corporation Common Stock outstanding.
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Bank of America Corporation
September 30, 2001 Form 10-Q
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INDEX
Page
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Part I Item 1. Financial Statements:
Financial Consolidated Statement of Income for the Three 2
Information Months and Nine Months Ended September 30,
2001 and 2000
Consolidated Balance Sheet at September 30, 2001 3
and December 31, 2000
Consolidated Statement of Changes in Shareholders' 4
Equity for the Nine Months Ended September 30,
2001 and 2000
Consolidated Statement of Cash Flows for the Nine 5
Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results 20
of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures about 68
Market Risk
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Part II
Other
Information Item 1. Legal Proceedings 68
Item 2. Changes in Securities and Use of Proceeds 69
Item 6. Exhibits and Reports on Form 8-K 69
Signature 70
Index to Exhibits 71
Part I. Financial Information
Item 1. Financial Statements
=================================================================================================================================
Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
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(Dollars in millions, except per share information) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans and leases $ 6,511 $ 8,283 $ 21,371 $ 23,593
Interest and dividends on securities 891 1,251 2,631 3,830
Federal funds sold and securities purchased under agreements to resell 321 633 1,161 1,803
Trading account assets 930 744 2,712 1,974
Other interest income 669 324 1,613 828
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 9,322 11,235 29,488 32,028
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 2,097 2,868 7,173 8,083
Short-term borrowings 869 2,223 3,467 6,015
Trading account liabilities 285 237 887 607
Long-term debt 867 1,344 3,088 3,638
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 4,118 6,672 14,615 18,343
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Net interest income 5,204 4,563 14,873 13,685
Noninterest income
Consumer service charges 712 684 2,120 1,948
Corporate service charges 528 474 1,538 1,413
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Total service charges 1,240 1,158 3,658 3,361
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Consumer investment and brokerage services 386 357 1,164 1,108
Corporate investment and brokerage services 142 114 415 340
- ------------------------------------------------------------------------------------------------------------------------------
Total investment and brokerage services 528 471 1,579 1,448
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage banking income 109 121 426 366
Investment banking income 305 376 1,106 1,146
Equity investment gains 22 422 340 1,119
Card income 618 594 1,792 1,634
Trading account profits/(1)/ 433 402 1,508 1,630
Other income 174 131 541 550
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Total noninterest income 3,429 3,675 10,950 11,254
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 8,633 8,238 25,823 24,939
Provision for credit losses 1,251 435 2,886 1,325
Gains on sales of securities 97 11 82 23
Noninterest expense
Personnel 2,304 2,298 7,239 7,143
Occupancy 448 419 1,309 1,248
Equipment 273 285 835 882
Marketing 165 147 516 398
Professional fees 144 100 411 298
Amortization of intangibles 219 215 665 650
Data processing 175 167 552 495
Telecommunications 121 127 368 391
Other general operating 613 509 1,732 1,529
General administrative and other 144 143 454 412
Business exit costs 1,305 - 1,305 -
Restructuring charges - 550 - 550
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Total noninterest expense 5,911 4,960 15,386 13,996
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Income before income taxes 1,568 2,854 7,633 9,641
Income tax expense 727 1,025 2,899 3,509
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 841 $ 1,829 $ 4,734 $ 6,132
==============================================================================================================================
Net income available to common shareholders $ 839 $ 1,828 $ 4,730 $ 6,128
==============================================================================================================================
Per share information
Earnings per common share $ .52 $ 1.11 $ 2.95 $ 3.70
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Diluted earnings per common share $ .51 $ 1.10 $ 2.90 $ 3.66
==============================================================================================================================
Dividends per common share $ .56 $ .50 $ 1.68 $ 1.50
==============================================================================================================================
Average common shares issued and outstanding (in thousands) 1,599,692 1,639,392 1,603,340 1,654,013
==============================================================================================================================
(1) Trading account profits for the nine months ended September 30, 2001
included the $83 million 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
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September 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 23,280 $ 27,513
Time deposits placed and other short-term investments 4,629 5,448
Federal funds sold and securities purchased under agreements to resell (includes $26,418
and $24,622 pledged as collateral) 26,450 28,055
Trading account assets (includes $35,079 and $21,216 pledged as collateral) 53,471 43,041
Derivative assets 23,816 15,534
Securities:
Available-for-sale (includes $34,746 and $40,674 pledged as collateral) 74,815 64,651
Held-to-maturity, at cost (market value - $1,094 and $1,133) 1,149 1,187
- -----------------------------------------------------------------------------------------------------------------------
Total securities 75,964 65,838
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Loans and leases 339,018 392,193
Allowance for credit losses (6,665) (6,838)
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Loans and leases, net of allowance for credit losses 332,353 385,355
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Premises and equipment, net 6,372 6,433
Interest receivable 3,355 4,432
Mortgage banking assets 3,477 3,762
Goodwill 11,028 11,643
Core deposits and other intangibles 1,330 1,499
Other assets 74,580 43,638
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Total assets $640,105 $642,191
=======================================================================================================================
Liabilities
Deposits in domestic offices:
Noninterest-bearing $98,881 $98,722
Interest-bearing 215,569 211,978
Deposits in foreign offices:
Noninterest-bearing 1,854 1,923
Interest-bearing 43,566 51,621
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Total deposits 359,870 364,244
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Federal funds purchased and securities sold under agreements to repurchase 59,839 49,411
Trading account liabilities 22,575 20,947
Derivative liabilities 18,193 22,402
Commercial paper 2,544 6,955
Other short-term borrowings 20,396 35,243
Accrued expenses and other liabilities 40,369 22,859
Long-term debt 61,213 67,547
Trust preferred securities 4,955 4,955
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Total liabilities 589,954 594,563
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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 - 1,556,979 and 1,692,172 shares 67 72
Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and
outstanding - 1,582,129,416 and 1,613,632,036 shares 6,491 8,613
Retained earnings 41,857 39,815
Accumulated other comprehensive income (loss) 1,731 (746)
Other 5 (126)
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Total shareholders' equity 50,151 47,628
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Total liabilities and shareholders' equity $640,105 $642,191
=======================================================================================================================
See accompanying notes to consolidated financial statements.
3
Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
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Accumulated
Common Stock Other
Preferred ------------------------ Retained Comprehensive
(Dollars in millions, shares in thousands) Stock Shares Amount Earnings Income (Loss) /(1)/
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $77 1,677,273 $11,671 $35,681 $(2,658)
Net income 6,132
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities 852
Net unrealized losses on foreign
currency translation adjustments (2)
Comprehensive income
Cash dividends:
Common (2,475)
Preferred (4)
Common stock issued under
employee plans 3,091 53
Common stock repurchased (49,650) (2,444)
Conversion of preferred stock (3) 109 3
Other 1 114 4
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Balance, September 30, 2000 $74 1,630,824 $9,397 $39,338 $(1,808)
===================================================================================================================================
Balance, December 31, 2000 $72 1,613,632 $8,613 $39,815 $(746)
Net income 4,734
Other comprehensive income, net of tax:
Net unrealized gains on available-
for-sale and marketable equity securities 1,029
Net unrealized losses on foreign
currency translation adjustments (4)
Net gains on derivatives /(2)/ 1,452
Comprehensive income
Cash dividends:
Common (2,691)
Preferred (4)
Common stock issued under
employee plans 22,096 830
Common stock repurchased (53,826) (3,016)
Conversion of preferred stock (5) 226 5
Other 1 59 3
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Balance, September 30, 2001 $67 1,582,129 $6,491 $41,857 $1,731
====================================================================================================================================
Total
Share-
holders' Comprehensive
(Dollars in millions, shares in thousands) Other Equity Income
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1999 $(339) $44,432
Net income 6,132 $6,132
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities 852 852
Net unrealized losses on foreign
currency translation adjustments (2) (2)
--------------
Comprehensive income $6,982
==============
Cash dividends:
Common (2,475)
Preferred (4)
Common stock issued under
employee plans 184 237
Common stock repurchased (2,444)
Conversion of preferred stock
Other 13 131
- ------------------------------------------------------------------------------
Balance, September 30, 2000 $(142) $46,859
==============================================================================
Balance, December 31, 2000 $(126) $47,628
Net income 4,734 $4,734
Other comprehensive income, net of tax:
Net unrealized gains on available-
for-sale and marketable equity securities 1,029 1,029
Net unrealized losses on foreign
currency translation adjustments (4) (4)
Net gains on derivatives /(2)/ 1,452 1,452
--------------
Comprehensive income $7,211
==============
Cash dividends:
Common (2,691)
Preferred (4)
Common stock issued under
employee plans 73 903
Common stock repurchased (3,016)
Conversion of preferred stock
Other 58 120
- ------------------------------------------------------------------------------
Balance, September 30, 2001 $5 $50,151
==============================================================================
(1) Accumulated Other Comprehensive Income (Loss) consists of the after-tax
valuation allowance for available-for-sale and marketable equity securities
of $469 and $(560) at September 30, 2001 and December 31, 2000,
respectively; foreign currency translation adjustments of $(190) and $(186)
at September 30, 2001 and December 31, 2000, respectively; and net gains on
derivatives of $1,452 at September 30, 2001.
(2) Net gains on derivatives for the nine months ended September 30, 2001
included the $9 million after-tax transition adjustment gain 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.
4
- ----------------------------------------------------------------------------------------------------------------------------
Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
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Nine Months
Ended September 30
-----------------------------
(Dollars in millions) 2001 2000
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Operating activities
Net income $ 4,734 $ 6,132
Reconciliation of net income to net cash provided by (used in) operating activities:
Provision for credit losses 2,886 1,325
Gains on sales of securities (82) (23)
Business exit costs 1,305 -
Restructuring charges - 550
Depreciation and premises improvements amortization 641 695
Amortization of intangibles 665 650
Deferred income tax expense 272 1,329
Net increase in trading and hedging instruments (19,788) (1,020)
Net (increase) decrease in interest receivable 1,077 (846)
Net increase in other assets (9,114) (6,364)
Net increase (decrease) in interest payable (992) 555
Net increase (decrease) in accrued expenses and other liabilities 17,068 (84)
Other operating activities, net (707) (1,421)
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Net cash provided by (used in) operating activities (2,035) 1,478
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Investing activities
Net (increase) decrease in time deposits placed and other short-term investments 819 (704)
Net decrease in federal funds sold and securities purchased under
agreements to resell 1,605 4,504
Proceeds from sales of available-for-sale securities 95,361 15,802
Proceeds from maturities of available-for-sale securities 5,632 4,536
Purchases of available-for-sale securities (99,971) (16,880)
Proceeds from maturities of held-to-maturity securities - 211
Proceeds from sales and securitizations of loans and leases 9,874 5,440
Other changes in loans and leases, net 11,565 (38,959)
Purchases and originations of mortgage banking assets (932) (337)
Net purchases of premises and equipment (580) (434)
Proceeds from sales of foreclosed properties 230 200
Acquisition and divestiture of business activities, net (417) 81
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 23,186 (26,540)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits (4,374) 6,899
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase 10,428 (1,665)
Net increase (decrease) in commercial paper and other short-term borrowings (19,258) 7,947
Proceeds from issuance of long-term debt 10,905 22,993
Retirement of long-term debt (18,239) (8,618)
Proceeds from issuance of common stock 903 237
Common stock repurchased (3,016) (2,444)
Cash dividends paid (2,695) (2,479)
Other financing activities, net (18) (340)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,364) 22,530
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (20) (62)
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,233) (2,594)
Cash and cash equivalents at January 1 27,513 26,989
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at September 30 $ 23,280 $ 24,395
- ----------------------------------------------------------------------------------------------------------------------------
Net loans and leases transferred to (from) loans held for sale amounted to
$18,651 and $(245) for the nine months ended September 30, 2001 and 2000,
respectively.
Loans transferred to foreclosed properties amounted to $398 and $289 for the
nine months ended September 30, 2001 and 2000, respectively.
Loans securitized and retained in the available-for-sale securities portfolio
amounted to $9,237 and $224 for the nine months ended September 30, 2001 and
2000, respectively.
See accompanying notes to consolidated fiancial statements.
5
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
==============================================================================
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 September 30, 2001, 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 66 to 72 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000 and on page seven of the
Corporation's Form 10-Q for the quarterly period ended June 30, 2001.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of Financial
Accounting Standards Board Statement No. 133," and Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an amendment of FASB Statement No. 133," was
adopted by the Corporation on January 1, 2001. In accordance with the provisions
of SFAS 133, the Corporation recorded certain transition adjustments as required
by SFAS 133. The impact of such transition adjustments to net income was a loss
of $52 million (net of related income tax benefits of $31 million), and a net
transition gain of $9 million (net of related income taxes of $5 million)
included in other comprehensive income on January 1, 2001. Because the
transition adjustment was not material to the Corporation's overall results, the
before-tax charge to earnings was included in trading account profits in
noninterest income rather than shown separately as the cumulative effect of an
accounting change. Further, the initial adoption of SFAS 133 resulted in the
Corporation recognizing $577 million of derivative assets and $514 million of
derivative liabilities on the balance sheet. The Corporation expects that within
the first twelve months after adoption of SFAS 133, it will reclassify into
earnings substantially all of the transition adjustment originally recorded in
other comprehensive income.
In 2000, the FASB issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125" (SFAS
140). SFAS 140 was effective for transfers occurring after March 31, 2001 and
for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. The December 31, 2000 consolidated
financial statements included the disclosures required by SFAS 140. The
implementation of SFAS 140 did not have a material impact on the Corporation's
results of operations or financial condition.
On July 20, 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 was effective for business combinations initiated after June 30, 2001.
SFAS 141 requires that all business combinations completed after its adoption be
accounted for under the purchase method of accounting and establishes specific
criteria for the recognition of intangible assets separately from goodwill. SFAS
142 will be effective for the Corporation on January 1, 2002 and primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition. Upon adoption of SFAS 142, goodwill will no longer be amortized and
will be tested for impairment at least annually at the reporting unit level.
6
Based on current levels of amortization expense, the Corporation estimates that
the elimination of goodwill amortization expense will positively impact net
income by approximately $600 million, or approximately $0.37 per common share
(diluted), on an annual basis.
Note Two - Exit and Restructuring Charges
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. See Note Five for additional information on the exit-related
provision for credit losses.
Restructuring Charges
As part of its productivity and investment initiatives announced on July
28, 2000, the Corporation recorded a pre-tax charge of $550 million ($346
million after-tax) in the third quarter of 2000. Of the $550 million
restructuring charge, approximately $475 million was used to cover severance and
related costs and approximately $75 million was used for other costs related to
process change and channel consolidation. The reserve balance at December 31,
2000 was $293 million. At September 30, 2001, the restructuring reserve had been
substantially utilized.
Note Three - 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. 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 table below
as they are both considered in evaluating the overall profitability of the
Corporation's trading positions. Trading-related revenue is derived from foreign
exchange spot, forward and cross-currency contracts, fixed income and equity
securities and derivative contracts in interest rates, equities, credit and
commodities. Trading account profits for the nine months ended September 30,
2001 included an $83 million transition adjustment net loss recorded as a result
of the implementation of SFAS 133.
7
- --------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------
Trading account profits - as reported $433 $402 $1,508 $1,630
Net interest income 397 244 1,136 719
- -------------------------------------------------------------------------------------------------
Total trading-related revenue $830 $646 $2,644 $2,349
- -------------------------------------------------------------------------------------------------
Trading-related revenue by product
Foreign exchange contracts $138 $114 $419 $400
Interest rate contracts 220 115 582 634
Fixed income 249 120 724 372
Equities and equity derivatives 195 290 757 892
Commodities and other 28 7 162 51
- -------------------------------------------------------------------------------------------------
Total trading-related revenue $830 $646 $2,644 $2,349
=================================================================================================
Trading Account Assets and Liabilities
The fair values of the components of trading account assets and liabilities
at September 30, 2001 and December 31, 2000 were:
- ----------------------------------------------------------------------------
September 30 December 31
(Dollars in millions) 2001 2000
- ----------------------------------------------------------------------------
Trading account assets
U.S. Government & Agency securities $19,119 $10,545
Foreign sovereign debt 8,458 10,432
Corporate & other debt securities 11,910 7,841
Equity securities 3,598 6,363
Mortgage-backed securities 2,060 1,713
Other 8,326 6,147
- --------------------------------------------------------------------------
Total $53,471 $43,041
=========================================================================
Trading account liabilities
U.S. Government & Agency securities $9,865 $10,906
Foreign sovereign debt 1,831 1,860
Corporate & other debt securities 1,267 2,215
Equity securities 5,121 5,712
Mortgage-backed securities 22 37
Other 4,469 217
- --------------------------------------------------------------------------
Total $22,575 $20,947
==========================================================================
See Note Four below for additional information on derivative positions,
including credit risk.
Note Four - 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
8
obligation, to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined rate or price at a time or during a period in
the future. Option agreements can be transacted on organized exchanges or
directly between parties.
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 gain position to the
Corporation completely fail to perform under the terms of those contracts and
any collateral underlying the contracts proves to be of no value. 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 U.S. and foreign commercial banks, broker-dealers and
corporates. To minimize credit risk, the Corporation enters into legally
enforceable master netting arrangements, which reduce risk by permitting the
closeout and netting of transactions with the same counterparty upon occurrence
of certain events.
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, the credit risk is considered
minimal.
The following table presents the notional or contract and credit risk
amounts at September 30, 2001 and December 31, 2000 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 but take into consideration the effects of legally enforceable
master netting agreements.
Derivative Assets
- ------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000/(1)/
---------------------------------------------------------
Contract/ Credit Contract/ Credit
(Dollars in millions) Notional Risk Notional Risk
- ------------------------------------------------------------------------------------------------
Interest rate contracts
Swaps $5,063,450 $12,406 $3,256,992 $ 3,236
Futures and forwards 1,510,891 148 1,227,537 57
Written options 647,298 - 664,108 -
Purchased options 687,363 1,338 601,828 145
Foreign exchange contracts
Swaps 127,506 1,874 61,035 1,424
Spot, futures and forwards 720,643 2,107 682,665 3,215
Written options 58,329 - 35,161 -
Purchased options 55,621 331 32,639 380
Equity contracts
Swaps 14,027 1,052 17,482 637
Futures and forwards 49,230 - 61,004 353
Written options 23,535 - 30,976 -
Purchased options 27,499 2,574 36,304 3,670
Commodity and other contracts
Swaps 7,328 1,196 9,126 1,902
Futures and forwards 2,732 27 2,098 81
Written options 10,180 - 12,603 -
Purchased options 10,129 201 10,515 228
Credit derivatives 39,009 562 40,638 206
- ------------------------------------------------------------------------------------------------
Net replacement cost $23,816 $15,534
- ------------------------------------------------------------------------------------------------
(1) The amounts at December 31, 2000 do not reflect derivative positions that
were off-balance sheet prior to the adoption of SFAS 133.
9
The table above includes both long and short derivative positions. The
average fair value of derivative assets for the nine months ended September 30,
2001 and 2000 was $17.9 billion and $18.6 billion, respectively. The average
fair value of derivative liabilities for the nine months ended September 30,
2001 and 2000 was $17.3 billion and $19.3 billion, respectively. The fair value
of derivative assets at September 30, 2001 and December 31, 2000 was $23.8
billion and $15.5 billion, respectively. The fair value of derivative
liabilities at September 30, 2001 and December 31, 2000 was $18.2 billion and
$22.4 billion, respectively.
During the nine months ended September 30, 2001 and 2000, there were no
material credit losses associated with derivative contracts. At September 30,
2001 and December 31, 2000, there were no nonperforming derivative positions
that were material to the Corporation.
In addition to credit risk management activities, the Corporation uses
credit derivatives to generate revenue by taking on exposure to underlying
credits. The Corporation also provides credit derivatives to sophisticated
customers who wish to hedge existing credit exposures or take on additional
credit exposure to generate revenue. The Corporation's credit derivative
positions at September 30, 2001 and December 31, 2000 consisted of credit
default swaps and total return swaps.
Asset and Liability Management (ALM) Activities
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 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. 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 and floors. Interest rate
caps and floors are agreements where, for a fee, the purchaser obtains the right
to receive interest payments when a variable interest rate moves above or below
a specified cap or floor rate, respectively. 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.
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 nine months ended September 30, 2001, the
Corporation recognized in the Consolidated Statement of Income a net loss of $9
million (included in net interest income), which represented the ineffective
portion and excluded component in assessing hedge effectiveness of fair value
hedges.
10
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. For the nine months ended
September 30, 2001, the Corporation recognized in the Consolidated Statement of
Income a net loss of $6 million (included in mortgage banking income), which
represented the ineffective portion and excluded component in assessing hedge
effectiveness of cash flow hedges. The Corporation has determined that there are
no hedging positions where it is probable that certain forecasted transactions
may not occur by the end of the originally specified time period or within an
additional two months.
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 in the same period the forecasted transaction affects
earnings. Deferred net gains on derivative instruments of approximately $99
million included in accumulated other comprehensive income at September 30, 2001
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.
Hedges of Net Investments in Foreign Operations
The Corporation uses forward exchange contracts, currency swaps, and
nonderivative hedging instruments to hedge its net investments in foreign
operations against adverse movements in exchange rates. For the nine months
ended September 30, 2001, net gains of $136 million related to these derivatives
and nonderivative hedging instruments were recorded as a component of the
foreign currency translation adjustment in other comprehensive income. These net
gains were largely offset by losses in the Corporation's net investments in
foreign operations. For the same period, the Corporation had no excluded
component of net investment hedges.
Note Five - Loans and Leases
Loans and leases at September 30, 2001 and December 31, 2000 were:
- -----------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
----------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------
Commercial - domestic $126,410 37.2 % $146,040 37.2 %
Commercial - foreign 25,357 7.5 31,066 7.9
Commercial real estate - domestic 23,607 7.0 26,154 6.7
Commercial real estate - foreign 366 .1 282 .1
- ---------------------------------------------------------------------------------------------
Total commercial 175,740 51.8 203,542 51.9
- ---------------------------------------------------------------------------------------------
Residential mortgage 76,962 22.7 84,394 21.5
Home equity lines 22,288 6.6 21,598 5.5
Direct/Indirect consumer 38,513 11.4 40,457 10.3
Consumer finance 5,352 1.6 25,800 6.6
Bankcard 18,040 5.3 14,094 3.6
Foreign consumer 2,123 .6 2,308 .6
- ---------------------------------------------------------------------------------------------
Total consumer 163,278 48.2 188,651 48.1
- ---------------------------------------------------------------------------------------------
Total loans and leases $339,018 100.0 % $392,193 100.0 %
=============================================================================================
As part of the strategic decision to exit the subprime real estate lending
business, the Corporation recorded a provision for credit losses of $395 million
which, combined with an existing allowance for credit losses of $240 million,
was used to write the loan portfolio down to estimated market value. As a
result, charge-offs of $635 million were recorded in the subprime real estate
loan portfolio. The entire subprime real estate loan portfolio of approximately
$21.4 billion, which was included in consumer finance loans, was transferred
from the loans and leases portfolio to loans held for sale included in other
assets and is carried at the lower of cost or market value.
11
The Corporation securitizes, sells and services interests in certain types
of loans. During 2001, $9.2 billion of residential mortgage loans were
securitized, of which $8.5 billion occurred in the third quarter of 2001.
The table below summarizes the changes in the allowance for credit losses
for the three months and nine months ended September 30, 2001 and 2000:
- ----------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 6,911 $ 6,815 $ 6,838 $ 6,828
- ----------------------------------------------------------------------------------------------------------------------
Loans and leases charged off (1,654) (586) (3,523) (1,776)
Recoveries of loans and leases previously charged off 163 151 473 451
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,491) (435) (3,050) (1,325)
- ----------------------------------------------------------------------------------------------------------------------
Provision for credit losses 1,251 435 2,886 1,325
Other, net (6) (76) (9) (89)
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30 $ 6,665 $ 6,739 $ 6,665 $ 6,739
======================================================================================================================
The allowance on certain homogeneous loan portfolios, which generally
consist of consumer loans, is based on aggregated portfolio segment evaluations
generally by loan type. The remaining portfolios are reviewed on an individual
loan basis.
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 September 30, 2001 and December 31, 2000:
- -----------------------------------------------------------------------
September 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
Commercial - domestic $2,630 $2,891
Commercial - foreign 582 521
Commercial real estate - domestic 391 412
Commercial real estate - foreign - 2
- -----------------------------------------------------------------------
Total impaired loans $3,603 $3,826
=======================================================================
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 impaired, management
measures impairment in accordance with SFAS 114. Impaired loans are measured
based on the present value of payments expected to be received, observable
market prices or for loans that are solely dependent on the collateral for
repayment, the estimated fair value of the collateral. If the recorded
investment in impaired loans exceeds the measure of estimated fair value, a
valuation allowance is established as a component of the allowance for credit
losses.
At September 30, 2001 and December 31, 2000, nonperforming loans, including
certain loans which were considered impaired, totaled $4.1 billion and $5.2
billion, respectively. Included in other assets was $1.3 billion and $124
million of loans held for sale which would have been classified as nonperforming
had they been included in loans at September 30, 2001 and December 31, 2000,
respectively. The decrease in nonperforming loans was primarily due to the
transfer of approximately $1.2 billion of nonperforming subprime real estate
loans to loans held for sale in the third quarter of 2001 as a result of the
decision to exit the subprime real estate lending business and due to sales of
nonperforming commercial - domestic and residential mortgage loans in 2001.
Foreclosed properties amounted to $404 million and $249 million at September 30,
2001 and December 31, 2000, respectively.
12
Note Six - Short-Term Borrowings and Long-Term Debt
During 2001, Bank of America Corporation issued $7.0 billion of senior and
subordinated long-term debt, domestically and internationally, with maturities
ranging from 2002 to 2031. Of the $7.0 billion issued, $5.9 billion was
converted from fixed rates ranging from 5.65 percent to 7.54 percent to floating
rates through interest rate swaps at spreads ranging from 6 basis points below
to 139 basis points over three-month London InterBank Offered Rate (LIBOR). The
remaining $1.1 billion bears interest at floating rates ranging primarily from
25 to 83 basis points over three-month LIBOR and 28 basis points over one-month
LIBOR.
At September 30, 2001, Bank of America Corporation had the authority to
issue approximately $14.6 billion of additional corporate debt and other
securities under its existing shelf registration statements. During the third
quarter of 2001, Bank of America Corporation filed a $3.4 billion shelf
registration statement to be used exclusively for "retail targeted" offerings of
InterNotesSM in the United States.
At September 30, 2001, Bank of America Corporation had the authority to
issue 300 billion in yen-denominated notes (approximately U.S. $3 billion) under
a shelf registration statement 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. The Corporation had $420 million
outstanding under these programs at September 30, 2001. At December 31, 2000,
the Corporation had no notes outstanding under these programs.
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 $2.6 billion at September 30,
2001 compared to $14.5 billion at December 31, 2000. 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 $5.7 billion at
September 30, 2001 compared to $17.6 billion at December 31, 2000. During 2001,
Bank of America, N.A. issued $428 million in senior long-term bank notes
maturing in 2002 through 2006. Of the $428 million, $388 million bears interest
at fixed rates ranging from 3.75 percent to 4.88 percent. The remaining $40
million bears interest at 20 basis points over three-month LIBOR.
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 $6.1 billion at September 30, 2001 compared to $5.2 billion at December
31, 2000. Bank of America, N.A.'s notes outstanding under this program totaled
$1.4 billion at September 30, 2001 and December 31, 2000. Of the $25.0 billion
authorized at September 30, 2001, Bank of America Corporation and Bank of
America, N.A. had remaining authority to issue approximately $8.9 billion and
$8.5 billion, respectively. At September 30, 2001 and December 31, 2000, $1.7
billion and $2.7 billion, respectively, was outstanding under the former
BankAmerica Corporation (BankAmerica) Euro medium-term note program. No
additional debt securities will be offered under that program.
At September 30, 2001, Bank of America Oregon, N.A. maintained
approximately $6.0 billion in Federal Home Loan borrowings from the Home Loan
Bank in Seattle, Washington. During 2001, Bank of America Oregon, N.A. accepted
$463 million in Federal Home Loan Bank, Seattle advances with maturities ranging
from 2004 to 2031. Of the $463 million accepted, $450 million was converted from
fixed rates ranging from 5.72 percent to 5.89 percent to floating rates through
interest rate swaps at a spread of 11 basis points below three-month LIBOR. The
remaining $13 million bears interest at fixed rates ranging from 5.44 percent to
6.44 percent.
During the third quarter of 2001, Bank of America Georgia, N.A. accepted
$2.3 billion in advances from the Federal Home Loan Bank in Atlanta, Georgia.
All of the $2.3 billion matures in 2006 and bears interest at floating rates
ranging from 33 basis points below to 8 basis points below three-month LIBOR.
13
Subsequent to September 30, 2001, Bank of America Corporation issued $3.0
billion of long-term senior and subordinated debt with maturities ranging from
2004 to 2026. During the same time period, Bank of America, N.A. issued $2.7
billion of bank notes with maturities ranging from 2001 to 2007.
Note Seven - Commitments and Contingencies
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters
of credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial institutions.
The following table summarizes outstanding commitments to extend credit at
September 30, 2001 and December 31, 2000:
- -----------------------------------------------------------------------------
September 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
Credit card commitments $77,970 $72,058
Other loan commitments 228,387 243,124
Standby letters of credit and financial guarantees 42,469 33,420
Commercial letters of credit 8,071 3,327
=============================================================================
When-Issued Securities
At September 30, 2001, the Corporation had commitments to purchase and sell
when-issued securities of $50.8 billion and $34.1 billion, respectively. At
December 31, 2000, the Corporation had commitments to purchase and sell
when-issued securities of $26.4 billion and $20.6 billion, respectively.
Litigation
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and directors have
been named as defendants in a number of actions filed in several federal courts
that have been consolidated for pretrial purposes before a Missouri federal
court. The amended complaint in the consolidated actions alleges, among other
things, that the defendants failed to disclose material facts about
BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. ("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, 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 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. Discovery, for
the most part, has been completed. Pretrial proceedings are scheduled to
conclude by December 2001, and the court has ordered the parties to be ready for
trial in March 2002. A former NationsBank stockholder who opted out of the
federal class action has commenced an action asserting claims substantially
similar to the claims related to D.E. Shaw set forth in the consolidated action.
This action is now proceeding with the federal class action in the Missouri
federal court, although that stockholder has requested that its case be tried
separately. Similar class actions have been filed in California. Plaintiffs in
one such class action, brought on behalf of California residents who owned
BankAmerica stock, claim that the proxy statement-prospectus of August 4, 1998,
falsely
14
stated that the merger would be one of equals. Plaintiffs in this matter have
recently agreed to become included in the federal action rather than proceed in
California state court. Other California state court class actions were
consolidated, but not yet certified as class actions. The Missouri federal court
has 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 are currently pursuing further relief with the United States Court of
Appeals. The Corporation believes that the actions lack merit and will defend
them vigorously. The amount of ultimate liability cannot be determined at this
time.
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.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
Terrorist Attacks of September 11, 2001
The Corporation incurred certain costs and losses associated with the
terrorist attacks of September 11, 2001, such as property losses and costs to
re-establish business operations. Management believes that these costs and
losses will not be material to the Corporation's financial position or results
of operations.
Note Eight - Shareholders' Equity and Earnings Per Common Share
During 2000, the Corporation completed its 1999 stock repurchase plan. On
July 26, 2000, the Corporation's Board of Directors (the Board) authorized a new
stock repurchase program of up to 100 million shares of the Corporation's common
stock at an aggregate cost of up to $7.5 billion. At September 30, 2001, the
remaining buyback authority for common stock under the 2000 program totaled $3.8
billion, or 31 million shares. During the nine months ended September 30, 2001,
the Corporation repurchased approximately 54 million shares of its common stock
in open market repurchases at an average per-share price of $56.06, which
reduced shareholders' equity by $3.0 billion. During the nine months ended
September 30, 2000, the Corporation repurchased approximately 50 million shares
of its common stock in open market repurchases at an average per-share price of
$49.18, which reduced shareholders' equity by $2.4 billion.
In September 1999, the Corporation began selling 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 September 30, 2001,
there were three million put options outstanding with exercise prices ranging
from $56.36 per share to $61.84 per share which expire from October 2001 to
September 2002. At December 31, 2000, there were three million put options
outstanding with exercise prices ranging from $45.22 per share to $50.37 per
share which expired from January 2001 to April 2001.
Earnings per common share is computed by dividing net income available to
common shareholders by the weighted average common shares issued and
outstanding. For diluted earnings per common share, net income available to
common shareholders can be affected by the conversion of the registrant's
convertible preferred stock. Where the effect of this conversion would have been
dilutive, net income available to common shareholders is adjusted by the
associated preferred dividends. This adjusted net income is divided by the
weighted average number of common shares issued and outstanding for each period
plus amounts representing the dilutive effect of stock options outstanding and
the dilution resulting from the conversion of the registrant's convertible
preferred stock, if applicable. The effect of convertible preferred stock is
excluded from the computation of diluted earnings per common share in periods in
which the effect would be antidilutive.
15
The calculation of earnings per common share and diluted earnings per
common share for the three months and nine months ended September 30, 2001 and
2000 is presented below:
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(Dollars in millions, except per share information; September 30 September 30
-------------------------------------------------------
shares in thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share
Net income $841 $1,829 $4,734 $6,132
Preferred stock dividends (2) (1) (4) (4)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders $839 $1,828 $4,730 $6,128
- -----------------------------------------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,599,692 1,639,392 1,603,340 1,654,013
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ .52 $ 1.11 $ 2.95 $ 3.70
===================================================================================================================================
Diluted earnings per common share
Net income available to common shareholders $839 $1,828 $4,730 $6,128
Preferred stock dividends 2 1 4 4
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common shareholders and assumed
conversions $841 $1,829 $4,734 $6,132
- -----------------------------------------------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,599,692 1,639,392 1,603,340 1,654,013
- -----------------------------------------------------------------------------------------------------------------------------------
Incremental shares from assumed conversions:
Convertible preferred stock 2,633 2,914 2,705 2,944
Stock options 31,738 18,725 26,883 17,791
- -----------------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 34,371 21,639 29,588 20,735
- -----------------------------------------------------------------------------------------------------------------------------------
Total diluted average common shares issued and outstanding 1,634,063 1,661,031 1,632,928 1,674,748
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ .51 $ 1.10 $ 2.90 $ 3.66
===================================================================================================================================
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.
Consumer and Commercial Banking provides a diversified range of products
and services to individuals and small businesses through multiple delivery
channels and commercial lending and treasury management services to middle
market companies with annual revenue between $10 million and $500 million. Asset
Management offers customized asset management and credit, financial advisory,
fiduciary, trust and banking services, as well as both full-service and discount
brokerage services. It provides management of equity, fixed income, cash and
alternative investments to individuals, corporations and a wide array of
institutional clients. Global Corporate and Investment Banking provides a
diversified range of financial products such as investment banking, trade
finance, treasury management, capital markets, leasing and financial advisory
services to domestic and international corporations, financial institutions and
government entities. Equity Investments includes Principal Investing which makes
both direct and indirect equity investments in a wide variety of transactions.
Equity Investments also includes the Corporation's strategic technology and
alliances investment portfolio. Corporate Other consists primarily of the
functions associated with managing the interest rate risk of the Corporation and
Consumer Special Assets which includes certain consumer finance businesses being
liquidated and certain residential mortgages originated by the mortgage group
(not from retail branch originations).
In the first quarter of 2001, the thirty-year mortgage portfolio was moved
from Consumer and Commercial Banking to Corporate Other. In the third quarter of
2001, certain consumer finance businesses being liquidated were transferred from
Consumer and Commercial Banking to Corporate Other.
Effective January 2, 2001, the Corporation acquired the remaining 50
percent of Marsico Capital Management LLC (Marsico), which is part of the Asset
Management segment, for a total investment of $1.1 billion. The Corporation
acquired the first 50 percent in 1999. Marsico is a Denver-based investment
management firm specializing in large capitalization growth stocks.
16
The following tables include total revenue, net income and average total
assets for the three months and nine months ended September 30, 2001 and 2000
for each business segment. Certain prior period amounts have been reclassified
between segments to conform to the current period presentation.
Business Segments
- --------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30
Consumer and
Total Corporation Commercial Banking /(1)/ Asset Management /(1)/
-----------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income /(2)/ $ 5,290 $ 4,642 $ 3,347 $ 3,124 $ 185 $ 158
Noninterest income 3,429 3,675 2,022 1,954 424 445
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 8,719 8,317 5,369 5,078 609 603
Provision for credit losses 1,251 435 433 211 16 -
Gains (losses) on sales of securities 97 11 2 - - -
Amortization of intangibles 219 215 161 161 15 8
Other noninterest expense 5,692 4,745 2,726 2,630 348 343
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,654 2,933 2,051 2,076 230 252
Income tax expense 813 1,104 798 815 82 97
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 841 $ 1,829 $ 1,253 $ 1,261 $ 148 $ 155
=============================================================================================================================
Average total assets $642,184 $685,017 $291,078 $281,431 $27,070 $25,224
=============================================================================================================================
For the three months ended September 30
Global Corporate and
Investment Banking /(1)/ Equity Investments /(1)/ Corporate Other
-------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income /(2)/ $ 1,140 $ 900 $ (36) $ (37) $ 654 $ 497
Noninterest income 1,068 1,075 (18) 383 (67) (182)
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue 2,208 1,975 (54) 346 587 315
Provision for credit losses /(3)/ 285 118 - - 517 106
Gains (losses) on sales of securities (9) (8) - - 104 19
Amortization of intangibles 36 34 2 3 5 9
Other noninterest expense /(3)/ 1,149 1,061 39 22 1,430 689
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 729 754 (95) 321 (1,261) (470)
Income tax expense 253 238 (37) 124 (283) (170)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 476 $ 516 $ (58) $ 197 $ (978) $ (300)
============================================================================================================================
Average total assets $227,300 $234,202 $ 6,435 $ 5,522 $90,301 $138,638
============================================================================================================================
(1) There were no material intersegment revenues among the segments.
(2) Net interest income is presented on a taxable-equivalent basis.
(3) Corporate Other includes exit charges consisting of provision for credit
losses of $395 million and noninterest expense of $1,305 million related to
the exit of certain consumer finance businesses in the third quarter of
2001 and restructuring charges of $550 million in the third quarter of
2000.
17
Business Segments
- ---------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30
Consummer and
Total Corporation Commercial Banking/(1)/ Asset Management/(1)/
-------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income/(2)/ $ 15,128 $ 13,913 $ 9,702 $ 9,264 $ 525 $ 477
Noninterest income/(3)/ 10,950 11,254 5,973 5,452 1,317 1,355
- ----------------------------------------------------------------------------------------------------------------------------
Total revenue 26,078 25,167 15,675 14,716 1,842 1,832
Provision for credit losses 2,886 1,325 1,230 786 87 9
Gains (losses) on sales of securities 82 23 3 - - -
Amortization of intangibles 665 650 483 488 43 23
Other noninterest expense 14,721 13,346 8,055 7,860 1,101 1,043
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,888 9,869 5,910 5,582 611 757
Income tax expense 3,154 3,737 2,309 2,188 222 290
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 4,734 $ 6,132 $ 3,601 $ 3,394 $ 389 $ 467
============================================================================================================================
Average total assets $648,789 $669,598 $288,174 $281,840 $26,839 $24,245
============================================================================================================================
For the nine months ended September 30
Global Corporate and
Investment Banking/(1)/ Equity Investments/(1)/ Corporate Other
-------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income/(2)/ $ 3,257 $ 2,694 $ (112) $ (98) $ 1,756 $ 1,576
Noninterest income/(3)/ 3,659 3,593 239 1,053 (238) (199)
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 6,916 6,287 127 955 1,518 1,377
Provision for credit losses/(4)/ 780 270 - 3 789 257
Gains (losses) on sales of securities (30) (6) - - 109 29
Amortization of intangibles 109 104 8 8 22 27
Other noninterest expense/(4)/ 3,730 3,387 128 73 1,707 983
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,267 2,520 (9) 871 (891) 139
Income tax expense 800 850 (7) 337 (170) 72
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,467 $ 1,670 $ (2) $ 534 $ (721) $ 67
===========================================================================================================================
Average total assets $231,364 $226,436 $ 6,562 $ 5,129 $95,850 $131,948
===========================================================================================================================
(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. 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) Corporate Other includes exit charges consisting of provision for credit
losses of $395 million and noninterest expense of $1,305 million related to
the exit of certain consumer finance businesses in the third quarter of
2001 and restructuring charges of $550 million in the third quarter of
2000.
18
A reconciliation of the segments' net income (excluding Corporate Other) to
consolidated net income follows:
- -----------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-----------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Segments' net income $1,819 $2,129 $5,455 $6,065
Adjustments, net of taxes:
Earnings associated with unassigned capital 56 63 - 212 167
Consumer Special Assets activity 156 (33) 375 246
SFAS 133 transition adjustment loss - - (68) -
Provision for credit losses in excess of net charge-offs - - (49) -
Gains on sales of securities 67 12 71 18
Exit charges (1,250) - (1,250) -
Restructuring charges - (346) - (346)
Other (7) 4 (12) (18)
- -----------------------------------------------------------------------------------------------------------------
Consolidated net income $841 $1,829 $4,734 $6,132
=================================================================================================================
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 2000 Annual Report on Form 10-K. These statements are
representative only on the date hereof, and the Corporation undertakes no
obligation to update any forward-looking statements made.
The possible events or factors include the following: the Corporation's
loan growth is dependent on 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 impact of the events of September 11, 2001 and the
energy crisis, concentrations of borrowers, industries, products and geographic
locations, the mix of the loan portfolio and management's judgments regarding
the collectibility of loans. Liquidity requirements may change as a result of
fluctuations in assets and liabilities and off-balance sheet exposures, which
will impact the capital and debt financing needs of the Corporation and the mix
of funding sources. Decisions to purchase, hold or sell securities are also
dependent on liquidity requirements and market volatility, as well as on- and
off-balance sheet positions. Factors that may impact interest rate risk include
local, regional and international economic conditions, levels, mix, maturities,
yields or rates of assets and liabilities, utilization and effectiveness of
interest rate contracts and the wholesale and retail funding sources of the
Corporation. The Corporation is also exposed to the potential of losses arising
from adverse changes in market rates and prices which can adversely impact the
value of financial products, including securities, loans, deposits, debt and
derivative financial instruments, such as futures, forwards, swaps, options and
other financial instruments with similar characteristics.
In addition, the banking industry in general is subject to various monetary
and fiscal policies and regulations, which include those determined by the
Federal Reserve Board, the Office of the Comptroller of Currency, the Federal
Deposit Insurance Corporation, state regulators and the Office of Thrift
Supervision, whose policies and regulations could affect the Corporation's
results. Other factors that may cause actual results to differ from the
forward-looking statements include the following: projected business increases
following process changes and productivity and investment initiatives are lower
than expected or do not pay for severance or other related costs as quickly as
anticipated; competition with other local, regional and international banks,
thrifts, credit unions and other nonbank financial institutions, such as
investment banking firms, investment advisory firms, brokerage firms, investment
companies and insurance companies, as well as other entities which offer
financial services, located both within and outside the United States and
through alternative delivery channels such as the Internet; interest rate,
market and monetary fluctuations; inflation; market volatility; general economic
conditions and economic conditions in the geographic regions and industries in
which the Corporation operates, including the impact of the events of September
11, 2001 and the energy crisis; 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 38 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. At September 30, 2001, the Corporation had $640 billion in assets
and approximately 144,000 full-time equivalent employees.
The remainder of management's discussion and analysis of the Corporation's
results of operations and financial position should be read in conjunction with
the consolidated financial statements and related notes presented on pages 6
through 19.
Refer to Table One for selected financial data for the three months and
nine months ended September 30, 2001 and 2000 and Table Seventeen for the three
most recent quarters.
Key performance highlights for the nine months ended September 30, 2001 compared
to the same period in 2000:
. Net income totaled $4.7 billion, or $2.90 per common share (diluted),
compared to $6.1 billion, or $3.66 per common share (diluted). The return
on average common shareholders' equity was 13.03 percent.
. Operating earnings, which excluded charges related to the Corporation's
strategic decision to exit certain consumer finance businesses in the third
quarter of 2001 and related to restructuring in the third quarter of 2000,
totaled $6.0 billion, or $3.66 per common share (diluted), compared to $6.5
billion, or $3.87 per common share (diluted). Excluding exit charges, the
return on average common shareholders' equity was 16.48 percent.
Shareholder value added (SVA), excluding exit and restructuring charges,
declined $623 million to $2.3 billion.
. Total revenue includes net interest income on a taxable-equivalent basis
and noninterest income. Total revenue was $26.1 billion, an increase of
$911 million.
- Net interest income increased $1.2 billion to $15.1 billion. The
increase was primarily due to changes in interest rates and investment
portfolio repositioning, an increased trading-related contribution,
higher deposit and equity levels and a favorable shift in loan mix.
These factors were partially offset by the impact of the money market
deposit pricing initiative and deterioration in auto lease residual
values. Average managed loans and leases were $396.4 billion, a $3.5
billion increase, primarily due to a seven percent increase in
consumer loans and leases, partially offset by a five percent decrease
in commercial loans and leases. Average customer-based deposits grew
to $303.3 billion, a $12.0 billion increase. The net interest yield
was 3.59 percent, a 39 basis point increase. The increase in the net
interest yield was primarily due to the effect of changes in interest
rates and investment portfolio repositioning.
- Noninterest income was $11.0 billion, a $304 million decrease.
Increases in service charges, card income, investment and brokerage
services and mortgage banking income were offset by a sharp decline in
equity investment gains as well as declines in trading account profits
and investment banking income. Consumer and Commercial Banking
experienced a $241 million, or nine percent, increase in service
charges driven by higher business volumes. A $158 million, or 10
percent, increase in card income was primarily due to new account
growth in both credit and debit card and increased purchase volume on
existing accounts. Revenue in the mortgage banking business increased
45 percent primarily reflecting higher origination activity and
servicing levels, increased gains from higher loan sales to the
secondary market and favorable mortgage banking asset hedge results,
partially offset by increased paydowns as a result of the declining
rate environment. Income from investment and brokerage services
increased in the Asset Management segment largely due to new asset
management business and the completed acquisition of Marsico Capital
Management LLC (Marsico), partially offset by lower broker activity
due to decreased trade volume as a result of significant market
decline. The noninterest income component of trading-related revenue
within Global Corporate and Investment Banking increased $52 million,
as increased revenues from trading-
21
related activities in fixed income, interest rate contracts and
commodities offset a decrease in equities and equity derivatives
trading. Investment banking income decreased $40 million, as strong
growth in fixed income origination was offset by weaker demand for
syndications, equity underwriting and advisory services. Equity
Investments had equity investment gains of $283 million, reflecting a
decrease of $756 million.
. On August 15, 2001, the Corporation announced that it was exiting its auto
leasing and subprime real estate lending businesses. As a result of exiting
these consumer finance businesses, the Corporation recorded pre-tax charges
of $1.7 billion ($1.3 billion after-tax), consisting of provision for
credit losses of $395 million and business exit costs, the noninterest
expense component, of $1.3 billion.
. Including the exit charge, the provision for credit losses was $2.9
billion. Excluding the exit charge, the provision for credit losses was
$2.5 billion, an increase of $1.2 billion from the same period in 2000.
Excluding exit-related charge-offs of $635 million, net charge-offs were
$2.4 billion, or 0.86 percent of average loans and leases, an increase of
41 basis points from the same period in 2000. This increase in net
charge-offs of $1.1 billion from the comparable period in 2000 was
primarily due to credit quality deterioration in the commercial - domestic
portfolio and an increase in bankcard charge-offs.
. Nonperforming assets were $4.5 billion, or 1.33 percent of loans, leases
and foreclosed properties at September 30, 2001, a $934 million, or six
basis point decrease from December 31, 2000. The decrease was primarily a
result of the transfer of $1.2 billion in nonperforming subprime real
estate loans to loans held for sale as well as loan sales, partially offset
by increases in the commercial - domestic loan portfolio that resulted from
credit deterioration as companies were affected by the weakening economic
environment. The allowance for credit losses totaled $6.7 billion or 1.97
percent of total loans and leases at September 30, 2001, a 23 basis point
improvement from 1.74 percent of total loans and leases at December 31,
2000.
. Noninterest expense excluding business exit costs and restructuring charges
was $14.1 billion, a $635 million increase, primarily driven by higher
marketing, professional fees and personnel expenses as well as costs
associated with various international activities. The Corporation incurred
certain costs and losses associated with the terrorist attacks of September
11, 2001, such as property losses and costs to re-establish business
operations. Management believes that these costs and losses will not be
material to the Corporation's financial position or results of operations.
22
Table One
Selected Financial Data
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------------------------------
(Dollars in millions, except per share information) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Basis /(1)/
- ---------------------
Income statement
Net interest income $ 5,204 $ 4,563 $ 14,873 $ 13,685
Net interest income (taxable-equivalent basis) 5,290 4,642 15,128 13,913
Noninterest income 3,429 3,675 10,950 11,254
Total revenue 8,633 8,238 25,823 24,939
Total revenue (taxable-equivalent basis) 8,719 8,317 26,078 25,167
Provision for credit losses 856 435 2,491 1,325
Gains on sales of securities 97 11 82 23
Other noninterest expense 4,606 4,410 14,081 13,446
Income before income taxes 3,268 3,404 9,333 10,191
Income tax expense 1,177 1,229 3,349 3,713
Net income 2,091 2,175 5,984 6,478
Average diluted common shares issued and
outstanding (in thousands) 1,634,063 1,661,031 1,632,928 1,674,748
- ----------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.29 % 1.26 % 1.23 % 1.29 %
Return on average common shareholders' equity 16.87 18.15 16.48 18.45
Efficiency ratio 52.82 53.01 53.99 53.42
Net interest yield 3.78 3.10 3.59 3.20
Shareholder value added $ 824 $ 953 $ 2,293 $ 2,916
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.31 $ 1.33 $ 3.73 $ 3.91
Diluted earnings 1.28 1.31 3.66 3.87
- ----------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data /(2)/
Earnings $ 2,310 $ 2,390 $ 6,649 $ 7,128
Earnings per common share 1.44 1.46 4.14 4.31
Diluted earnings per common share 1.41 1.44 4.07 4.26
Return on average assets 1.43 % 1.39 % 1.37 % 1.42 %
Return on average common shareholders' equity 18.64 19.94 18.31 20.30
Efficiency ratio 50.32 50.43 51.44 50.84
===================================================================================================================================
As Reported
- -----------
Income statement
Net interest income $ 5,204 $ 4,563 $ 14,873 $ 13,685
Noninterest income 3,429 3,675 10,950 11,254
Total revenue 8,633 8,238 25,823 24,939
Provision for credit losses 1,251 435 2,886 1,325
Gains on sales of securities 97 11 82 23
Business exit costs 1,305 - 1,305 -
Restructuring charges - 550 - 550
Other noninterest expense 4,606 4,410 14,081 13,446
Income before income taxes 1,568 2,854 7,633 9,641
Income tax expense 727 1,025 2,899 3,509
Net income 841 1,829 4,734 6,132
- ----------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets .52 % 1.06 % .98 % 1.22 %
Return on average common shareholders' equity 6.78 15.25 13.03 17.46
Total equity to total assets (period-end) 7.83 6.98 7.83 6.98
Total average equity to total average assets 7.66 6.97 7.49 7.01
Dividend payout ratio 106.49 44.83 56.88 40.38
- ----------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ .52 $ 1.11 $ 2.95 $ 3.70
Diluted earnings .51 1.10 2.90 3.66
Cash dividends paid .56 .50 1.68 1.50
Book value 31.66 28.69 31.66 28.69
- ----------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data /(2)/
Earnings $ 1,060 $ 2,044 $ 5,399 $ 6,782
Earnings per common share .66 1.25 3.37 4.10
Diluted earnings per common share .65 1.23 3.31 4.05
Return on average assets .65 % 1.18 % 1.11 % 1.35 %
Return on average common shareholders' equity 8.55 17.01 14.87 19.31
==================================================================================================================================
Balance sheet (period-end)
Total loans and leases $ 339,018 $ 402,592 $ 339,018 $ 402,592
Total assets 640,105 671,725 640,105 671,725
Total deposits 359,870 353,988 359,870 353,988
Long-term debt 61,213 69,412 61,213 69,412
Trust preferred securities 4,955 4,955 4,955 4,955
Common shareholders' equity 50,084 46,785 50,084 46,785
Total shareholders' equity 50,151 46,859 50,151 46,859
- ----------------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios (period-end)
Tier 1 capital 7.95 % 7.32 % 7.95 % 7.32 %
Total capital 12.12 10.80 12.12 10.80
Leverage ratio 6.59 6.06 6.59 6.06
- ----------------------------------------------------------------------------------------------------------------------------------
Market price per share of common stock
Closing $ 58.40 $ 52.38 $ 58.40 $ 52.38
High 65.54 57.63 65.54 61.00
Low 50.25 43.63 45.00 42.31
==================================================================================================================================
(1) Operating basis excludes provision for credit losses of $395 million and
noninterest expense of $1,305 million related to the exit of certain
consumer finance businesses in the third quarter of 2001 and restructuring
charges of $550 million in the third quarter of 2000.
(2) Cash basis calculations exclude goodwill and other intangible amortization
expense.
23
Business Segment Operations
The Corporation provides a diversified range of banking and nonbanking
financial services and products through its various subsidiaries. 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. In the first quarter of 2001,
the thirty-year mortgage portfolio was moved from Consumer and Commercial
Banking to the Corporate Other segment. In the third quarter of 2001, certain
consumer finance businesses being liquidated were transferred from Consumer and
Commercial Banking to Corporate Other.
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. These
performance measures are also presented on a cash basis which excludes the
impact of goodwill and other intangible amortization expense. Total revenue
includes net interest income on a taxable-equivalent basis and noninterest
income. The net interest yield of the business segments reflects the results of
a funds transfer pricing process which derives net interest income by matching
assets and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity is allocated to each business segment based on an
assessment of its inherent risk. SVA is a performance measure that is aligned
with the Corporation's growth strategy orientation and strengthens the
Corporation's focus on generating shareholder value. SVA is defined as cash
basis operating earnings less a charge for the use of capital. The capital
charge is calculated by multiplying 12 percent (management's estimate of the
shareholder's minimum required rate of return on capital invested) by average
total common shareholders' equity (at the Corporation level) and by average
allocated equity (at the business segment level).
See Note Nine of the consolidated financial statements for additional
business segment information and a reconciliation to consolidated amounts.
Additional information on noninterest income can be found in the "Noninterest
Income" section beginning on page 40. Certain prior period amounts have been
reclassified between segments and their components (presented after Table Two)
to conform to the current period presentation.
24
Table Two
Business Segment Summary
- --------------------------------------------------------------------------------------------------------------------------------
For the three months ended September 30
Consumer and Global Corporate and
Commercial Banking (1) Asset Management (1) Investment Banking (1) Equity Investments (1)
------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income (2) $ 3,347 $ 3,124 $ 185 $ 158 $ 1,140 $ 900 $ (36) $ (37)
Noninterest income 2,022 1,954 424 445 1,068 1,075 (18) 383
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue 5,369 5,078 609 603 2,208 1,975 (54) 346
Net income 1,253 1,261 148 155 476 516 (58) 197
Cash basis earnings 1,414 1,422 163 163 512 550 (56) 200
Shareholder value added 828 831 96 113 169 151 (128) 141
Net interest yield 6.61 % 6.43 % 2.85 % 2.58 % 2.38 % 1.82 % n/m n/m
Return on average equity 25.7 25.6 26.8 37.4 16.6 15.5 (9.4) % 40.1 %
Cash basis return on equity 29.0 28.9 29.4 39.2 17.9 16.5 (8.9) 40.6
Efficiency ratio 53.8 55.0 59.5 58.2 53.7 55.4 n/m 7.0
Cash basis efficiency ratio 50.8 51.8 57.2 57.0 52.0 53.7 n/m 6.3
Average:
Total loans and leases $ 182,792 $ 175,608 $ 24,631 $ 23,221 $ 76,643 $ 97,298 $ 468 $ 450
Total deposits 266,351 256,725 11,837 11,444 68,472 71,861 - 18
Total assets 291,078 281,431 27,070 25,224 227,300 234,202 6,435 5,522
- ----------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September 30
Consumer and Global Corporate and
Commercial Banking (1) Asset Management (1) Investment Banking (1) Equity Investments (1)
-----------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income (2) $ 9,702 $ 9,264 $ 525 $ 477 $ 3,257 $ 2,694 $ (112) $ (98)
Noninterest income (3) 5,973 5,452 1,317 1,355 3,659 3,593 239 1,053
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 15,675 14,716 1,842 1,832 6,916 6,287 127 955
Net income 3,601 3,394 389 467 1,467 1,670 (2) 534
Cash basis earnings 4,084 3,882 432 490 1,576 1,774 6 542
Shareholder value added 2,348 2,099 234 341 521 595 (206) 377
Net interest yield 6.45 % 6.55 % 2.75 % 2.73 % 2.25 % 1.91 % n/m n/m
Return on average equity 24.9 22.8 23.5 37.7 16.7 17.0 (0.1) % 38.8 %
Cash basis return on equity 28.2 26.1 26.1 39.6 17.9 18.1 0.4 39.4
Efficiency ratio 54.5 56.7 62.1 58.2 55.5 55.5 106.7 8.5
Cash basis efficiency ratio 51.4 53.4 59.8 57.0 53.9 53.9 100.5 7.7
Average:
Total loans and leases $ 181,567 $ 172,737 $ 24,328 $ 22,302 $ 84,336 $ 94,260 $ 487 $ 428
Total deposits 263,618 256,456 11,883 11,343 67,288 68,390 17 13
Total assets 288,174 281,840 26,839 24,245 231,364 226,436 6,562 5,129
- -----------------------------------------------------------------------------------------------------------------------------
n/m = not meaningful
(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 included in trading account profits. The components of
the transition adjustment by business 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 (not
included in the table above).
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.
The results for the nine months ended September 30, 2001 reflect the
Corporation's continued focus on Card Services as a growth area as end of period
managed consumer card outstandings increased 21 percent, merchant processing
volume increased 15 percent and total card services purchase volume increased 10
percent compared to the same period in 2000.
The Corporation's mortgage banking results, which include mortgage banking
income and the mark-to-market adjustments on mortgage banking assets and the
related instruments used to economically hedge the mortgage banking assets, is
included within the discussion of the results of operations in the Consumer and
Commercial Banking segment. The mark-to-market adjustments are included in
trading account profits in the Consumer and Commercial Banking segment.
25
In the second quarter of 2001, the Corporation's commercial real estate
banking business was moved from Global Corporate and Investment Banking to
Consumer and Commercial Banking. The credit and client management process and
customer base of the business are better aligned with those of Consumer and
Commercial Banking.
Consumer and Commercial Banking
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Net interest income $ 3,347 $ 3,124 $ 9,702 $ 9,264
Noninterest income 2,022 1,954 5,973 5,452
- -----------------------------------------------------------------------------------------------
Total revenue 5,369 5,078 15,675 14,716
Cash basis earnings 1,414 1,422 4,084 3,882
Shareholder value added 828 831 2,348 2,099
Cash basis efficiency ratio 50.8 % 51.8 % 51.4 % 53.4 %
================================================================================================
. Total revenue increased $959 million, or seven percent, for the nine months
ended September 30, 2001 compared to the same period in 2000.
- Net interest income increased $438 million, or five percent, as a
favorable shift in loan mix and overall loan and deposit growth were
partially offset by the impact of the money market deposit pricing
initiative as the Corporation offered more competitive money market
savings rates.
- Noninterest income increased $521 million, or 10 percent, driven by a
10 percent increase in card income, a nine percent increase in service
charges and improved mortgage banking results.
. Cash basis earnings for the nine months ended September 30, 2001 rose $202
million, or five percent, due to the increases in net interest income and
noninterest income discussed above, partially offset by an increase in the
provision for credit losses and a two percent increase in noninterest
expense.
- The provision for credit losses increased $444 million, or 56 percent,
reflecting higher charge-offs in the commercial - domestic and
bankcard loan portfolios.
. Shareholder value added increased $249 million over the prior year as a
result of the increase in cash basis earnings, driven by higher net
interest income and fee revenue.
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 approximately 4,300 banking
centers, 13,000 ATMs, telephone and Internet channels on www.bankofamerica.com.
Banking Regions provides a wide array of products and services, including
deposit products such as checking, money market savings accounts, time deposits
and IRAs, 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 over two million small business
relationships across the franchise.
26
Banking Regions
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Net interest income $ 2,149 $ 2,140 $ 6,266 $ 6,297
Noninterest income 1,009 913 2,908 2,615
- -----------------------------------------------------------------------------------------------
Total revenue 3,158 3,053 9,174 8,912
Cash basis earnings 827 811 2,338 2,251
Shareholder value added 489 472 1,333 1,225
Cash basis efficiency ratio 56.9 % 56.3 % 58.0 % 58.3%
================================================================================================
. Total revenue for the nine months ended September 30, 2001 increased $262
million, or three percent, as a rise in noninterest income was partially
offset by a slight decrease in net interest income.
- Loan growth, primarily in residential mortgages and home equity
lending, and deposit growth had a positive effect on net interest
income but were offset by the impact of the money market deposit
pricing initiative.
- Noninterest income increased $293 million, or 11 percent, primarily
due to an increase in consumer service charges of $148 million, or
eight percent, (throughout all Banking Regions) and an $89 million, or
24 percent, increase in debit card income, driven by a higher number
of active debit cards and increases in transactions and purchase
volume.
. Cash basis earnings increased $87 million, or four percent, for the nine
months ended September 30, 2001, primarily attributable to the increase in
revenue discussed above offset by a slight increase in noninterest expense.
. Shareholder value added rose $108 million as a result of the increase in
cash basis earnings.
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.
Consumer Products
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Net interest income $ 560 $ 348 $ 1,512 $ 986
Noninterest income 758 773 2,311 2,092
- ----------------------------------------------------------------------------------------------
Total revenue 1,318 1,121 3,823 3,078
Cash basis earnings 344 328 1,036 780
Shareholder value added 234 222 712 457
Cash basis efficiency ratio 40.1 % 43.4 % 40.9 % 47.1 %
===============================================================================================
27
. Total revenue increased $745 million, or 24 percent, due to increases in
both net interest income and noninterest income.
- Net interest income increased $526 million, or 53 percent, due
primarily to an increase in bankcard receivables.
- Noninterest income increased $219 million, or 10 percent, primarily
due to improved mortgage banking results and increased credit card
income. Mortgage banking results have increased due to higher
origination activity and servicing levels, increased gains from higher
loan sales to the secondary market and the net mark-to-market
adjustments related to the mortgage banking assets and related hedging
instruments. These increases were partially offset by increased
paydowns as a result of the declining rate environment. Credit card
income grew $64 million, or five percent, due to new consumer card
account growth and an increase in purchase volume.
. The $256 million, or 33 percent, increase in cash basis earnings for the
nine months ended September 30, 2001 was due to the increases in net
interest income and noninterest income discussed above. These increases
were partially offset by a rise in the provision for credit losses and
higher expenses, primarily driven by higher card marketing.
- The provision for credit losses increased 47 percent to $633 million
primarily due to higher net charge-offs in the bankcard loan
portfolio. The increase in bankcard charge-offs was driven by
portfolio growth and an increase in personal bankruptcy filings.
. Shareholder value added increased $255 million due to the increase in cash
basis earnings.
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.
Commercial Banking
--------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------
Net interest income $ 638 $ 636 $ 1,924 $ 1,981
Noninterest income 255 268 754 745
- -------------------------------------------------------------------------------------------------
Total revenue 893 904 2,678 2,726
Cash basis earnings 243 283 710 851
Shareholder value added 105 137 303 417
Cash basis efficiency ratio 44.9 % 47.0 % 43.7 % 44.4 %
=================================================================================================
. Noninterest income increased one percent and was offset by a three percent
decrease in net interest income. Total revenue for the nine months ended
September 30, 2001 decreased two percent.
- The $9 million 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, offset by the liquidation of certain
commercial finance businesses.
28
- Net interest income decreased $57 million, primarily due to a
reduction in commercial loans and the liquidation of certain
commercial finance businesses.
. Lower noninterest expense was more than offset by lower revenue and an
increase in the provision for credit losses resulting in a $141 million, or
17 percent, decline in cash basis earnings for the nine months ended
September 30, 2001.
- Noninterest expense decreased $41 million, or three percent, to $1.2
billion, primarily due to lower personnel expense and the liquidation
of certain commercial finance businesses.
- The provision for credit losses increased $226 million to $392 million
as a result of credit deterioration in the commercial loan portfolio.
. Shareholder value added decreased $114 million as the decline in cash basis
earnings was partially offset by a lower charge for the use of capital.
Asset Management
Asset Management includes the Private Bank, Banc of America Capital
Management and Banc of America Investment Services, Inc. The Private Bank offers
financial solutions to high-net-worth clients and foundations in the U.S. and
internationally by providing customized asset management and credit, financial
advisory, fiduciary, trust and banking services. Banc of America Capital
Management offers management of equity, fixed income, cash, and alternative
investments; manages the assets of individuals, corporations, municipalities,
foundations and universities, and public and private institutions; and provides
advisory services to the Corporation's affiliated family of mutual funds. Banc
of America Investment Services, Inc. provides both full-service and discount
brokerage services through investment professionals located throughout the
franchise and a brokerage web site that provides customers a wide array of
market analyses, investment research and self-help tools, account information
and transaction capabilities.
The Corporation's strategy is to focus on and grow the asset management
business. Recent initiatives include the addition of two new investment
platforms which 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. Assets under
management rose $5 billion to $280 billion at September 30, 2001 compared to
September 30, 2000. Assets of the Nations Funds family of mutual funds reached
$125 billion at September 30, 2001 compared to $98 billion one year ago.
Effective January 2, 2001, the Corporation acquired the remaining 50
percent of Marsico for a total investment of $1.1 billion. The Corporation
acquired the first 50 percent in 1999. Marsico is a Denver-based investment
management firm specializing in large capitalization growth stocks.
Asset Management
--------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------
Net interest income $ 185 $ 158 $ 525 $ 477
Noninterest income 424 445 1,317 1,355
- -------------------------------------------------------------------------------------------------
Total revenue 609 603 1,842 1,832
Cash basis earnings 163 163 432 490
Shareholder value added 96 113 234 341
Cash basis efficiency ratio 57.2 % 57.0 % 59.8 % 57.0 %
=================================================================================================
29
. Total revenue increased $10 million, or one percent, for the nine months
ended September 30, 2001, due largely to an increase in net interest
income, partially offset by a decline in noninterest income.
- Net interest income increased $48 million, or 10 percent, due to
growth in the commercial and residential mortgage loan portfolios.
- Noninterest income decreased $38 million, or three percent, as an
increase in investment and brokerage services income was offset by a
decline in trading account profits. The increase in investment and
brokerage services income was due to new asset management business and
the completed acquisition of Marsico, partially offset by lower broker
activity due to decreased trade volume as the result of significant
market decline.
. Cash basis earnings decreased $58 million, or 12 percent, for the nine
months ended September 30, 2001, as modest revenue growth was offset by a
$78 million increase in provision expense largely related to one loan that
was charged off in the second quarter of 2001 and increased noninterest
expense.
- Noninterest expense increased $78 million, or seven percent,
reflecting investments in new private banking offices, the acquisition
of Marsico, and in personnel supporting the revenue growth
initiatives, partially offset by one-time business divestiture
expenditures in 2000.
. Shareholder value added declined $107 million due to the decline in cash
basis earnings and the increased capital associated with building the
business.
Global Corporate and Investment Banking
Global Corporate and Investment Banking provides a broad array of financial
services such as investment banking, trade finance, treasury management,
lending, capital markets, leasing and financial advisory services to domestic
and international corporations, financial institutions and government entities.
Clients are supported through offices in 38 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, senior bank debt, structured finance and trade services.
Global Corporate and
Investment Banking
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Net interest income $ 1,140 $ 900 $ 3,257 $ 2,694
Noninterest income 1,068 1,075 3,659 3,593
- -----------------------------------------------------------------------------------------------
Total revenue 2,208 1,975 6,916 6,287
Cash basis earnings 512 550 1,576 1,774
Shareholder value added 169 151 521 595
Cash basis efficiency ratio 52.0 % 53.7 % 53.9 % 53.9 %
===============================================================================================
. For the nine months ended September 30, 2001, total revenue increased $629
million, or 10 percent, primarily due to 21 percent, or $469 million,
growth in trading-related revenue.
- Net interest income increased $563 million, or 21 percent, as a result
of higher trading-related activities and lower funding costs,
partially offset by lower commercial loan levels.
30
- Noninterest income increased $66 million, or two percent, as increases
in investment and brokerage services, corporate service charges and
trading account profits were partially offset by declines in other
income, equity investment gains and investment banking income.
. Cash basis earnings decreased $198 million, or 11 percent, for the nine
months ended September 30, 2001 as revenue growth was more than offset by
higher credit-related costs and noninterest expense.
- The provision for credit losses increased $510 million to $780 million
due to credit quality deterioration in the commercial - domestic loan
portfolio of Global Credit Products.
- A $348 million, or 10 percent, increase in noninterest expense was
primarily due to higher personnel expense, costs associated with
various international activities and the build-out of the investment
banking platform.
. Shareholder value added declined $74 million as a result of higher credit
costs, 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 services for other
securities broker/dealers, traditional brokerage services to high-net-worth
individuals and prime- brokerage services. Debt and equity securities research,
loan syndications, mergers and acquisitions advisory services, private
placements and equity derivatives are also provided through Banc of America
Securities LLC.
In addition, Global Investment Banking provides risk management solutions
for our global customer base using interest rate, 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 Nine Months Ended
September 30 September 30
------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------
Net interest income $ 420 $ 261 $ 1,177 $ 758
Noninterest income 642 714 2,533 2,501
- -----------------------------------------------------------------------------------------------------
Total revenue 1,062 975 3,710 3,259
Cash basis earnings 209 215 766 731
Shareholder value added 98 110 450 424
Cash basis efficiency ratio 69.7 % 67.8 % 67.8 % 66.7 %
=====================================================================================================
. Total revenue grew $451 million, or 14 percent, for the nine months ended
September 30, 2001 primarily due to higher trading-related revenue.
- Net interest income grew $419 million, or 55 percent, as a result of
higher trading-related activities.
31
- Higher investment and brokerage services income, trading account
profits and service charges offset declines in equity investment gains
and investment banking income, resulting in noninterest income growth
of one percent. Three percent, or $52 million, growth in trading
account profits was driven by increases in commodities and other
contracts, foreign exchange, fixed income and interest rate contract
categories, offset by a decline in equities and equity derivatives
contracts. Investment banking income decreased $40 million as strong
fixed income originations were offset by weaker demand in
syndications, equity underwriting and advisory services.
. Cash basis earnings increased $35 million, or five percent, for the nine
months ended September 30, 2001, as revenue growth was partially offset by
an increase in noninterest expense.
- The $346 million, or 16 percent, increase in noninterest expense was
primarily due to higher personnel expense, costs associated with
international activities and the build-out of the investment banking
platform.
. Shareholder value added increased six percent, or $26 million, due to
higher cash basis earnings.
Global Credit Products
Global Credit Products provides credit and lending services and includes
the corporate industry-focused portfolio, leasing and project finance.
Global Credit Products
------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------
Net interest income $ 537 $ 485 $ 1,576 $ 1,495
Noninterest income 209 172 509 519
- -----------------------------------------------------------------------------------------------
Total revenue 746 657 2,085 2,014
Cash basis earnings 208 268 580 855
Shareholder value added (8) (11) (109) 29
Cash basis efficiency ratio 20.6 % 21.2 % 21.5 % 22.1 %
===============================================================================================
. Total revenue increased three percent for the nine months ended September
30, 2001.
- Net interest income increased $81 million, or five percent, compared
to the prior year as lower funding costs offset the impact of lower
commercial loan levels.
- Noninterest income declined $10 million, or two percent, primarily due
to lower gains in the leasing portfolio.
. Cash basis earnings declined $275 million, or 32 percent, primarily due to
a $497 million increase in the provision for credit losses driven by credit
quality deterioration in the commercial - domestic loan portfolio.
. Shareholder value added decreased $138 million as a result of the increase
in the provision for credit losses which was partially offset by lower
capital, reflecting the continued efforts to reduce corporate loan levels
and exit less profitable relationships.
32
Global Treasury Services
Global Treasury Services provides the technology, strategies and integrated
solutions to help financial institutions, government agencies and public and
private companies of all sizes manage their operations and cash flows on a
local, regional, national and global level.
Global Treasury Services
------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------
Net interest income $ 183 $ 154 $ 504 $ 441
Noninterest income 217 189 617 573
- -----------------------------------------------------------------------------------------
Total revenue 400 343 1,121 1,014
Cash basis earnings 95 67 230 188
Shareholder value added 79 52 180 142
Cash basis efficiency ratio 63.8 % 75.8 % 68.2 % 76.0 %
=========================================================================================
. Revenue increased $107 million, or 11 percent, with increases in both net
interest income and noninterest income for the nine months ended September
30, 2001.
- Net interest income increased $63 million, or 14 percent, primarily
due to lower funding costs.
- Noninterest income increased $44 million, or eight percent, due to an
increase in corporate service charges as customers chose to pay
service charges rather than maintain excess deposit balances in the
lower rate environment.
. Cash basis earnings increased $42 million, or 22 percent, for the nine
months ended September 30, 2001, driven primarily by the growth in revenue.
. Shareholder value added increased $38 million due to the increase in cash
basis earnings.
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.
33
Equity Investments
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------
Net interest income $ (36) $ (37) $ (112) $ (98)
Noninterest income (18) 383 239 1,053
- ---------------------------------------------------------------------------------------
Total revenue (54) 346 127 955
Cash basis earnings (56) 200 6 542
Shareholder value added (128) 141 (206) 377
Cash basis efficiency ratio n/m % 6.3 % 100.5 % 7.7 %
=======================================================================================
. For the nine months ended September 30, 2001, both revenue and cash basis
earnings decreased substantially primarily due to lower equity investment
gains.
- Equity investment gains decreased $756 million to $283 million, with
$108 million in Principal Investing and $175 million in the strategic
investments portfolio. Equity investment gains in the strategic
investments portfolio included $140 million in the first quarter of
2001 related to the sale of an interest in the Star Systems ATM
network.
- Net interest income consists primarily of the funding cost associated
with the carrying value of investments.
. Shareholder value added declined $583 million reflecting the decline in
cash basis earnings.
Corporate Other
Corporate Other consists primarily of the functions associated with
managing the interest rate risk of the Corporation and Consumer Special Assets,
which includes certain consumer finance businesses being liquidated and certain
residential mortgages originated by the mortgage group (not from retail branch
originations). Corporate Other also includes the earnings associated with
unassigned capital, certain expenses that have not been allocated to any
particular business segment and other corporate transactions.
Corporate Other results for the nine months ended September 30, 2001
included charges of $1.7 billion ($1.3 billion after-tax) related to the exit of
the auto leasing and subprime real estate lending businesses in the third
quarter of 2001 and a pre-tax $106 million transition adjustment loss related to
the implementation of SFAS 133 in the first quarter of 2001. Corporate Other
results for the nine months ended September 30, 2000 included restructuring
charges of $550 million ($346 million after-tax) resulting from the
Corporation's productivity and investment initiatives. See Note Two of the
consolidated financial statements for additional information on exit and
restructuring charges. See Note Nine of the consolidated financial statements
for additional information on Corporate Other.
Results of Operations
Net Interest Income
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheet for the most recent five
quarters and for the nine months ended September 30, 2001 and 2000 are presented
in Tables Four and Five, respectively.
As reported, net interest income on a taxable-equivalent basis increased
$648 million to $5.3 billion for the three months ended September 30, 2001
compared to the same period in 2000. Net interest income on a taxable-
34
equivalent basis increased $1.2 billion to $15.1 billion for the nine months
ended September 30, 2001, compared to the same period in 2000. Management also
reviews "core net interest income," which adjusts reported net interest income
for the impact of trading-related activities, securitizations, asset sales and
divestitures, excluding balance sheet portfolios used to manage interest rate
risk. For purposes of internal analysis, management combines trading- related
net interest income with trading account profits, as discussed in the
"Noninterest Income" section on page 40, as trading strategies are typically
evaluated based on total revenue. The determination of core net interest income
also requires adjustment for the impact of securitizations (primarily home
equity and credit card), asset sales (primarily commercial loans) and
divestitures. 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 on securitizations, where
appropriate.
Table Three below provides a reconciliation of net interest income on a
taxable-equivalent basis presented in Tables Four and Five to core net interest
income for the three months and nine months ended September 30, 2001 and 2000,
respectively:
Table Three
Net Interest Income
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- Increase/ ----------------------- Increase/
(Dollars in millions) 2001 2000 (Decrease) 2001 2000 (Decrease)
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income
As reported/(1)/ $ 5,290 $ 4,642 14.0 % $ 15,128 $ 13,913 8.7 %
Less: Trading-related net interest income (397) (244) (1,136) (719)
Add: Impact of securitizations, asset sales
and divestitures 17 11 60 12
- --------------------------------------------------------------------------------------------------------------------------------
Core net interest income $ 4,910 $ 4,409 11.4 % $ 14,052 $ 13,206 6.4 %
- --------------------------------------------------------------------------------------------------------------------------------
Average earning assets
As reported $ 557,108 $597,248 (6.7)% $ 562,038 $581,029 (3.3)%
Less: Trading-related earning assets (128,672) (119,770) (123,455) (113,447)
Add: Earning assets securitized, sold
and divested 4,009 659 3,169 427
- --------------------------------------------------------------------------------------------------------------------------------
Core average earning assets $ 432,445 $478,137 (9.6)% $ 441,752 $468,009 (5.6)%
- --------------------------------------------------------------------------------------------------------------------------------
Net interest yield on earning assets/(1,2)/
As reported 3.78 % 3.10 % 68 bp 3.59 % 3.20 % 39 bp
Add: Impact of trading-related activities 0.75 0.58 17 0.66 0.57 9
Impact of securitizations, asset sales
and divestitures (0.01) - (1) (0.01) - (1)
- --------------------------------------------------------------------------------------------------------------------------------
Core net interest yield on earning assets 4.52 % 3.68 % 84 bp 4.24 % 3.77 % 47 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 was $4.9 billion and
$14.1 billion for the three months and nine months ended September 30, 2001,
respectively, an increase of $501 million and $846 million over the
corresponding periods in 2000. The increase in core net interest income for the
nine months ended September 30, 2001, was driven by changes in interest rates
and the effect of portfolio repositioning, higher levels of core funding and a
favorable change in loan mix, partially offset by the impact of money market
deposit pricing initiative and the deterioration in auto lease residual values.
The higher levels of core funding reflected a $12.0 billion increase in average
customer-based deposits and a $1.6 billion increase in average shareholders'
equity.
Core average earning assets were $432.4 billion and $441.8 billion for the
three months and nine months ended September 30, 2001, respectively, a decrease
of $45.7 billion and $26.3 billion over the same periods in 2000, primarily
reflecting reduced securities levels and managed commercial loan balances
partially offset by growth in managed consumer loan levels. Falling interest
rates in 2001 allowed the Corporation to shed lower yielding assets and
reposition its balance sheet to take advantage of a steepened yield curve.
Managed consumer loans increased seven percent for the three months and nine
months ended September 30, 2001, led by growth in bankcard receivables,
residential mortgages and home equity lines. Managed commercial loans decreased
12 percent and five percent for the three months and nine months ended September
30, 2001, reflecting continuing efforts to reduce corporate loan levels and exit
less profitable relationships. Loan growth is dependent on economic conditions,
as
35
well as various discretionary factors, and the management of borrower, industry,
product and geographic concentrations.
The core net interest yield increased 84 basis points to 4.52 percent and
47 basis points to 4.24 percent for the three months and nine months ended
September 30, 2001, respectively, mainly due to the effects of changes in
interest rates and portfolio repositioning.
36
Table Four
Quarterly Average Balances and Interest Rates - Taxable-Equivalent Basis
- --------------------------------------------------------------------------------------------------------------
Third Quarter 2001
----------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $5,881 $ 71 4.84 %
Federal funds sold and securities purchased under
agreements to resell 36,133 321 3.54
Trading account assets 68,258 937 5.46
Securities/(1)/ 58,930 902 6.12
Loans and leases/(2)/:
Commercial - domestic 129,673 2,343 7.17
Commercial - foreign 25,267 353 5.54
Commercial real estate - domestic 24,132 395 6.50
Commercial real estate - foreign 366 5 5.78
- --------------------------------------------------------------------------------------------------------------
Total commercial 179,438 3,096 6.85
- --------------------------------------------------------------------------------------------------------------
Residential mortgage 80,526 1,457 7.22
Home equity lines 22,115 394 7.06
Direct/Indirect consumer 39,481 753 7.56
Consumer finance 16,358 359 8.77
Bankcard 17,632 493 11.11
Foreign consumer 2,176 28 5.28
- --------------------------------------------------------------------------------------------------------------
Total consumer 178,288 3,484 7.78
- --------------------------------------------------------------------------------------------------------------
Total loans and leases 357,726 6,580 7.31
- --------------------------------------------------------------------------------------------------------------
Other earning assets 30,180 597 7.89
- --------------------------------------------------------------------------------------------------------------
Total earning assets/(3)/ 557,108 9,408 6.72
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 20,753
Other assets, less allowance for credit losses 64,323
- --------------------------------------------------------------------------------------------------------------
Total assets $642,184
==============================================================================================================
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $20,076 53 1.04
NOW and money market deposit accounts 116,638 588 2.00
Consumer CDs and IRAs 73,465 918 4.95
Negotiable CDs, public funds and other time deposits 5,085 57 4.44
- --------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 215,264 1,616 2.98
- --------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits/(4)/:
Banks located in foreign countries 24,097 257 4.22
Governments and official institutions 3,533 35 3.90
Time, savings and other 23,847 189 3.16
- --------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 51,477 481 3.71
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 266,741 2,097 3.12
- --------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 89,042 869 3.87
Trading account liabilities 30,913 285 3.66
Long-term debt/(5)/ 67,267 867 5.15
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/(6)/ 453,963 4,118 3.61
- --------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 96,587
Other liabilities 42,432
Shareholders' equity 49,202
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $642,184
==============================================================================================================
Net interest spread 3.11
Impact of noninterest-bearing sources .67
- --------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $5,290 3.78 %
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
Second Quarter 2001
-------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
- --------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $7,085 $ 81 4.58 %
Federal funds sold and securities purchased under
agreements to resell 33,859 405 4.79
Trading account assets 67,311 944 5.62
Securities/(1)/ 55,719 909 6.53
Loans and leases/(2)/:
Commercial - domestic 139,096 2,585 7.45
Commercial - foreign 27,449 421 6.14
Commercial real estate - domestic 25,293 459 7.28
Commercial real estate - foreign 352 5 6.64
- --------------------------------------------------------------------------------------------------------------
Total commercial 192,190 3,470 7.24
- --------------------------------------------------------------------------------------------------------------
Residential mortgage 84,346 1,546 7.34
Home equity lines 21,958 424 7.75
Direct/Indirect consumer 40,117 736 7.35
Consumer finance 26,843 608 9.06
Bankcard 15,755 445 11.32
Foreign consumer 2,291 35 6.20
- --------------------------------------------------------------------------------------------------------------
Total consumer 191,310 3,794 7.94
- --------------------------------------------------------------------------------------------------------------
Total loans and leases 383,500 7,264 7.59
- --------------------------------------------------------------------------------------------------------------
Other earning assets 20,154 409 8.11
- --------------------------------------------------------------------------------------------------------------
Total earning assets/(3)/ 567,628 10,012 7.07
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 23,232
Other assets, less allowance for credit losses 64,697
- --------------------------------------------------------------------------------------------------------------
Total assets $655,557
==============================================================================================================
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $20,222 57 1.14
NOW and money market deposit accounts 113,031 676 2.40
Consumer CDs and IRAs 74,777 969 5.20
Negotiable CDs, public funds and other time deposits 6,005 81 5.37
- --------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 214,035 1,783 3.34
- --------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits/(4)/:
Banks located in foreign countries 24,395 294 4.82
Governments and official institutions 3,983 45 4.53
Time, savings and other 23,545 241 4.13
- --------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 51,923 580 4.49
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 265,958 2,363 3.57
- --------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 98,898 1,221 4.95
Trading account liabilities 30,710 312 4.07
Long-term debt/(5)/ 69,416 999 5.76
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities/(6)/ 464,982 4,895 4.22
- --------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 97,390
Other liabilities 44,476
Shareholders' equity 48,709
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $655,557
==============================================================================================================
Net interest spread 2.85
Impact of noninterest-bearing sources .76
- --------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $5,117 3.61 %
==============================================================================================================
(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 includes taxable-equivalent basis adjustments of $86, $87
and $82 in the third, second and first quarters of 2001 and $94 and $79 in
the fourth and third quarters of 2000, respectively. Interest income also
includes the impact of risk management interest rate contracts, which
increased (decreased) interest income on the underlying assets $284, $194
and $27 in the third, second and first quarters of 2001 and $(31) and $(13)
in the fourth and third quarters of 2000, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (increased ) decreased interest expense on the underlying
liabilities $31, $49 and $23 in the third, second and first quarters of
2001 and $(7) and $(16) in the fourth and third quarters of 2000,
respectively.
37
- -----------------------------------------------------------------------------------------------------------------------------
First Quarter 2001 Fourth Quarter 2000 Third Quarter 2000
- -----------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------
$6,675 $ 102 6.17 % $ 5,663 $ 99 6.96 % $ 4,700 $ 83 6.97 %
31,903 435 5.48 37,936 551 5.79 40,763 633 6.20
62,491 852 5.49 53,251 758 5.68 53,793 749 5.55
55,221 860 6.26 79,501 1,205 6.05 83,728 1,276 6.08
144,404 2,813 7.90 147,336 3,034 8.19 151,903 3,151 8.26
29,540 515 7.06 30,408 560 7.32 29,845 555 7.39
25,989 530 8.27 27,220 622 9.09 26,113 597 9.09
300 6 7.82 264 6 8.44 235 5 8.30
- -----------------------------------------------------------------------------------------------------------------------------
200,233 3,864 7.82 205,228 4,222 8.18 208,096 4,308 8.24
- -----------------------------------------------------------------------------------------------------------------------------
82,710 1,532 7.43 92,679 1,733 7.47 94,380 1,759 7.45
21,744 467 8.71 21,117 483 9.11 20,185 466 9.18
40,461 784 7.86 40,390 843 8.30 41,905 848 8.06
25,947 589 9.08 25,592 570 8.91 25,049 559 8.93
14,464 443 12.41 12,295 384 12.43 10,958 344 12.49
2,330 43 7.54 2,248 48 8.49 2,190 48 8.79
- -----------------------------------------------------------------------------------------------------------------------------
187,656 3,858 8.29 194,321 4,061 8.34 194,667 4,024 8.25
- -----------------------------------------------------------------------------------------------------------------------------
387,889 7,722 8.05 399,549 8,283 8.26 402,763 8,332 8.24
- -----------------------------------------------------------------------------------------------------------------------------
17,248 352 8.28 14,828 335 9.00 11,501 241 8.39
- -----------------------------------------------------------------------------------------------------------------------------
561,427 10,323 7.42 590,728 11,231 7.58 597,248 11,314 7.55
- -----------------------------------------------------------------------------------------------------------------------------
23,020 23,458 24,191
64,251 63,272 63,578
- -----------------------------------------------------------------------------------------------------------------------------
$648,698 $677,458 $685,017
- -----------------------------------------------------------------------------------------------------------------------------
$20,406 61 1.21 $ 22,454 80 1.42 $ 23,195 78 1.33
107,015 808 3.06 101,376 788 3.09 99,710 740 2.96
77,772 1,068 5.57 78,298 1,105 5.62 77,864 1,083 5.53
7,137 108 6.16 7,570 127 6.68 8,598 140 6.46
- -----------------------------------------------------------------------------------------------------------------------------
212,330 2,045 3.91 209,698 2,100 3.98 209,367 2,041 3.88
- -----------------------------------------------------------------------------------------------------------------------------
24,358 332 5.53 26,223 424 6.43 18,845 286 6.03
3,993 52 5.27 5,884 61 4.14 11,182 177 6.30
22,506 284 5.11 24,064 339 5.62 25,972 364 5.58
- -----------------------------------------------------------------------------------------------------------------------------
50,857 668 5.32 56,171 824 5.84 55,999 827 5.87
- -----------------------------------------------------------------------------------------------------------------------------
263,187 2,713 4.18 265,869 2,924 4.38 265,366 2,868 4.30
- -----------------------------------------------------------------------------------------------------------------------------
94,792 1,377 5.89 122,680 1,942 6.30 136,007 2,223 6.51
28,407 290 4.14 27,548 285 4.13 24,233 237 3.88
73,752 1,222 6.63 73,041 1,322 7.24 74,022 1,344 7.26
- -----------------------------------------------------------------------------------------------------------------------------
460,138 5,602 4.92 489,138 6,473 5.27 499,628 6,672 5.32
- -----------------------------------------------------------------------------------------------------------------------------
92,431 91,685 91,368
48,263 48,996 46,286
47,866 47,639 47,735
- -----------------------------------------------------------------------------------------------------------------------------
$648,698 $677,458 $685,017
- -----------------------------------------------------------------------------------------------------------------------------
2.50 2.31 2.23
.89 .90 .87
- -----------------------------------------------------------------------------------------------------------------------------
$4,721 3.39 % $4,758 3.21 % $4,642 3.10 %
- -----------------------------------------------------------------------------------------------------------------------------
38
Table Five
Average Balances and Interest Rates - Taxable-Equivalent Basis
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
- ----------------------------------------------------------------------------------------------------------------
2001
- ----------------------------------------------------------------------------------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------
Earning assets
- ----------------------------------------------------------------------------------------------------------------
Time deposits placed and other short-term investments $ 6,544 $254 5.20 %
- ----------------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 33,980 1,161 4.56
Trading account assets 66,041 2,733 5.52
Securities/(1)/ 56,637 2,671 6.29
Loans and leases /(2)/:
Commercial - domestic 137,670 7,741 7.52
Commercial - foreign 27,403 1,287 6.28
Commercial real estate - domestic 25,131 1,384 7.36
Commercial real estate - foreign 339 17 6.67
- ----------------------------------------------------------------------------------------------------------------
Total commercial 190,543 10,429 7.32
- ----------------------------------------------------------------------------------------------------------------
Residential mortgage 82,519 4,535 7.33
Home equity lines 21,940 1,285 7.83
Direct/Indirect consumer 40,017 2,272 7.59
Consumer finance 23,014 1,556 9.01
Bankcard 15,962 1,381 11.57
Foreign consumer 2,266 108 6.36
- ----------------------------------------------------------------------------------------------------------------
Total consumer 185,718 11,137 8.01
- ----------------------------------------------------------------------------------------------------------------
Total loans and leases 376,261 21,566 7.66
- ----------------------------------------------------------------------------------------------------------------
Other earning assets 22,575 1,358 8.04
- ----------------------------------------------------------------------------------------------------------------
Total earning assets /(3)/ 562,038 29,743 7.07
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 22,327
- ----------------------------------------------------------------------------------------------------------------
Other assets, less allowance for credit losses 64,424
- ----------------------------------------------------------------------------------------------------------------
Total assets $648,789
- ----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $20,233 171 1.13
NOW and money market deposit accounts 112,263 2,072 2.47
Consumer CDs and IRAs 75,322 2,955 5.24
Negotiated CDs, public funds and other time deposits 6,068 246 5.42
- ----------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 213,886 5,444 3.40
- ----------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits /(4)/:
- ----------------------------------------------------------------------------------------------------------------
Banks located in foreign countries 24,283 882 4.86
Governments and official institutions 3,835 132 4.59
- ----------------------------------------------------------------------------------------------------------------
Time, savings and other 23,304 715 4.11
- ----------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 51,422 1,729 4.50
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 265,308 7,173 3.61
- ----------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 94,223 3,467 4.92
Trading account liabilities 30,019 887 3.95
Long-term debt /(5)/ 70,121 3,088 5.87
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities /(6)/ 459,671 14,615 4.25
- ----------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 95,485
Other liabilities 45,036
Shareholders' equity 48,597
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $648,789
- ----------------------------------------------------------------------------------------------------------------
Net interest spread 2.82
Impact of noninterest-bearing sources .77
- ----------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $15,128 3.59 %
- ----------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
- ---------------------------------------------------------------------------------------------------------
2000
- ---------------------------------------------------------------------------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
- --------------------------------------------------------------------------------------------------------
Earning assets
- --------------------------------------------------------------------------------------------------------
Time deposits placed and other short-term investments $ 4,594 $237 6.88 %
- --------------------------------------------------------------------------------------------------------
Federal funds sold and securities purchased
under agreements to resell 43,392 1,803 5.54
Trading account assets 47,490 1,993 5.60
Securities/(1)/ 85,792 3,906 6.07
Loans and leases /(2)/:
Commercial - domestic 148,446 8,991 8.09
Commercial - foreign 28,950 1,556 7.17
Commercial real estate - domestic 25,427 1,677 8.81
Commercial real estate - foreign 318 21 8.99
- --------------------------------------------------------------------------------------------------------
Total commercial 203,141 12,245 8.05
- --------------------------------------------------------------------------------------------------------
Residential mortgage 90,558 5,021 7.40
Home equity lines 18,946 1,265 8.92
Direct/Indirect consumer 41,840 2,602 8.31
Consumer finance 23,994 1,590 8.84
Bankcard 9,602 857 11.92
Foreign consumer 2,215 146 8.86
- --------------------------------------------------------------------------------------------------------
Total consumer 187,155 11,481 8.19
- --------------------------------------------------------------------------------------------------------
Total loans and leases 390,296 23,726 8.12
- --------------------------------------------------------------------------------------------------------
Other earning assets 9,465 591 8.34
- --------------------------------------------------------------------------------------------------------
Total earning assets /(3)/ 581,029 32,256 7.41
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents 25,205
- --------------------------------------------------------------------------------------------------------
Other assets, less allowance for credit losses 63,364
- --------------------------------------------------------------------------------------------------------
Total assets $669,598
- --------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $23,787 234 1.31
NOW and money market deposit accounts 99,442 2,153 2.89
Consumer CDs and IRAs 77,110 3,100 5.37
Negotiated CDs, public funds and other time deposits 7,645 354 6.18
- --------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 207,984 5,841 3.75
- --------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits /(4)/:
- --------------------------------------------------------------------------------------------------------
Banks located in foreign countries 16,292 706 5.79
Governments and official institutions 9,942 452 6.07
- --------------------------------------------------------------------------------------------------------
Time, savings and other 26,681 1,084 5.42
- --------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 52,915 2,242 5.66
- --------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 260,899 8,083 4.14
- --------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 134,451 6,015 5.98
Trading account liabilities 22,599 607 3.59
Long-term debt /(5)/ 69,370 3,638 6.99
- --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities /(6)/ 487,319 18,343 5.03
- --------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 90,964
Other liabilities 44,353
Shareholders' equity 46,962
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $669,598
- --------------------------------------------------------------------------------------------------------
Net interest spread 2.38
Impact of noninterest-bearing sources .82
- --------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $13,913 3.20 %
- --------------------------------------------------------------------------------------------------------
(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 includes taxable-equivalent basis adjustments of $255 and
$228 for the nine months ended September 30, 2001 and 2000, respectively.
Interest income also includes the impact of risk management interest rate
contracts, which increased (decreased) interest income on the underlying
assets $505 and $(17) for the nine months ended September 30, 2001 and
2000, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (increased) decreased interest expense on the underlying
liabilities $103 and $(29) in the nine months ended September 30, 2001 and
2000, respectively.
39
Noninterest Income
As presented in Table Six, noninterest income decreased $246 million to
$3.4 billion and decreased $304 million to $11.0 billion for the three months
and nine months ended September 30, 2001, respectively, from the comparable 2000
periods. The decrease in noninterest income for the three months ended September
30, 2001 reflects the increases in service charges, investment and brokerage
services, other income, trading account profits and card income being offset by
a sharp decline in equity investment gains as well as declines in investment
banking income and mortgage banking income. The decrease in noninterest income
for the nine months ended September 30, 2001 reflects the increases in service
charges, card income, investment and brokerage services and mortgage banking
income being offset by a sharp decline in equity investment gains as well as
declines in trading account profits and investment banking income.
Table Six
Noninterest Income
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 Increase/(Decrease) September 30 Increase/(Decrease)
---------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 Amount Percent 2001 2000 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer service charges $ 712 $ 684 $ 28 4.1 % $ 2,120 $ 1,948 $ 172 8.8 %
Corporate service charges 528 474 54 11.4 1,538 1,413 125 8.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total service charges 1,240 1,158 82 7.2 3,658 3,361 297 8.8
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer investment and brokerage services 386 357 29 8.1 1,164 1,108 56 5.1
Corporate investment and brokerage services 142 114 28 24.6 415 340 75 22.1
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment and brokerage services 528 471 57 12.1 1,579 1,448 131 9.0
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage banking income 109 121 (12) (9.9) 426 366 60 16.4
Investment banking income 305 376 (71) (18.9) 1,106 1,146 (40) (3.5)
Equity investment gains 22 422 (400) (94.8) 340 1,119 (779) (69.6)
Card income 618 594 24 4.1 1,792 1,634 158 9.7
Trading account profits/(1)/ 433 402 31 7.7 1,508 1,630 (122) (7.5)
Other income 174 131 43 32.8 541 550 (9) (1.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $3,429 $3,675 $(246) (6.7)% $10,950 $11,254 $(304) (2.7)%
===================================================================================================================================
(1) Trading account profits for the nine months ended September 30, 2001
included the $83 million SFAS 133 transition adjustment net loss. 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.
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 $521
million to $6.0 billion for the nine months ended September 30, 2001 from
the comparable 2000 period, driven by higher service charges, strong card
income and improved mortgage banking results.
- Service charges include deposit account service charges, non-deposit
service charges and fees and bankers' acceptances and letters of
credit fees. Service charges increased $241 million to $2.8 billion
for the nine months ended September 30, 2001 due to an increase in
both consumer and corporate service charges. Consumer service charges
increased $168 million primarily due to higher business volumes.
Corporate service charges increased $73 million as corporate customers
chose to pay higher fees rather than maintain excess deposit balances
in the lower rate environment.
- Card income includes interchange income, credit and debit card fees
and merchant discount fees. Card income increased $158 million to $1.8
billion primarily due to new account growth in both credit and debit
card and increased purchase volume on existing accounts. Growth in
income for the core portfolio is being generated through traditional
marketing channels, expanding relationships with existing customers
and leveraging the franchise network. Card income includes activity
from the securitized portfolio of $139
40
million and $158 million for the nine months ended September 30, 2001
and 2000, respectively. This amount represents excess servicing income
which consists of revenues from the securitized credit card portfolio
offset by charge-offs and interest expense paid to the bondholders.
- Mortgage banking results improved for the nine months ended September
30, 2001, primarily reflecting higher origination activity and
servicing levels, increased gains from higher loan sales to the
secondary market and the net mark-to-market adjustments on mortgage
banking assets and the related instruments used to economically hedge
mortgage banking assets. These increases were partially offset by
increased paydowns as a result of the declining rate environment. The
mark-to-market adjustments are included in trading account profits.
The average managed portfolio of mortgage loans serviced increased
$11.0 billion to $337.5 billion for the nine months ended September
30, 2001 compared to the same period in 2000. Total production of
first mortgage loans originated through the Corporation increased
$18.5 billion to $59.0 billion for the nine months ended September 30,
2001, reflecting a significant increase in refinancings as a result of
declining interest rates. First mortgage loan origination volume was
composed of approximately $31.6 billion of retail loans and $27.4
billion of correspondent and wholesale loans for the nine months ended
September 30, 2001. Retail first mortgage origination volume increased
to 53 percent of total volume for the nine months ended September 30,
2001 from 40 percent in the comparable 2000 period. The Corporation
made a strategic decision to exit the correspondent loan origination
channel during the second quarter of 2001. The Corporation's decision
to exit the correspondent business is based upon its overall strategy
to focus on businesses with higher returns and potential to deepen and
expand customer relationships.
Asset Management
. Noninterest income for Asset Management decreased $38 million to $1.3
billion for the nine months ended September 30, 2001 compared to the same
period in 2000. The decrease was primarily attributable to increased income
from investment and brokerage services, offset by a decline in trading
account profits.
- Income from investment and brokerage services includes personal and
institutional asset management fees and consumer brokerage income.
Income from investment and brokerage services increased $25 million to
$1.2 billion for the nine months ended September 30, 2001 compared to
the same period in 2000. This increase was largely due to new asset
management business and the completed acquisition of Marsico being
offset by lower broker activity due to decreased trade volume as a
result of significant market decline. Assets under management were
$280 billion at September 30, 2001 compared to $275 billion one year
ago.
Global Corporate and Investment Banking
. Noninterest income for Global Corporate and Investment Banking increased
$66 million to $3.7 billion for the nine months ended September 30, 2001
compared to the same period in 2000. The increase was primarily due to
increases in investment and brokerage services, corporate service charges
and trading account profits, partially offset by declines in other income,
equity investment gains and investment banking income.
- 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. 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 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.
41
Trading-related revenue increased $469 million to $2.7 billion for the
nine months ended September 30, 2001, due to a $417 million increase
in the net interest margin and a $52 million increase in trading
account profits. Increases in the fixed income, interest rate,
commodities and other contracts, and foreign exchange contract
categories were partially offset by a decrease in equities and equity
derivatives contracts. Fixed income increased $249 million to $621
million primarily attributable to an increase in market liquidity and
widening credit spreads. Revenue from interest rate contracts
increased $143 million to $711 million as the Corporation adjusted for
the volatile rate environment in the third quarter of 2001.
Commodities and other contracts increased $118 million to $155
million, attributable to market volatility and increased customer
flow. Foreign exchange revenue increased $19 million to $419 million.
Income from equities and equity derivatives contracts decreased $60
million to $771 million, due to a slowdown in customer activity in the
market. Trading account profits for the nine months ended September
30, 2001 included a $19 million transition adjustment gain resulting
from the adoption of SFAS 133.
- --------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------
Trading account profits - as reported $398 $349 $1,541 $1,489
Net interest income 397 244 1,136 719
- -------------------------------------------------------------------------------------------
Total trading-related revenue $795 $593 $2,677 $2,208
- -------------------------------------------------------------------------------------------
Trading-related revenue by product
Foreign exchange contracts $138 $114 $419 $400
Interest rate contracts 212 87 711 568
Fixed income 206 120 621 372
Equities and equity derivatives 214 268 771 831
Commodities and other 25 4 155 37
- -------------------------------------------------------------------------------------------
Total trading-related revenue $795 $593 $2,677 $2,208
===========================================================================================
- Investment banking income decreased $40 million to $1.1 billion for
the nine months ended September 30, 2001. Increases in underwriting
and other investment banking income were offset by declines in loan
syndications and advisory fees. Securities underwriting fees increased
$76 million to $565 million from strong growth in high grade and high
yield origination which was offset by lower equity underwriting fees.
Syndication fees decreased $104 million to $280 million for the nine
months ended September 30, 2001 as a result of fewer deals in the
marketplace. A sluggish market for advisory services drove a decline
in fees of $55 million to $172 million for the nine months ended
September 30, 2001. Investment banking income by major activity
follows:
- --------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- --------------------------------------------------------------------
Investment banking income
Securities underwriting $158 $160 $565 $489
Syndications 83 130 280 384
Advisory services 40 69 172 227
Other 24 17 89 46
- --------------------------------------------------------------------
Total $305 $376 $1,106 $1,146
====================================================================
- Corporate service charges increased $53 million to $816 million for
the nine months ended September 30, 2001, primarily driven by
corporate customers opting to pay service charges rather than maintain
excess deposit balances in the lower rate environment.
42
Equity Investments
. Noninterest income for Equity Investments decreased $814 million to $239
million for the nine months ended September 30, 2001 compared to the same
period in 2000. This decrease was driven by a sharp decline in equity
investment gains driven by weaker equity markets.
- Equity investment gains decreased $756 million to $283 million, with
$108 million in Principal Investing and $175 million in the strategic
investments portfolio. Equity investment gains in the strategic
investments portfolio included a gain of $140 million in the first
quarter of 2001 related to the sale of an interest in the Star Systems
ATM network.
Provision for Credit Losses
Excluding the impact of charges related to the exit of the subprime real
estate lending business, the provision for credit losses totaled $856 million
and $2.5 billion for the three months and nine months ended September 30, 2001,
respectively, compared to $435 million and $1.3 billion for the same periods in
2000. The increase in the provision for credit losses from last year was
primarily due to an increase in net charge-offs. Additional provision expense
was also recorded in 2001 to increase the allowance for credit losses as a
result of deterioration in credit quality due to the current economic
environment. Total net charge-offs, excluding the impact of exit-related
charges, were $856 million and $2.4 billion for the three months and nine months
ended September 30, 2001, respectively, compared to $435 million and $1.3
billion for the same periods in 2000. This increase was due to higher
charge-offs in the commercial - domestic portfolio due to deterioration in
credit quality stemming from the weak economic environment. Bankcard charge-offs
also increased due to growth in the portfolio and an increase in personal
bankruptcy filings.
An exit-related provision for credit losses of $395 million, combined with
an existing allowance for credit losses of $240 million, was used to write down
the subprime real estate loan portfolio to estimated market value. This resulted
in charge-offs of $635 million in the consumer finance loan portfolio. Including
the exit impact, the provision for credit losses totaled $1.3 billion and $2.9
billion for the three months and nine months ended September 30, 2001,
respectively, and total net charge-offs were $1.5 billion and $3.1 billion for
the three months and nine months ended September 30, 2001, respectively.
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 47.
Noninterest Expense
As presented in Table Seven, the Corporation's noninterest expense
increased $951 million to $5.9 billion and increased $1.4 billion to $15.4
billion for the three months and nine months ended September 30, 2001,
respectively, compared to the same periods in 2000. These increases in
noninterest expense were driven by business exit costs, higher marketing costs
related to the Corporation's national brand-building campaign, increases in
professional fees, costs associated with various international activities and
investments in growth businesses such as e-commerce, Asset Management, card and
payment businesses and the investment banking platform.
43
Table Seven
Noninterest Expense
- -------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Increase/(Decrease) Ended September 30 Increase/(Decrease)
------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 Amount Percent 2001 2000 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
Personnel $2,304 $2,298 $ 6 .3 % $7,239 $7,143 $96 1.3 %
Occupancy 448 419 29 7.0 1,309 1,248 61 4.9
Equipment 273 285 (12) (4.0) 835 882 (47) (5.3)
Marketing 165 147 18 11.8 516 398 118 29.6
Professional fees 144 100 44 44.1 411 298 113 37.9
Amortization of intangibles 219 215 4 1.7 665 650 15 2.3
Data processing 175 167 8 4.8 552 495 57 11.5
Telecommunications 121 127 (6) (4.7) 368 391 (23) (5.9)
Other general operating 613 509 104 20.4 1,732 1,529 203 13.3
General administrative and other 144 143 1 .6 454 412 42 10.2
Business exit costs 1,305 - 1,305 n/m 1,305 - 1,305 n/m
Restructuring charges - 550 (550) n/m - 550 (550) n/m
- -------------------------------------------------------------------------------------------------------------------------
Total $5,911 $4,960 $951 19.2 % $15,386 $13,996 $1,390 9.9 %
=========================================================================================================================
. Personnel expense increased $96 million, or one percent, to $7.2 billion
for the nine months ended September 30, 2001, as an increase in
revenue-related incentive compensation as well as increased salaries
expense in Global Corporate and Investment Banking and Asset Management
were partially offset by a lower number of associates. At September 30,
2001, the Corporation had approximately 144,000 full-time equivalent
employees compared to approximately 146,000 at September 30, 2000.
. Marketing expense increased $118 million to $516 million for the nine
months ended September 30, 2001, due to the Corporation's national
brand-building campaign and higher card marketing in Consumer and
Commercial Banking.
. Professional fees increased $113 million to $411 million for the nine
months ended September 30, 2001, primarily reflecting higher consulting and
other professional fees due to an increase in initiatives related to the
Corporation's strategy to improve customer satisfaction.
. Data processing expense increased $57 million to $552 million for the nine
months ended September 30, 2001, primarily due to higher outsourced
processing expense as a result of the outsourcing of personnel services and
higher item processing and check clearing expenses.
. Other general operating expense increased $104 million to $613 million and
$203 million to $1.7 billion for the three months and nine months ended
September 30, 2001, respectively, reflecting higher employee placement
expenses, costs associated with various international activities,
foreclosed properties expense in Corporate Other and other miscellaneous
expenses throughout the Corporation.
. General administrative and other expense increased $42 million to $454
million for the nine months ended September 30, 2001, primarily due to
increased subscription services in Global Corporate and Investment Banking.
. 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 business exit costs in
the third quarter of 2001 of $1.3 billion in noninterest expense. Business
exit costs consisted of goodwill writeoffs 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.
. As part of its productivity and investment initiatives announced on July
28, 2000, the Corporation recorded a pre-tax charge of $550 million ($346
million after-tax) in the third quarter of 2000. Of the $550 million
restructuring charge, approximately $475 million was used to cover
severance and related costs and approximately $75 million was used for
other costs related to process change and channel consolidation. At
September 30, 2001, the reserve had been substantially utilized.
44
Income Taxes
The Corporation's income tax expense for the three months and nine months
ended September 30, 2001 was $727 million and $2.9 billion, respectively, for an
effective tax rate of 46.4 percent and 38.0 percent, respectively. Excluding
charges related to the exit of certain consumer finance businesses, the
effective tax rate for the three months and nine months ended September 30, 2001
was 36.0 percent and 35.9 percent, respectively. Income tax expense for the
three and nine months ended September 30, 2000 was $1.0 billion and $3.5
billion, respectively, for an effective tax rate of 35.9 percent and 36.4
percent, respectively. The increase in the effective tax rate for the three
months ended September 30, 2001 is due primarily to the portion of goodwill
write-offs included in business exit costs recorded during the third quarter of
2001 that is not deductible for federal or state income tax purposes.
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its balance
sheet that includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. The Corporation restructured its
balance sheet over the last year, reducing risk-weighted assets as declines in
categories with lower returns were offset by underlying core growth. The
discussion of average balances below compares the nine months ended September
30, 2001 to the same period in 2000. With the exception of average managed
loans, the average balances discussed below can be derived from Table Five.
Average loans and leases, the Corporation's primary use of funds, decreased
$14.0 billion to $376.3 billion for the nine months ended September 30, 2001.
Adjusting for securitizations, sales and divestitures, average managed loans and
leases increased $3.5 billion to $396.4 billion for the nine months ended
September 30, 2001. This increase was primarily due to growth in average managed
consumer loans, partially offset by a decline in average managed commercial
loans.
Average managed consumer loans increased seven percent in the nine months
ended September 30, 2001, reflecting increases in each of the consumer loan
portfolios. Average managed bankcard loans increased $4.4 billion to $24.2
billion due to an increase in new business volume and slower balance paydowns.
Average managed residential mortgages increased $4.0 billion to $85.2 billion
due to strong growth in branch-originated products. Average managed home equity
lines increased $3.0 billion to $21.9 billion, reflecting growth in all Banking
Regions due to the impact of new marketing programs implemented in mid 2000.
Average managed consumer finance loans increased $960 million to $29.5 billion,
and average managed direct/indirect consumer loans increased $760 million to
$40.6 billion.
Average managed commercial loans decreased $9.7 billion to $192.7 billion
for the nine months ended September 30, 2001. The commercial - domestic
portfolio decreased $8.6 billion to $139.9 billion, reflecting paydowns and
continuing efforts to reduce corporate loan levels and exit less profitable
relationships. The commercial - foreign portfolio declined $1.2 billion to $27.4
billion primarily due to paydowns on customer balances.
The average securities portfolio for the nine months ended September 30,
2001 decreased $29.2 billion to $56.6 billion. As a percentage of total uses of
funds, the average securities portfolio decreased by four percent to nine
percent for the nine months ended September 30, 2001. See the following
"Securities" section for additional information on the securities portfolio.
Average other assets and cash and cash equivalents remained relatively
stable as it decreased $1.8 billion to $86.8 billion for the nine months ended
September 30, 2001.
At September 30, 2001, cash and cash equivalents were $23.3 billion, a
decrease of $4.2 billion from December 31, 2000. During the nine months ended
September 30, 2001, net cash used in operating activities was $2.0 billion, net
cash provided by investing activities was $23.2 billion and net cash used in
financing activities was $25.4 billion. For further information on cash flows,
see the Consolidated Statement of Cash Flows of the consolidated financial
statements.
45
Average levels of customer-based deposits increased $12.0 billion to $303.3
billion for the nine months ended September 30, 2001, primarily due to increases
in consumer money market savings accounts. These increases are due to new
customer accounts as well as existing customers shifting from other deposit
sources, reflecting the success of the new deposit pricing strategy implemented
in 2000. As a percentage of total sources of funds, average levels of
customer-based deposits increased by three percent to 47 percent for the nine
months ended September 30, 2001.
Average levels of market-based funds decreased $35.9 billion for the nine
months ended September 30, 2001 to $181.7 billion, primarily driven by the
decline in securities sold under agreements to repurchase. In addition, average
levels of long-term debt increased $751 million to $70.1 billion for the nine
months ended September 30, 2001, mainly as a result of borrowings to fund
business development opportunities, build liquidity, repay maturing debt and
fund share repurchases.
In conjunction with its funding activities, the Corporation carefully
monitors its liquidity position - the ability to fulfill its cash requirements.
The Corporation assesses its liquidity requirements and modifies its assets and
liabilities accordingly. This process, coupled with the Corporation's ability to
raise capital and debt financing, is designed to cover the liquidity needs of
the Corporation. The Corporation also takes into consideration the ability of
its subsidiary banks to pay dividends to the Corporation. For additional
information on the dividend capabilities of subsidiary banks, see Note Fourteen
of the Corporation's 2000 Annual Report on Form 10-K. Management believes that
the Corporation's sources of liquidity are more than adequate to meet its cash
requirements.
Securities
The securities portfolio at September 30, 2001 consisted of
available-for-sale securities totaling $74.8 billion compared to $64.7 billion
at December 31, 2000. Held-to-maturity securities totaled $1.1 billion and $1.2
billion at September 30, 2001 and December 31, 2000, respectively. During 2001,
$9.2 billion of residential mortgage loans were securitized, of which $8.5
billion occurred in the third quarter of 2001. At September 30, 2001, $7.8
billion of these securitized loans remained in the available-for-sale securities
portfolio.
The valuation allowance for available-for-sale and marketable equity
securities is included in shareholders' equity. At September 30, 2001, the
valuation allowance consisted of unrealized gains of $469 million, net of
related income taxes of $240 million, primarily reflecting $876 million of
pre-tax net unrealized gains on available-for-sale securities and $167 million
pre-tax net unrealized losses on marketable equity securities. At December 31,
2000, the valuation allowance consisted of unrealized losses of $560 million,
net of related income taxes of $330 million, primarily reflecting $991 million
of pre-tax net unrealized losses on available-for-sale securities and $101
million of pre-tax net unrealized gains on marketable equity securities.
At September 30, 2001 and December 31, 2000, the market value of the
Corporation's held-to-maturity securities reflected pre-tax net unrealized
losses of $55 million and $54 million, respectively.
The estimated average duration of the available-for-sale securities
portfolio was 3.53 years at September 30, 2001 compared to 4.13 years at
December 31, 2000.
Gains on sales of securities were $97 million and $82 million for the three
months and nine months ended September 30, 2001, respectively, compared to gains
of $11 million and $23 million in the respective periods of 2000. The
Corporation realized these gains on sales of securities as a result of the
repositioning of its investment portfolio.
Capital Resources and Capital Management
Shareholders' equity at September 30, 2001 was $50.2 billion compared to
$47.6 billion at December 31, 2000, an increase of $2.6 billion. The increase
was primarily due to net earnings (net income less dividends) of $2.0 billion,
recognition of $1.0 billion of after-tax net unrealized gains on
available-for-sale and marketable equity securities, net gains on derivatives of
$1.5 billion, and $903 million in common stock issued under employee plans,
partially offset by the repurchase of approximately 54 million shares of common
stock for approximately $3.0 billion.
46
During 2000, the Corporation completed its 1999 stock repurchase plan, and
on July 26, 2000, the Corporation's Board of Directors (the Board) authorized a
new stock repurchase program of up to 100 million shares of the Corporation's
common stock at an aggregate cost of up to $7.5 billion. At September 30, 2001,
the remaining buyback authority for common stock under the 2000 program totaled
$3.8 billion, or 31 million shares. During the nine months ended September 30,
2001, the Corporation repurchased approximately 54 million shares of its common
stock in open market repurchases at an average per-share price of $56.06, which
reduced shareholders' equity by $3.0 billion and increased earnings per share by
approximately $0.03 for the nine months ended September 30, 2001. During the
nine months ended September 30, 2000, the Corporation repurchased approximately
50 million shares of its common stock in open market repurchases at an average
per-share price of $49.18, which reduced shareholders' equity by $2.4 billion.
Presented below are the regulatory risk-based capital ratios and capital
amounts for the Corporation and Bank of America, N.A. at September 30, 2001 and
December 31, 2000. The Corporation and Bank of America, N.A. were considered
"well-capitalized" at September 30, 2001:
- ---------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
------------------------------------------------------------
(Dollars in millions) Ratio Amount Ratio Amount
- ---------------------------------------------------------------------------------------------------
Tier 1 Capital
Bank of America Corporation 7.95 % $41,517 7.50 % $40,667
Bank of America, N.A. 8.39 40,589 7.72 39,178
Total Capital
Bank of America Corporation 12.12 63,311 11.04 59,826
Bank of America, N.A. 11.57 55,970 10.81 54,871
Leverage
Bank of America Corporation 6.59 41,517 6.12 40,667
Bank of America, N.A. 7.35 40,589 6.59 39,178
- ---------------------------------------------------------------------------------------------------
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 September 30, 2001, the Corporation had no subordinated
debt that qualified as Tier 3 Capital.
At September 30, 2001, 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.
On October 24, 2001, the Board approved a $0.04 per share, or seven
percent, increase in the quarterly common dividend. This increase brings the
common dividend to $0.60 per share for the fourth quarter of 2001 and $2.28 per
share for the year ended December 31, 2001.
Credit Risk Management and Credit Portfolio Review
The following section discusses credit risk in the loan portfolio. The
Corporation's primary credit exposure is focused in its loans and leases
portfolio, which totaled $339.0 billion and $392.2 billion at September 30, 2001
and December 31, 2000, respectively. Table Eight presents loans and leases,
nonperforming assets and net charge-offs by category. Additional information on
components of and changes in the Corporation's consumer and commercial
47
loan portfolios can be found in the average earning asset discussion within the
"Net Interest Income" section on page 34 and the "Balance Sheet Review and
Liquidity Risk Management" section on page 45.
As a result of the exit of the auto leasing and subprime real estate
lending businesses, the Corporation immediately ceased originations of auto
leases and subprime real estate loans. The Corporation intends to allow its auto
lease portfolio to run off over its remaining term of three to four years. The
Corporation intends to liquidate the subprime real estate loan portfolio through
securitizations and sales. Accordingly, the portfolio was transferred to loans
held for sale in other assets. Additional information on the exit of these
consumer finance businesses can be found in the Consumer Portfolio section on
page 50.
48
Table Eight
Loans and Leases, Nonperforming Assets and Net Charge-offs
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and Leases Nonperforming Assets/(1)/
------------------------------------------------------------------------------
September 30 December 31 September 30 December 31
2001 2000 2001 2000
------------------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial - domestic $126,410 37.2 % $146,040 37.2 % $2,705 $2,777
Commercial - foreign 25,357 7.5 31,066 7.9 566 486
Commercial real estate - domestic 23,607 7.0 26,154 6.7 257 236
Commercial real estate - foreign 366 .1 282 .1 2 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 175,740 51.8 203,542 51.9 3,530 3,502
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 76,962 22.7 84,394 21.5 491 551
Home equity lines 22,288 6.6 21,598 5.5 61 32
Direct/Indirect consumer 38,513 11.4 40,457 10.3 20 19
Consumer finance 5,352 1.6 25,800 6.6 9 1,095
Bankcard 18,040 5.3 14,094 3.6 - -
Foreign consumer 2,123 .6 2,308 .6 8 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 163,278 48.2 188,651 48.1 589 1,706
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 4,119 5,208
- ------------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties 404 249
- ------------------------------------------------------------------------------------------------------------------------------------
Total $339,018 100.0 % $392,193 100.0 % $4,523 $5,457
====================================================================================================================================
Nonperforming assets as a percentage of:
Total assets .71 % .85 %
Loans, leases and foreclosed properties 1.33 1.39
Nonperforming loans as a percentage of loans and leases 1.22 1.33
Loans past due 90 days or more and not classified as
nonperforming $691 $495
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs/(2)/
-----------------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
-----------------------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial - domestic $412 1.26 % $185 .48 % $1,235 1.20 % $583 .52 %
Commercial - foreign 57 .89 23 .30 148 .72 52 .24
Commercial real estate - domestic 4 .07 (2) n/m 22 .12 10 .05
Commercial real estate - foreign - - - - - - (2) n/m
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 473 1.05 206 .39 1,405 .99 643 .42
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 7 .04 6 .03 20 .03 14 .02
Home equity lines 4 .07 2 .04 14 .08 8 .05
Direct/Indirect consumer 94 .94 61 .57 234 .78 213 .68
Consumer finance/(3)/ 720 17.47 68 1.08 880 5.11 184 1.02
Bankcard 181 4.08 79 2.89 464 3.89 237 3.30
Other consumer - domestic 11 n/m 12 n/m 30 n/m 24 n/m
Foreign consumer 1 .21 1 .20 3 .21 2 .14
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 1,018 2.27 229 .47 1,645 1.18 682 .49
- ------------------------------------------------------------------------------------------------------------------------------------
Total net charge-offs $1,491 1.65 % $435 .43 % $3,050 1.08 % $1,325 .45 %
====================================================================================================================================
Managed bankcard net charge-offs and ratios/(4)/ $307 4.81 % $216 4.16 % $852 4.71 % $710 4.79 %
====================================================================================================================================
n/m = not meaningful
(1) Balances do not include $1.3 billion and $124 million of loans held for
sale, included in other assets at September 30, 2001 and December 31, 2000,
respectively, which would have been classified as nonperforming had they
been included in loans. In the third quarter of 2001, $1.2 billion of
nonperforming loans were transferred to loans held for sale as a result of
the exit of the subprime real estate lending business. The Corporation had
approximately $206 million and $390 million of troubled debt restructured
loans at September 30, 2001 and December 31, 2000, 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 outstanding loans and leases during the period for each loan
category.
(3) Includes $635 million related to the exit of the subprime real estate
lending business in the third quarter of 2001.
(4) Includes both on-balance sheet and securitized loans.
49
Commercial Portfolio
At September 30, 2001 and December 31, 2000, total commercial loans
outstanding totaled $175.7 billion and $203.5 billion, respectively, or 52
percent of total loans and leases at both points in time. Domestic commercial
loans, including commercial real estate, accounted for 85 percent of total
commercial loans at both September 30, 2001 and December 31, 2000.
Commercial - domestic loans outstanding totaled $126.4 billion and $146.0
billion at September 30, 2001 and December 31, 2000, respectively, or 37 percent
of total loans and leases at both points in time. The Corporation had commercial
- - domestic loan net charge-offs of $1.2 billion, or 1.20 percent of average
commercial - domestic loans, for the nine months ended September 30, 2001,
compared to $583 million, or 0.52 percent, for the nine months ended September
30, 2000. Net charge-offs increased primarily due to deterioration in credit
quality stemming from the weak economic environment and the sale of distressed
loans in 2001. Nonperforming commercial - domestic loans were $2.7 billion, or
2.14 percent of commercial - domestic loans, at September 30, 2001, compared to
$2.8 billion, or 1.90 percent, at December 31, 2000. The decline in
nonperformers was primarily driven by sales of nonperforming loans in 2001,
partially offset by the addition of four large credits as well as smaller
credits across various industries and business segments. Two of the four large
credits occurred in the first quarter of 2001 when a client in the utilities
industry and a client in the chemical and plastics industry filed for
bankruptcy. The other two credits occurred in the second quarter of 2001 in the
apparel industry and the computer services industry. Commercial - domestic loans
past due 90 days or more and still accruing interest were $133 million at
September 30, 2001, compared to $141 million at December 31, 2000, or 0.10
percent of commercial - domestic loans at both points in time.
Commercial - foreign loans outstanding totaled $25.4 billion and $31.1
billion at September 30, 2001 and December 31, 2000, respectively, or eight
percent of total loans and leases at both points in time. The Corporation had
commercial - foreign loan net charge-offs for the nine months ended September
30, 2001 of $148 million, or 0.72 percent of average commercial - foreign loans,
compared to $52 million, or 0.24 percent of average commercial - foreign loans,
for the nine months ended September 30, 2000. Nonperforming commercial - foreign
loans were $566 million, or 2.23 percent of commercial - foreign loans, at
September 30, 2001, compared to $486 million, or 1.56 percent, at December 31,
2000. The inflows for 2001 included one large credit in the steel industry
during the third quarter. Commercial - foreign loans past due 90 days or more
and still accruing interest were $142 million at September 30, 2001, compared to
$37 million at December 31, 2000, or 0.56 percent and 0.12 percent of commercial
- - foreign loans, respectively. For additional information, see the International
Exposure discussion beginning on page 57.
Commercial real estate - domestic loans totaled $23.6 billion and $26.2
billion at September 30, 2001 and December 31, 2000, respectively, and remained
stable at seven percent of total loans and leases. Net charge-offs remained
negligible at $22 million, or 0.12 percent of average commercial real estate -
domestic loans, for the nine months ended September 30, 2001. Nonperforming
commercial real estate - domestic loans were $257 million, or 1.09 percent of
commercial real estate - domestic loans, at September 30, 2001, compared to $236
million, or 0.90 percent, at December 31, 2000. At September 30, 2001,
commercial real estate - domestic loans past due 90 days or more and still
accruing interest were $8 million, or 0.03 percent of total commercial real
estate - domestic loans, compared to $16 million, or 0.06 percent, at December
31, 2000. Table Eleven displays commercial real estate loans by geographic
region and property type, including the portion of such loans which are
nonperforming, and other real estate credit exposures.
Table Twelve presents aggregate commercial loan and lease exposures by
certain significant industries.
Consumer Portfolio
At September 30, 2001 and December 31, 2000, total consumer loans
outstanding totaled $163.3 billion and $188.7 billion, respectively, or 48
percent of total loans and leases at both points in time. Approximately 65
percent and 70 percent of these loans were secured by first and second mortgages
on residential real estate at September 30, 2001 and December 31, 2000,
respectively.
50
In 1999, the Federal Financial Institutions Examination Council (FFIEC)
issued the Uniform Classification and Account Management Policy (the Policy)
which provides guidance for and promotes consistency among banks on the charge-
off treatment of delinquent and bankruptcy-related consumer loans.
Residential mortgage loans decreased to $77.0 billion at September 30,
2001, compared to $84.4 billion at December 31, 2000, or 23 percent and 22
percent of total loans and leases, respectively. This decrease was primarily due
to an $8.5 billion securitization in the third quarter of 2001. Net charge-offs
on residential mortgage loans remained negligible at $20 million, or 0.03
percent of average residential mortgage loans, for the nine months ended
September 30, 2001. Nonperforming residential mortgage loans decreased $60
million to $491 million at September 30, 2001. The decline in nonperformers was
driven by the sale of approximately $200 million of nonperforming loans in the
third quarter of 2001.
Home equity loans increased to $22.3 billion at September 30, 2001
compared to $21.6 billion at December 31, 2000 or seven percent and six percent
of total loans and leases, respectively. Net charge-offs on home equity loans
remained negligible at $14 million, or 0.08 percent of average home equity
loans, for the nine months ended September 30, 2001. Nonperforming home equity
loans increased by $29 million to $61 million at September 30, 2001 compared to
$32 million at December 31, 2000.
Consumer finance loans outstanding totaled $5.4 billion and $25.8 billion
at September 30, 2001 and December 31, 2000, respectively, or two percent and
seven percent of total loans and leases, respectively. Consumer finance
nonperforming loans decreased $1.1 billion to $9 million at September 30, 2001.
These decreases were due to the transfer of approximately $21.4 billion of
subprime real estate loans, of which $1.2 billion were nonperforming, to loans
held for sale related to the exit of the subprime real estate lending business
in the third quarter of 2001. The Corporation had consumer finance net
charge-offs of $880 million, or 5.11 percent of average consumer finance loans,
for the nine months ended September 30, 2001, compared to $184 million, or 1.02
percent, for the nine months ended September 30, 2000. The increase in
charge-offs primarily reflected exit-related charge- offs of $635 million that
were used to write down the subprime real estate loan portfolio to estimated
market value in the third quarter of 2001. In addition, a weakened economic
environment as well as the effect of the FFIEC charge- off policy adopted in the
fourth quarter of 2000 contributed to the net charge-off increase.
Bankcard receivables increased to $18.0 billion at September 30, 2001,
compared to $14.1 billion at December 31, 2000. Net charge-offs on bankcard
receivables for the nine months ended September 30, 2001 were $464 million, or
3.89 percent of average bankcard receivables, compared to $237 million, or 3.30
percent, for the nine months ended September 30, 2000. The increase in
charge-offs was primarily a result of growth in the portfolio outstandings and
an increase in personal bankruptcy filings. Managed bankcard net charge-offs
increased $142 million to $852 million, while the managed net charge-off ratio
decreased 8 basis points to 4.71 percent for the nine months ended September 30,
2001. Bankcard loans past due 90 days or more and still accruing interest were
$280 million, or 1.55 percent of bankcard receivables, at September 30, 2001,
compared to $191 million, or 1.36 percent, at December 31, 2000.
Other consumer loans, which include direct and indirect consumer and
foreign consumer loans, were $40.6 and $42.8 billion at September 30, 2001 and
December 31, 2000, respectively. Direct and indirect consumer loan net
charge-offs were $234 million, or 0.78 percent of average direct and indirect
consumer loans outstanding, for the nine months ended September 30, 2001,
compared to $213 million, or 0.68 percent of the average balance outstanding,
for the comparable period in 2000. Foreign consumer loan net charge-offs were $3
million and $2 million, or 0.21 percent and 0.14 percent of average foreign
consumer loans, for the nine months ended September 30, 2001 and 2000,
respectively.
Excluding bankcard, total consumer loans past due 90 days or more and
still accruing interest were $128 million, or 0.08 percent of total consumer
loans, at September 30, 2001, compared to $110 million, or 0.06 percent, at
December 31, 2000.
Nonperforming Assets
As presented in Table Eight, nonperforming assets decreased to $4.5
billion, or 1.33 percent of loans, leases and foreclosed properties, at
September 30, 2001 from $5.5 billion, or 1.39 percent, at December 31, 2000.
51
Nonperforming loans decreased to $4.1 billion at September 30, 2001 from $5.2
billion at December 31, 2000, primarily due to the transfer of $1.2 billion of
nonperforming subprime real estate loans from the loans and leases portfolio to
loans held for sale included in other assets related to the decision to exit the
subprime real estate lending business and due to sales of nonperforming
commercial - domestic and residential mortgage loans in 2001. These decreases
were partially offset by nonperforming inflows in the commercial - domestic,
commercial - foreign, residential mortgage and home equity lines portfolios.
Credit deterioration in loans continued as companies and individuals were
affected by the weakening economic environment. Foreclosed properties increased
to $404 million at September 30, 2001, compared to $249 million at December 31,
2000.
Table Nine presents the additions to and reductions in nonperforming
assets in the consumer and commercial portfolios during the most recent five
quarters.
Table Nine
Nonperforming Assets
- -----------------------------------------------------------------------------------------------------------------------------
Third Second First Fourth Third
Quarter Quarter Quarter Quarter Quarter
(Dollars in millions) 2001 2001 2001 2000 2000
- -----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $6,195 $5,897 $5,457 $4,403 $3,886
- -----------------------------------------------------------------------------------------------------------------------------
Commercial
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 761 1,376 1,315 1,954 913
Advances on loans 32 33 26 28 19
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial additions 793 1,409 1,341 1,982 932
- -----------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (635) (732) (398) (288) (179)
Returns to performing status (86) (19) (126) (73) (72)
Charge-offs/(1)/ (513) (525) (467) (774) (243)
Transfers to assets held for sale - - - - (63)
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial reductions (1,234) (1,276) (991) (1,135) (557)
- -----------------------------------------------------------------------------------------------------------------------------
Total commercial net additions (reductions) to
nonperforming assets (441) 133 350 847 375
- -----------------------------------------------------------------------------------------------------------------------------
Consumer
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 694 836 819 834 722
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer additions 694 836 819 834 722
- -----------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (413) (159) (135) (95) (110)
Returns to performing status (256) (440) (483) (391) (402)
Charge-offs/(1)/ (69) (69) (101) (135) (64)
Transfers to assets held for sale/(2)/ (1,187) (3) (10) (6) (4)
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer reductions (1,925) (671) (729) (627) (580)
- -----------------------------------------------------------------------------------------------------------------------------
Total consumer net additions (reductions) to
nonperforming assets (1,231) 165 90 207 142
- -----------------------------------------------------------------------------------------------------------------------------
Total net additions (reductions) to nonperforming
assets (1,672) 298 440 1,054 517
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $4,523 $6,195 $5,897 $5,457 $4,403
=============================================================================================================================
(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) Primarily related to the exit of the subprime real estate lending business
in the third quarter of 2001.
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. As
part of this process, management routinely evaluates all reasonable
alternatives, including the sale of assets individually or in groups, and
selects what it believes to be the optimal strategy.
During the nine months ended September 30, 2001, the Corporation sold
approximately $1.7 billion of nonperforming and poorly performing commercial and
consumer loans. The Corporation expects to continue to aggressively manage
credit risk and exit problem credits where practical.
Note Five of the consolidated financial statements provides the reported
investment in specific loans considered to be impaired at September 30, 2001 and
December 31, 2000. The Corporation's investment in specific loans that were
considered to be impaired at September 30, 2001 was $3.6 billion, compared to
$3.8 billion at
52
December 31, 2000. Commercial - domestic impaired loans decreased $261 million
to $2.6 billion at September 30, 2001 compared to December 31, 2000.
Commercial - foreign impaired loans increased $61 million to $582 million.
Commercial real estate - domestic impaired loans decreased $21 million to $391
million.
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its
loan and lease 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. Loss forecast models are
utilized for these segments which consider a variety of factors including, but
not limited to, anticipated defaults or foreclosures based on portfolio trends,
delinquencies and credit scores, and expected loss factors by loan type. The
remaining portfolios are reviewed on an individual loan basis. Loans subject to
individual reviews are analyzed 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
specific allowances for credit losses. 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 loan and lease 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 and
believes that the allowance for credit losses reflected management's best
estimate of incurred credit losses as of the balance sheet date.
The provision for credit losses increased $1.6 billion to $2.9 billion for
the nine months ended September 30, 2001, compared to the same period in 2000.
The increase in the provision was primarily driven by increased credit
deterioration related to a slowing economy as well as a provision for credit
losses of $395 million in the consumer finance portfolio related to the
Corporation's strategic decision to exit the subprime real estate lending
business. The $395 million provision was combined with an existing allowance for
credit losses of $240 million and used to write down the subprime real estate
loan portfolio to estimated market value.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. After review of all relevant matters affecting loan collectibility,
management believes that the allowance for credit losses is appropriate given
its analysis of estimated incurred credit losses at September 30, 2001. Table
Ten provides the changes in the allowance for credit losses for the three months
and nine months ended September 30, 2001 and 2000.
53
Table Ten
Allowance for Credit Losses
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30 Ended September 30
-----------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 6,911 $ 6,815 $ 6,838 $ 6,828
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases charged off
Commercial - domestic (471) (214) (1,376) (671)
Commercial - foreign (71) (33) (179) (80)
Commercial real estate - domestic (5) (3) (27) (25)
Commercial real estate - foreign - (1) - (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial (547) (251) (1,582) (777)
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage (11) (8) (30) (22)
Home equity lines (8) (4) (23) (14)
Direct/Indirect consumer (133) (102) (364) (357)
Consumer finance /(1)/ (734) (112) (948) (294)
Bankcard (204) (92) (524) (277)
Other consumer - domestic (16) (16) (48) (32)
Foreign consumer (1) (1) (4) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer (1,107) (335) (1,941) (999)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases charged off (1,654) (586) (3,523) (1,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off
Commercial - domestic 59 29 141 88
Commercial - foreign 14 10 31 28
Commercial real estate - domestic 1 5 5 15
Commercial real estate - foreign - 1 - 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 74 45 177 134
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 4 2 10 8
Home equity lines 4 2 9 6
Direct/Indirect consumer 39 41 130 144
Consumer finance 14 44 68 110
Bankcard 23 13 60 40
Other consumer - domestic 5 4 18 8
Foreign consumer - - 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 89 106 296 317
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans and leases previously charged off 163 151 473 451
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,491) (435) (3,050) (1,325)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for credit losses /(2)/ 1,251 435 2,886 1,325
Other, net (6) (76) (9) (89)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30 $ 6,665 $ 6,739 $ 6,665 $ 6,739
====================================================================================================================================
Loans and leases outstanding at September 30 $339,018 $402,592 $339,018 $402,592
Allowance for credit losses as a percentage of loans and leases
outstanding at September 30 1.97 % 1.67 % 1.97 % 1.67 %
Average loans and leases outstanding during the period $357,726 $402,763 $376,261 $390,296
Annualized net charge-offs as a percentage of average outstanding
loans and leases during the period 1.65 % .43 % 1.08 % .45 %
Allowance for credit losses as a percentage of nonperforming
loans at end of period 161.81 161.32 161.81 161.32
====================================================================================================================================
(1) Includes $635 million related to the exit of the subprime real estate
lending business in the third quarter of 2001.
(2) Includes $395 million related to the exit of the subprime real estate
lending business in the third quarter of 2001.
54
Concentrations of Credit Risk
In an effort to minimize the adverse impact of any single event or set of
events, the Corporation strives to maintain a diverse credit portfolio as
outlined in Tables Eleven, Twelve and Thirteen.
The Corporation maintains a diverse commercial loan portfolio,
representing 52 percent of total loans and leases at September 30, 2001. The
largest concentration is in commercial real estate, which represents seven
percent of total loans and leases at September 30, 2001. The exposures presented
in Table Eleven 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.
55
Table Eleven
Commercial Real Estate Loans, Foreclosed Properties
and Other Real Estate Credit Exposures
- ----------------------------------------------------------------------------------------------------------------------------
September 30, 2001
Loans Other
-------------------------------------- Foreclosed Credit
(Dollars in millions) Outstanding Nonperforming Properties /(1)/ Exposures /(2)/
- ----------------------------------------------------------------------------------------------------------------------------
By Geographic Region /(3)/
California $5,361 $ 33 $2 $ 1,163
Southwest 3,349 28 1 927
Northwest 2,523 24 2 189
Florida 2,494 25 - 503
Geographically diversified 2,377 - - 333
Midwest 1,822 26 26 704
Mid-Atlantic 1,542 22 - 471
Carolinas 1,447 7 - 181
Midsouth 1,340 4 - 380
Northeast 701 50 - 790
Other states 651 38 47 289
Non-US 366 2 - 9
- ----------------------------------------------------------------------------------------------------------------------
Total $23,973 $259 $78 $5,939
======================================================================================================================
By Property Type
Office buildings $4,619 $19 $ - $ 619
Apartments 4,163 22 - 1,534
Residential 3,368 30 - 213
Shopping centers/retail 3,165 10 17 1,010
Industrial/warehouse 2,359 33 16 226
Land and land development 1,476 1 7 193
Hotels/motels 1,206 34 15 428
Multiple use 790 1 - 67
Miscellaneous commercial 417 1 - 26
Unsecured 168 - - 391
Other 1,876 106 23 1,223
Non-US 366 2 - 9
- ----------------------------------------------------------------------------------------------------------------------
Total $23,973 $259 $78 $5,939
======================================================================================================================
(1) Foreclosed properties include 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 Twelve presents the ten largest industries included in the
commercial loan and lease portfolio at September 30, 2001 and the respective
balances at December 31, 2000. Total commercial loans outstanding, excluding
commercial real estate loans, comprised 45 percent of total loans and leases at
both September 30, 2001 and December 31, 2000, respectively. No commercial
industry concentration is greater than 3.2 percent of total loans and leases.
56
Table Twelve
Significant Industry Loans and Leases (1)
- -------------------------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
-----------------------------------------------------------------------
Percent of Total Percent of Total
(Dollars in millions) Outstanding Loans and Leases Outstanding Loans and Leases
- -------------------------------------------------------------------------------------------------------------------
Transportation $10,801 3.2 % $11,704 3.0 %
Business services 7,855 2.3 8,883 2.3
Media 7,362 2.2 9,322 2.4
Equipment and general manufacturing 7,039 2.1 8,982 2.3
Agribusiness 6,169 1.8 7,672 2.0
Healthcare 6,000 1.8 7,201 1.8
Telecommunications 5,918 1.7 6,801 1.7
Autos 5,848 1.7 6,741 1.7
Retail 5,180 1.5 7,049 1.8
Oil and gas 4,733 1.4 5,299 1.4
===================================================================================================================
(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. These include most countries in
the 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 Thirteen sets forth selected
regional foreign exposure at September 30, 2001. The countries selected
represent those that are sometimes considered as having higher credit and
foreign exchange risk. At September 30, 2001, the Corporation's total exposure
to these select countries was $23.6 billion, a decrease of $6.7 billion from
December 31, 2000, primarily due to reductions in exposure to Japan and to most
other countries in Asia, Europe and Latin America, with the exception of Brazil.
Table Thirteen is based on the FFIEC's instructions for periodic reporting of
foreign exposure.
As part of the Corporation's ongoing, normal risk management process, the
Corporation has significantly reduced its credit exposure to Argentina. The
Corporation has $726 million of credit exposure in Argentina, a country
experiencing considerable economic difficulties. The current risk of default is
expected to be with Argentine government bonds. At September 30, 2001, the
Corporation's credit exposure related to Argentine government bonds was
approximately $70 million. The Corporation continues to assess its credit
exposure to Argentina.
57
Table Thirteen
Selected Regional Foreign Exposure
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives Total Increase/
(Net Total Gross Binding (Decrease)
Loans Positive Securities/ Cross- Local Exposure from
and Loan Other Mark-to- Other border Country September 30, December 31,
(Dollars in millions) Commitments Financing/(1)/ Market) Investments Exposure/(2)/ Exposure/(3)/ 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Region/Country
Asia
China $ 92 $ 64 $ 23 $ 80 $ 259 $ 90 $ 349 $ 29
Hong Kong 169 50 27 111 357 3,643 4,000 (564)
India 667 67 60 35 829 1,007 1,836 (373)
Indonesia 231 8 19 14 272 22 294 (101)
Japan 741 66 276 2,934 4,017 339 4,356 (2,738)
Korea (South) 230 463 37 16 746 795 1,541 (679)
Malaysia 54 9 1 - 64 259 323 (199)
Pakistan 15 6 - 2 23 - 23 5
Philippines 181 14 15 43 253 93 346 (45)
Singapore 187 9 54 6 256 928 1,184 (290)
Taiwan 262 61 21 - 344 519 863 (266)
Thailand 41 11 27 29 108 331 439 32
Other 2 15 - - 17 98 115 (17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,872 $ 843 $ 560 $ 3,270 $ 7,545 $ 8,124 $ 15,669 $ (5,206)
- ------------------------------------------------------------------------------------------------------------------------------------
Central and Eastern
Europe
Russian Federation $ - $ 1 $ - $ 3 $ 4 $ - $ 4 $ 2
Turkey 51 28 1 34 114 - 114 (218)
Other 70 18 14 183 285 57 342 98
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 121 $ 47 $ 15 $ 220 $ 403 $ 57 $ 460 $ (118)
- ------------------------------------------------------------------------------------------------------------------------------------
Latin America
Argentina $ 363 $ 87 $ 35 $ 138 $ 623 $ 103 $ 726 $ (348)
Brazil 975 337 34 193 1,539 855 2,394 130
Chile 354 13 32 3 402 143 545 (435)
Colombia 125 16 14 6 161 - 161 (125)
Mexico 1,134 295 117 1,312 2,858 121 2,979 (457)
Venezuela 128 16 7 214 365 8 373 (106)
Other 153 63 11 98 325 - 325 (37)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 3,232 $ 827 $ 250 $ 1,964 $ 6,273 $ 1,230 $ 7,503 $ (1,378)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 6,225 $ 1,717 $ 825 $ 5,454 $ 14,221 $ 9,411 $ 23,632 $ (6,702)
====================================================================================================================================
(1) Includes acceptances, standby letters of credit, commercial letters of
credit, and formal guarantees.
(2) 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.
(3) 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.
58
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 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. 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.
Trading Portfolio
The Corporation's Board of Directors (the Board) delegates responsibility
of 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.
The objective of the Corporation's Risk Management group (Risk Management)
is to provide senior management with independent, timely assessments of the
bottom line impacts of all 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 reasonable 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.
59
Histogram of Daily Market Risk-Related Revenue
Twelve Months Ended September 30, 2001
[GRAPHIC]
Daily Market Risk-Related Revenue Number
(Dollars in millions) of Days
- ------------------------------------------------------------------
Less than $(10) 6
$(5) to $(10) 1
$(5) to $0 14
$0 to $5 22
$5 to $10 55
$10 to $15 40
$15 to $20 45
$20 to $25 30
$25 to $30 24
$30 to $35 4
$35 to $40 3
$40 to $45 1
Greater than $45 5
Market risk-related revenue includes trading revenue and
trading-related net interest income, which encompass both proprietary trading
and customer-related activities. During 2001, the Corporation has continued its
efforts to build on its client franchise and reduce the proportion of
proprietary trading revenue to total revenue. The success of these efforts can
be seen in the histogram above. During the twelve months ended September 30,
2001, the Corporation recorded positive daily market risk-related revenue for
229 of 250 trading days. Furthermore, of the 21 days that showed negative
revenue, only six days were greater than $10 million.
Value at Risk
Value at Risk (VAR) is the key measure of market risk for the Corporation.
VAR represents 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. Its purpose is to describe the amount of capital required to absorb
potential losses from adverse market movements.
As the following graph shows, during the twelve months ended September 30,
2001, actual market risk-related revenue exceeded VAR measures three days out of
250 total trading days. During the same period, actual market risk-related
losses exceeded VAR measures one day out of 250 total trading days. This
occurred immediately following the events of September 11, 2001, due to extreme
market conditions. 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.
60
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 September 30, 2001. During the period, the daily market
risk-related revenue ranged from $(56) million to $49 million. Over the same
period. VAR ranged from $25 million to $70 million.
61
The following table summarizes the VAR in the Corporation's trading
portfolios for the twelve months ended September 30, 2001 and 2000:
Table Fourteen
Trading Activities Market Risk
- -----------------------------------------------------------------------------------------------------------------------
Twelve Months Ended September 30
-------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR /(1)/ VAR /(2)/ VAR /(2)/ VAR /(1)/ VAR /(2)/ VAR /(2)/
- -----------------------------------------------------------------------------------------------------------------------
Interest rate $ 32.6 $ 47.0 $ 16.3 $ 24.9 $ 35.5 $ 17.8
Foreign exchange 8.6 15.5 5.0 10.6 21.7 5.4
Commodities 3.0 8.2 .1 1.9 5.8 .5
Equities 14.6 28.0 5.5 29.5 41.5 16.5
Credit products 9.1 16.9 3.0 12.6 18.1 6.1
Real estate/mortgage 29.5 55.5 8.3 7.0 11.3 2.5
Total trading portfolio 49.2 69.9 25.1 42.1 53.0 30.7
- ----------------------------------------------------------------------------------------------------------------------
(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 the individual
portfolios may have occurred on different trading days.
Total trading portfolio VAR increased during the twelve months ended
September 30, 2001 relative to the twelve months ended September 30, 2000. This
increase was due to increased activity in the interest rate business and the
addition of mortgage banking assets to the VAR calculation for the real
estate/mortgage portfolio in the first quarter of 2001. These increases were
partially offset by a decrease in the equities business.
In the fourth quarter of 2000, the methodology used to calculate VAR for
the equities portfolio was changed. The net effect of the change was an
approximate $20 million reduction in reported VAR for equities. VAR was not
restated for previous quarters for this change.
The following table summarizes the quarterly VAR in the Corporation's
trading portfolios for the most recent four quarters:
Table Fifteen
Quarterly Trading Activities Market Risk
- -------------------------------------------------------------------------------------------------------------
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)/
- -------------------------------------------------------------------------------------------------------------
Interest rate $ 34.4 $ 47.0 $ 23.0 $ 38.8 $ 43.5 $ 32.6
Foreign exchange 7.6 11.2 5.2 8.0 11.0 5.5
Commodities 4.8 8.2 1.5 2.7 5.7 1.3
Equities 16.2 19.1 12.7 18.1 25.1 13.5
Credit products 13.0 15.8 10.3 10.7 16.9 6.6
Real estate/mortgage 32.9 41.5 23.2 41.2 55.5 28.6
Total trading portfolio 53.1 63.3 45.4 61.3 69.9 55.2
- ------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
First Quarter 2001 Fourth Quarter 2000
------------------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR /(1)/ VAR /(2)/ VAR /(2)/ VAR /(1)/ VAR /(2)/ VAR /(2)/
- -----------------------------------------------------------------------------------------------------------------------
Interest rate $ 32.1 $ 46.2 $ 26.9 $ 25.2 $ 42.2 $ 16.3
Foreign exchange 8.2 12.8 5.0 10.6 15.5 5.7
Commodities 1.8 3.8 .9 2.8 4.8 1.5
Equities 13.1 22.5 8.9 10.4 21.6 5.5
Credit products 6.2 8.0 3.0 6.3 8.5 3.2
Real estate/mortgage 33.7 43.4 8.8 9.6 11.1 8.3
Total trading portfolio 50.0 59.6 42.4 32.0 45.5 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.
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.
62
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 moves in the relevant
markets that are based on significant historical 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, but plausible, events that would be of concern given the Corporation's
current portfolio. The results of these specific scenarios are presented to the
Corporation's Trading Risk Committee as part of its regular meetings. 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 throughout Asia.
Asset and Liability Management Activities
Non-Trading Portfolio
The Corporation's Asset and Liability Management (ALM) process, managed
through the Asset and Liability Committee of the Finance Committee, is used to
manage interest rate risk through the structuring of 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
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 September 30, 2001, the interest rate risk position of the
Corporation was relatively neutral to parallel shifts in the yield curve as the
impact on net interest income of a 100 basis point parallel shift, up or down,
over either two months (rapid) or twelve months (gradual) would be less than one
and one-half percent. A non-parallel shift in interest rates has been more
prevalent during 2001. Given a steepening or flattening in the yield curve of 50
basis points, the Corporation's position at September 30, 2001 was also neutral
as the impact of such a change on net interest income would be less than
one-half 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 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. See Note Four
of the consolidated financial statements for additional information on the
Corporation's hedging activities.
63
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. As reflected in Table
Sixteen, the notional amount of the Corporation's receive fixed and pay fixed
interest rate swaps at September 30, 2001 was $70.5 billion and $25.9 billion,
respectively. The receive fixed interest rate swaps are primarily converting
variable rate commercial loans to fixed rate. The net receive fixed position at
September 30, 2001 was $44.6 billion notional compared to $48.8 billion notional
at December 31, 2000. The Corporation had $15.7 billion notional and $14.7
billion notional of basis swaps at September 30, 2001 and December 31, 2000,
respectively, linked primarily to loans and long-term debt. At September 30,
2001, the notional amount of option products being used in the Corporation's ALM
process netted to zero, consisting of a $3.5 billion long position and a $3.5
billion short position, compared to $22.5 billion notional of option products at
December 31, 2000. The Corporation had $7.1 billion notional and $24.8 billion
notional of futures and forward rate contracts at September 30, 2001 and
December 31, 2000, respectively. In addition, open foreign exchange contracts at
September 30, 2001 had a notional amount of $22.7 billion compared to $19.0
billion at December 31, 2000.
Table Sixteen also summarizes the expected maturity and the average
estimated duration, weighted average receive and pay rates and the net
unrealized gains and losses at September 30, 2001 and December 31, 2000 of the
Corporation's open ALM interest rate swaps, as well as the expected maturity and
net unrealized gains and losses at September 30, 2001 and December 31, 2000 of
the Corporation's open ALM basis swaps, options, futures and forward rate and
foreign exchange contracts. Unrealized gains and losses are based on the last
repricing and will change in the future primarily based on movements in one-,
three- and six-month LIBOR rates. The ALM swap portfolio had a net unrealized
gain of $2.6 billion and $364 million at September 30, 2001 and December 31,
2000, respectively. The ALM option products had a net unrealized loss of $3
million and $157 million at September 30, 2001 and December 31, 2000,
respectively. The ALM futures and forward rate contracts had a net unrealized
loss of $24 million and $52 million at September 30, 2001 and December 31, 2000,
respectively. At September 30, 2001 and December 31, 2000, open foreign exchange
contracts had a net unrealized loss of $222 million and $387 million,
respectively.
The amount of unamortized net realized deferred gains associated with
closed ALM swaps was $525 million and $25 million at September 30, 2001 and
December 31, 2000, respectively. The amount of unamortized net realized deferred
gains associated with closed ALM options was $13 million and $95 million at
September 30, 2001 and December 31, 2000, respectively. The amount of
unamortized net realized deferred losses associated with closed ALM futures and
forward contracts was $34 million and $15 million at September 30, 2001 and
December 31, 2000, respectively. There were no unamortized net realized deferred
gains or losses associated with closed foreign exchange contracts at September
30, 2001 and December 31, 2000. Of these unamortized net realized deferred
gains, $457 million was included in accumulated other comprehensive income at
September 30, 2001.
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.
64
Table Sixteen
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 2001
Expected Maturity
----------------------------------------------------------------------- Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2001 2002 2003 2004 2005 2005 Duration
- -----------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $ 3,486 3.93
Notional value $ 70,483 $ 205 $ 5,609 $ 8,661 $ 8,202 $ 9,898 $ 37,908
Weighted average receive rate 5.72% 6.67% 4.52% 4.96% 5.87% 6.65% 5.79%
Total pay fixed swaps (895) 4.40
Notional value $ 25,901 $ 18 $ 828 $ 6,730 $ 4,348 $ 2,679 $ 11,298
Weighted average pay rate 5.37% 7.49% 6.96% 4.72% 4.32% 6.77% 5.71%
Basis swaps 9
Notional value $ 15,700 $ - $ - $ - $ 9,000 $ 500 $ 6,200
------
Total swaps 2,600
- -----------------------------------------------------------------------------------------------------------------------------------
Option products (3)
Notional amount $ -
Futures and forward rate contracts (24)
Notional amount $ 7,100 $ 7,100
- -----------------------------------------------------------------------------------------------------------------------------------
Total open interest rate
contracts 2,573
- -----------------------------------------------------------------------------------------------------------------------------------
Closed interest rate
contracts/(1)/ 504
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract
position 3,077
- -----------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (222)
Notional amount $ 22,709 $ 797 $ 2,214 $ 3,560 $ 4,835 $ 6,644 $ 4,659
- -----------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $ 2,855
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Expected Maturity
----------------------------------------------------------------------- Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2001 2002 2003 2004 2005 2005 Duration
- -----------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $ 900 3.65
Notional amount $ 62,485 $ 4,001 $ 7,011 $ 9,787 $12,835 $15,853 $ 12,998
Weighted average receive rate 6.39% 6.28% 6.71% 5.53% 6.45% 6.76% 6.41%
Total pay fixed swaps (529) 5.66
Notional amount $ 13,640 $ 1,878 $1,064 $ 114 $ 20 $ 2,584 $ 7,980
Weighted average pay rate 6.72% 5.86% 6.39% 7.14% 5.85% 7.05% 6.82%
Basis swaps (7)
Notional amount $14,739 $ 576 $1,669 $ 442 $ 7,700 $ 4,317 $ 35
------
Total swaps 364
- -----------------------------------------------------------------------------------------------------------------------------------
Option products (157)
Notional amount $22,477 $ 2,087 $ 868 $ 1,575 $ 7,882 $ 4,101 $ 5,964
Futures and forward rate contracts (52)
Notional amount $24,818 $19,068 $5,750 $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Total open interest rate
contracts 155
- -----------------------------------------------------------------------------------------------------------------------------------
Closed interest rate
contracts/(1)/ 105
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract
position 260
- -----------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (387)
Notional amount $18,958 $ 1,059 $2,179 $ 3,472 $ 4,472 $ 5,821 $ 1,955
- -----------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $ (127)
===================================================================================================================================
(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 loan funding date. To manage this risk, the Corporation enters into
various financial instruments including forward delivery contracts, Euro dollar
futures and option contracts. The notional amount of such contracts was $18.4
billion at September 30, 2001 with associated net unrealized losses of $82
million. At December 31, 2000, the notional amount of such contracts was $9.7
billion with associated net unrealized losses of $53 million. These contracts
have an average expected maturity of less than 90 days.
66
Table Seventeen
Selected Quarterly Financial Data
- --------------------------------------------------------------------------------------------------------------------------------
2001 Quarters
----------------------------------------------------
(Dollars in millions, except per share information) Third Second First
- --------------------------------------------------------------------------------------------------------------------------------
Operating Basis/(1)/
- ------------------
Income statement
Net interest income $ 5,204 $ 5,030 $ 4,639
Net interest income (taxable-equivalent basis) 5,290 5,117 4,721
Noninterest income 3,429 3,741 3,780
Total revenue 8,633 8,771 8,419
Total revenue (taxable-equivalent basis) 8,719 8,858 8,501
Provision for credit losses 856 800 835
Gains (losses) on sales of securities 97 (7) (8)
Other noninterest expense 4,606 4,821 4,654
Income before income taxes 3,268 3,143 2,922
Income tax expense 1,177 1,120 1,052
Net income 2,091 2,023 1,870
Average diluted common shares issued and outstanding (in thousands) 1,634,063 1,632,964 1,631,099
- --------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.29% 1.24 % 1.17 %
Return on average common shareholders' equity 16.87 16.67 15.86
Efficiency ratio 52.82 54.44 54.73
Net interest yield 3.78 3.61 3.39
Shareholder value added $ 824 $ 791 $ 679
- --------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.31 $ 1.26 $ 1.16
Diluted earnings 1.28 1.24 1.15
- --------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data /(2)/
Earnings $ 2,310 $ 2,246 $ 2,093
Earnings per common share 1.44 1.40 1.30
Diluted earnings per common share 1.41 1.38 1.28
Return on average assets 1.43% 1.37 % 1.31 %
Return on average common shareholders' equity 18.64 18.52 17.75
Efficiency ratio 50.32 51.92 52.11
- --------------------------------------------------------------------------------------------------------------------------------
As Reported
- -----------
Income statement
Net interest income $ 5,204 $ 5,030 $ 4,639
Noninterest income 3,429 3,741 3,780
Total revenue 8,633 8,771 8,419
Provision for credit losses 1,251 800 835
Gains (losses) on sales of securities 97 (7) (8)
Business exit costs 1,305 - -
Other noninterest expense 4,606 4,821 4,654
Income before income taxes 1,568 3,143 2,922
Income tax expense 727 1,120 1,052
Net income 841 2,023 1,870
- --------------------------------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets .52 % 1.24 % 1.17 %
Return on average common shareholders' equity 6.78 16.67 15.86
Total equity to total assets (period-end) 7.83 7.88 8.02
Total average equity to total average assets 7.66 7.43 7.38
Dividend payout ratio 106.49 44.35 48.14
- --------------------------------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ .52 $ 1.26 $ 1.16
Diluted earnings .51 1.24 1.15
Cash dividends paid .56 .56 .56
Book value 31.66 30.75 30.47
- --------------------------------------------------------------------------------------------------------------------------------
Cash basis financial data /(2)/
Earnings $ 1,060 $ 2,246 $ 2,093
Earnings per common share .66 1.40 1.30
Diluted earnings per common share .65 1.38 1.28
Return on average assets .65 % 1.37 % 1.31 %
Return on average common shareholders' equity 8.55 18.52 17.75
- --------------------------------------------------------------------------------------------------------------------------------
Balance sheet (period-end)
Total loans and leases $339,018 $380,425 $382,677
Total assets 640,105 625,525 609,755
Total deposits 359,870 363,486 352,460
Long-term debt 61,213 63,243 67,044
Trust preferred securities 4,955 4,955 4,955
Common shareholders' equity 50,084 49,234 48,815
Total shareholders' equity 50,151 49,302 48,886
- --------------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios (period-end)
Tier 1 capital 7.95 % 7.90 % 7.65 %
Total capital 12.12 12.09 11.84
Leverage ratio 6.59 6.50 6.41
- --------------------------------------------------------------------------------------------------------------------------------
Market price per share of common stock
Closing $ 58.40 $ 60.03 $ 54.75
High 65.54 62.18 55.94
Low 50.25 48.65 45.00
- --------------------------------------------------------------------------------------------------------------------------------
(1) Operating basis excludes provision for credit losses of $395 million and
noninterest expense of $1,305 million related to the exit of certain
consumer finance businesses in the third quarter of 2001.
(2) Cash basis calculations exclude goodwill and other intangible amortization
expense.
67
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,
substantial money damages are asserted against the Corporation
and its subsidiaries and certain of these actions and
proceedings are based on alleged violations of consumer
protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and
directors have been named as defendants in a number of actions
filed in several federal courts that have been consolidated for
pretrial purposes before a Missouri federal court. The amended
complaint in the consolidated actions alleges, among other
things, that the defendants failed to disclose material facts
about BankAmerica's losses relating to D.E. Shaw Securities
Group, L.P. ("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, 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 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. Discovery, for the most part, has been
completed. Pretrial proceedings are scheduled to conclude by
December 2001, and the court has ordered the parties to be
ready for trial in March 2002. A former NationsBank stockholder
who opted out of the federal class action has commenced an
action asserting claims substantially similar to the claims
related to D.E. Shaw set forth in the consolidated action. This
action is now proceeding with the federal class action in the
Missouri federal court, although that stockholder has requested
that its case be tried separately. Similar class actions have
been filed in California. Plaintiffs in one such class action,
brought on behalf of California residents who owned BankAmerica
stock, claim that the proxy statement-prospectus of August 4,
1998, falsely stated that the merger would be one of equals.
Plaintiffs in this matter have recently agreed to become
included in the federal action rather than proceed in
California state court. Other California state court class
actions were consolidated, but not yet certified as class
actions. The Missouri federal court has 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 are currently pursuing further
relief with the United States Court of Appeals. The Corporation
believes that the actions lack merit and will defend them
vigorously. The amount of ultimate liability cannot be
determined at this time.
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
68
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.
Management believes that the actions and proceedings and
the losses, if any, resulting from the final outcome
thereof, will not be material in the aggregate to the
Corporation's financial position or results of
operations.
Item 2. Changes in As part of its share repurchase program, during the third
Securities and Use quarter of 2001, 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 exercise prices ranging
from $61.82 per share to $61.84 per share and expiration
dates in September 2002. 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 September 30, 2001, the Corporation had three million
put options outstanding with exercise prices ranging from
$56.36 per share to $61.84 per share and expiration dates
ranging from October 2001 to September 2002.
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(a) - Ratio of Earnings to Fixed Charges
Exhibit 12(b) - 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 September 30, 2001:
Current Report on Form 8-K dated and filed July 16, 2001,
Items 5, 7 and 9.
Current Report on Form 8-K dated and filed August 15,
2001, Items 5, 7 and 9.
69
- --------------------------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bank of America Corporation
---------------------------------
Registrant
Date: November 14, 2001 /s/ Marc D. Oken
----------------- ---------------------------------
MARC D. OKEN
Executive Vice President and
Principal Financial Executive
(Duly Authorized Officer and
Chief Accounting Officer)
70
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(a) Ratio of Earnings to Fixed Charges
12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends
71