================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [check mark] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-6523 Exact name of registrant as specified in its charter: Bank of America Corporation State of incorporation: Delaware IRS Employer Identification Number: 56-0906609 Address of principal executive offices: Bank of America Corporate Center Charlotte, North Carolina 28255 Registrant's telephone number, including area code: (888) 279-3457 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (check mark) No On October 31, 2000, there were 1,627,537,119 shares of Bank of America Corporation Common Stock outstanding. ================================================================================ Bank of America Corporation September 30, 2000 Form 10-Q - -------------------------------------------------------------------------------- INDEX Page ---- Part I Item 1. Financial Statements: Financial Consolidated Statement of Income for the Three Information Months and Nine Months Ended September 30, 2000 and 1999 2 Consolidated Balance Sheet at September 30, 2000 and December 31, 1999 3 Consolidated Statement of Changes in Share- holders' Equity for the Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 62 - ------------------------------------------------------------------------------------------------------------------- Part II Other Information Item 1. Legal Proceedings 62 Item 6. Exhibits and Reports on Form 8-K 63 Signature 64 Index to Exhibits 65 1 Part I. Financial Information Item 1. Financial Statements ==================================================================================================================================== Bank of America Corporation and Subsidiaries Consolidated Statement of Income - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Nine Months Ended September 30 Ended September 30 -------------------------------------------------------- (Dollars in millions, except per share information) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Interest income Interest and fees on loans and leases $ 8,305 $ 6,883 $ 23,622 $ 20,506 Interest and dividends on securities 1,259 1,208 3,861 3,526 Federal funds sold and securities purchased under agreements to resell 633 440 1,803 1,208 Trading account assets 744 482 1,974 1,552 Other interest income 324 281 828 909 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 11,265 9,294 32,088 27,701 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense Deposits 2,868 2,198 8,083 6,678 Short-term borrowings 2,223 1,437 6,015 4,188 Trading account liabilities 237 189 607 468 Long-term debt 1,344 920 3,635 2,605 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 6,672 4,744 18,340 13,939 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 4,593 4,550 13,748 13,762 Provision for credit losses 435 450 1,325 1,470 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for credit losses 4,158 4,100 12,423 12,292 Gains on sales of securities 11 44 23 226 Noninterest income Consumer service charges 684 644 1,948 1,881 Corporate service charges 489 480 1,457 1,372 - ------------------------------------------------------------------------------------------------------------------------------------ Total service charges 1,173 1,124 3,405 3,253 - ------------------------------------------------------------------------------------------------------------------------------------ Consumer investment and brokerage services 357 355 1,108 1,000 Corporate investment and brokerage services 114 63 340 311 - ------------------------------------------------------------------------------------------------------------------------------------ Total investment and brokerage services 471 418 1,448 1,311 - ------------------------------------------------------------------------------------------------------------------------------------ Mortgage servicing income 144 206 408 463 Investment banking income 376 363 1,146 1,017 Equity investment gains 422 339 1,119 628 Card income 594 557 1,634 1,448 Trading account profits 372 313 1,567 1,208 Other income 93 408 464 1,145 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest income 3,645 3,728 11,191 10,473 - ------------------------------------------------------------------------------------------------------------------------------------ Merger and restructuring charges 550 - 550 200 Other noninterest expense Personnel 2,298 2,336 7,143 6,930 Occupancy 419 417 1,248 1,208 Equipment 285 313 882 1,010 Marketing 147 145 398 439 Professional fees 100 160 298 452 Amortization of intangibles 215 222 650 669 Data processing 167 164 495 568 Telecommunications 127 131 391 407 Other general operating 509 498 1,529 1,364 General administrative and other 143 140 412 389 - ------------------------------------------------------------------------------------------------------------------------------------ Total other noninterest expense 4,410 4,526 13,446 13,436 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 2,854 3,346 9,641 9,355 Income tax expense 1,025 1,195 3,509 3,375 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,829 $ 2,151 $ 6,132 $ 5,980 ==================================================================================================================================== Net income available to common shareholders $ 1,828 $ 2,149 $ 6,128 $ 5,975 ==================================================================================================================================== Per share information Earnings per common share $ 1.11 $ 1.25 $ 3.70 $ 3.45 ==================================================================================================================================== Diluted earnings per common share $ 1.10 $ 1.23 $ 3.66 $ 3.37 ==================================================================================================================================== Dividends per common share $ .50 $ .45 $ 1.50 $ 1.35 ==================================================================================================================================== Average common shares issued and outstanding (in thousands) 1,639,392 1,722,307 1,654,013 1,734,401 ==================================================================================================================================== See accompanying notes to consolidated financial statements. 2 ==================================================================================================================================== Bank of America Corporation and Subsidiaries Consolidated Balance Sheet - ------------------------------------------------------------------------------------------------------------------------------------ September 30 December 31 (Dollars in millions) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 24,395 $ 26,989 Time deposits placed and other short-term investments 5,467 4,838 Federal funds sold and securities purchased under agreements to resell 33,408 37,928 Trading account assets 47,198 38,460 Derivative-dealer assets 15,398 16,055 Securities: Available-for-sale 79,747 81,647 Held-to-maturity, at cost (market value - $1,283 and $1,270) 1,356 1,422 - ------------------------------------------------------------------------------------------------------------------------------------ Total securities 81,103 83,069 - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases 402,592 370,662 Allowance for credit losses (6,739) (6,828) - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases, net of allowance for credit losses 395,853 363,834 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment, net 6,450 6,713 Customers' acceptance liability 2,277 1,869 Interest receivable 4,620 3,777 Mortgage servicing rights 4,029 4,093 Goodwill 11,803 12,262 Core deposits and other intangibles 1,554 1,730 Other assets 38,170 30,957 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $671,725 $632,574 ==================================================================================================================================== Liabilities Deposits in domestic offices: Noninterest-bearing $92,050 $93,476 Interest-bearing 207,801 207,048 Deposits in foreign offices: Noninterest-bearing 1,515 1,993 Interest-bearing 52,622 44,756 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 353,988 347,273 - ------------------------------------------------------------------------------------------------------------------------------------ Federal funds purchased and securities sold under agreements to repurchase 72,896 74,561 Trading account liabilities 25,354 20,958 Derivative-dealer liabilities 18,877 16,200 Commercial paper 10,330 7,331 Other short-term borrowings 45,271 40,340 Acceptances outstanding 2,277 1,869 Accrued expenses and other liabilities 21,506 19,169 Long-term debt 69,412 55,486 Trust preferred securities 4,955 4,955 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 624,866 588,142 ==================================================================================================================================== Commitments and contingencies (Note Seven) Shareholders' equity Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,732,349 and 1,797,702 shares 74 77 Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and outstanding - 1,630,823,577 and 1,677,273,267 shares 9,397 11,671 Retained earnings 39,338 35,681 Accumulated other comprehensive loss (1,808) (2,658) Other (142) (339) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 46,859 44,432 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $671,725 $632,574 ==================================================================================================================================== See accompanying notes to consolidated financial statements. 3 ============================================================================================================================= Bank of America Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Other Preferred -------------------------- Retained Comprehensive (Dollars in millions, shares in thousands) Stock Shares Amount Earnings Income (Loss)(1,2) Other - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $83 1,724,484 $14,837 $30,998 $ 152 $(132) Net income 5,980 Other comprehensive loss, net of tax (2,081) Comprehensive income Cash dividends: Common (2,342) Preferred (5) Common stock issued under employee plans 28,320 1,353 (349) Common stock repurchased (43,000) (2,904) Conversion of preferred stock (5) 232 5 Other 3 247 52 - ----------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1999 $78 1,710,039 $13,538 $34,631 $ (1,929) $(429) ============================================================================================================================= Balance, December 31, 1999 $77 1,677,273 $11,671 $35,681 $(2,658) $(339) Net income 6,132 Other comprehensive income, net of tax 850 Comprehensive income Cash dividends: Common (2,475) Preferred (4) Common stock issued under employee plans 3,091 53 184 Common stock repurchased (49,650) (2,444) Conversion of preferred stock (3) 109 3 Other 1 114 4 13 - ----------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 $74 1,630,824 $9,397 $39,338 $(1,808) $(142) ============================================================================================================================= ================================================================================ - -------------------------------------------------------------------------------- Total Share- holders' Comprehensive (Dollars in millions, shares in thousands) Equity Income - -------------------------------------------------------------------------------- Balance, December 31, 1998 $45,938 Net income 5,980 $5,980 Other comprehensive loss, net of tax (2,081) (2,081) ------ Comprehensive income $3,899 ====== Cash dividends: Common (2,342) Preferred (5) Common stock issued under employee plans 1,004 Common stock repurchased (2,904) Conversion of preferred stock Other 299 - -------------------------------------------------------------------------------- Balance, September 30, 1999 $45,889 ================================================================================ Balance, December 31, 1999 $44,432 Net income 6,132 $6,132 Other comprehensive income, net of tax 850 850 ------ Comprehensive income $6,982 ====== Cash dividends: Common (2,475) Preferred (4) Common stock issued under employee plans 237 Common stock repurchased (2,444) Conversion of preferred stock Other 131 - -------------------------------------------------------------------------------- Balance, September 30, 2000 $46,859 ================================================================================ (1) Changes in Accumulated Other Comprehensive Income (Loss) include after-tax net unrealized gains (losses) on available-for-sale and marketable equity securities of $852 and $(2,047) and after-tax net unrealized losses on foreign currency translation adjustments of $2 and $34 for the nine months ended September 30, 2000 and 1999, respectively. (2) Accumulated Other Comprehensive Income (Loss) consists of the after-tax valuation allowance for available-for-sale and marketable equity securities of $(1,618) and $(2,470) and foreign currency translation adjustments of $(190) and $(188) at September 30, 2000 and December 31, 1999, respectively. See accompanying notes to consolidated financial statements. 4 ============================================================================================================================ Bank of America Corporation and Subsidiaries Consolidated Statement of Cash Flows - ---------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 ------------------------ (Dollars in millions) 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Operating activities Net income $6,132 $5,980 Reconciliation of net income to net cash provided by operating activities: Provision for credit losses 1,325 1,470 Gains on sales of securities (23) (226) Merger and restructuring charges 550 200 Depreciation and premises improvements amortization 695 781 Amortization of intangibles 650 669 Deferred income tax (benefit) expense 1,329 (1,282) Net (increase) decrease in trading instruments (1,020) 3,571 Net increase in interest receivable (846) (108) Net (increase) decrease in other assets (6,364) 4,830 Net increase in interest payable 555 11 Net decrease in accrued expenses and other liabilities (84) (9,558) Other operating activities, net (103) 306 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,796 6,644 - ---------------------------------------------------------------------------------------------------------------------------- Investing activities Net (increase) decrease in time deposits placed and other short-term investments (704) 1,746 Net (increase) decrease in federal funds sold and securities purchased under agreements to resell 4,504 (13,223) Proceeds from sales of available-for-sale securities 15,802 29,722 Proceeds from maturities of available-for-sale securities 4,536 7,359 Purchases of available-for-sale securities (16,880) (35,047) Proceeds from maturities of held-to-maturity securities 211 514 Proceeds from sales and securitizations of loans and leases 22,618 38,179 Purchases and net originations of loans and leases (57,455) (42,303) Purchases and originations of mortgage servicing rights (337) (1,869) Net purchases of premises and equipment (434) (226) Proceeds from sales of foreclosed properties 200 247 Acquisitions and divestitures of business activities, net of cash 81 (1,311) - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (27,858) (16,212) - ---------------------------------------------------------------------------------------------------------------------------- Financing activities Net increase (decrease) in deposits 6,899 (19,204) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase (1,665) 12,196 Net increase in commercial paper and other short-term borrowings 7,947 9,229 Proceeds from issuance of long-term debt 22,993 14,297 Retirement of long-term debt (8,618) (5,628) Proceeds from issuance of common stock 237 1,004 Common stock repurchased (2,444) (2,904) Cash dividends paid (2,479) (2,347) Other financing activities, net (340) 56 - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 22,530 6,699 - ---------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (62) 6 - ---------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (2,594) (2,863) Cash and cash equivalents at December 31 26,989 28,277 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at September 30 $24,395 $25,414 ============================================================================================================================= Loans transferred to foreclosed properties amounted to $289 and $267 for the nine months ended September 30, 2000 and 1999, respectively. Loans securitized and retained in the available-for-sale securities portfolio amounted to $224 and $3,206 for the nine months ended September 30, 2000 and 1999, respectively. There were no acquisitions for the nine months ended September 30, 2000. The fair value of noncash assets acquired and liabilities assumed in acquisitions for the nine months ended September 30, 1999 were $1,557 and $74, net of cash acquired. See accompanying notes to consolidated financial statements. 5 Bank of America Corporation and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Bank of America Corporation (the Corporation) is a Delaware corporation, a bank holding company and a financial holding company. Through its banking and nonbanking subsidiaries, the Corporation provides a diverse range of financial services and products throughout the U.S. and in selected international markets. Note One - Accounting Policies The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The information contained in the consolidated financial statements is unaudited. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the interim period results have been made. Certain prior period amounts have been reclassified to conform to current period classifications. Accounting policies followed in the presentation of interim financial results are presented on pages 58 to 63 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of Financial Accounting Standards Board Statement No. 133", and Statement of Financial Accounting Standards No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" is effective for the Corporation as of January 1, 2001. SFAS 133 requires all derivative instruments to be recognized as either assets or liabilities and measured at their fair values. In addition, SFAS 133 allows special hedge accounting for some types of transactions provided that certain criteria are met. If SFAS 133 were adopted as of September 30, 2000, the transition adjustment would not materially impact the Corporation's results of operations and financial condition. The estimated impact of adopting SFAS 133 is based on amounts, positions and market conditions that existed at September 30, 2000. The actual impact of adopting SFAS 133 on January 1, 2001 could be materially different due to changes in market conditions as well as various discretionary factors. On September 29, 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - A Replacement of FASB Statement No. 125" (SFAS 140). SFAS 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Corporation is in the process of evaluating the impact of SFAS 140 on its results of operations and financial condition. In 1999, the Federal Financial Institutions Examination Council (FFIEC) issued The Uniform Classification and Account Management Policy (the Policy) which provides guidance for and promotes consistency among banks on the treatment of delinquent and bankruptcy-related consumer loans. The Corporation is required to implement the Policy by December 31, 2000 and expects to be in full compliance with the Policy by that date. The Corporation estimates additional charge-offs in the consumer portfolio, primarily within the consumer finance products, of approximately $100 million in the fourth quarter to comply with the Policy. 6 Note Two - Acquisition and Merger Activities At September 30, 2000, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA). On September 1, 2000, Bank of America Community Development Bank, National Association changed its name to Bank of America California, National Association. On March 31, 1999, NationsBank of Delaware, N.A. merged with and into Bank of America, N.A. (USA), a national association headquartered in Phoenix, Arizona (formerly known as Bank of America National Association), which operates the Corporation's credit card business. On April 1, 1999, the mortgage business of BankAmerica transferred to NationsBanc Mortgage Corporation. On December 1, 1999, NationsBanc Mortgage Corporation merged with and into BA Mortgage, LLC, a Delaware limited liability company and a Bank of America, N.A. subsidiary. On April 8, 1999, the Corporation merged Bank of America Texas, N.A. into NationsBank, N.A. On July 5, 1999, NationsBank, N.A. changed its name to Bank of America, N.A. On July 23, 1999, Bank of America, N.A. merged into Bank of America National Trust and Savings Association (Bank of America NT&SA), and the surviving entity of that merger changed its name to Bank of America, N.A. On December 1, 1999, Bank of America, FSB, a federal savings bank formerly headquartered in Portland, Oregon, was converted into a national bank and merged into Bank of America, N.A. On September 30, 1998, BankAmerica Corporation (BankAmerica) merged (the Merger) with and into the Corporation, formerly NationsBank Corporation (NationsBank). In connection with the Merger, the Corporation recorded pre-tax merger charges of $525 million ($358 million after-tax) in 1999 and $1,325 million ($960 million after-tax) in 1998. Of the $525 million in 1999, $200 million ($145 million after-tax) and $325 million ($213 million after-tax) were recorded in the second and fourth quarters, respectively. Of the $1,325 million in 1998, $725 million ($519 million after-tax) and $600 million ($441 million after-tax) were recorded in the third and fourth quarters, respectively. The total pre-tax charge for 1999 consisted of approximately $219 million primarily of severance, change in control and other employee-related costs, $187 million of conversion and related costs including occupancy, equipment and customer communication expenses, $128 million of exit and related costs and a $9 million reduction of other merger costs. The total pre-tax charge for 1998 consisted of approximately $740 million primarily of severance, change in control and other employee-related costs, $150 million of conversion and related costs including occupancy and equipment expenses (primarily lease exit costs and the elimination of duplicate facilities and other capitalized assets) and customer communication expenses, $300 million of exit and related costs and $135 million of other merger costs (including legal, investment banking and filing fees). Total severance, change in control and other employee-related costs include amounts related to job eliminations of former associates of BankAmerica and NationsBank impacted by the Merger. Through September 30, 2000, approximately 13,800 employees had entered the severance process. Employee-related costs of the Merger were principally in overlapping functions, operations and businesses of the Corporation. The BankAmerica merger reserve balance was $300 million at January 1, 2000. Cash payments applied to the reserve in 2000 were approximately $206 million and non-cash reductions were $48 million. The remaining merger reserve balance was $46 million at September 30, 2000. During 2000, the Corporation entered into several unrelated transactions to invest in technologies and service providers. In addition, the Corporation disposed of some of its assets and investments. Certain of these transactions, primarily related to Internet activities, contained agreements requiring the Corporation to purchase agreed upon levels of service each year. On June 15, 2000, the Corporation entered into an agreement, effective January 2, 2001, to acquire the remaining 50 percent of Marsico Capital Management, LLC (Marsico) for a total investment of $1.1 billion. The Corporation acquired the first 50 percent in 1999. Marsico is a Denver-based investment 7 management firm with almost $17 billion in assets under management, specializing in large capitalization growth stocks. For additional information on the Corporation's merger activities, refer to Note Two of the Corporation's 1999 Annual Report on Form 10-K. Note Three - Productivity and Investment Initiatives As part of its productivity and investment initiatives announced on July 28, 2000, the Corporation recorded a pre-tax restructuring charge of $550 million ($346 million after-tax) in the third quarter of 2000 which is included in merger and restructuring charges in the Consolidated Statement of Income. As part of these initiatives and in order to reallocate resources, the Corporation announced that it would eliminate 9,000 to 10,000 positions, or six to seven percent of its work force, over a twelve-month period. Of the $550 million restructuring charge, approximately $475 million will be used to cover severance and related costs and $75 million for other costs related to process change and channel consolidation. Over half of the severance and related costs are related to management positions which were eliminated in a review of span of control and management structure. The restructuring charge includes severance and related payments for 8,300 positions, which are company-wide and across all levels. The difference between the 8,300 positions and the 10,000 positions initially announced is expected to come from normal attrition. Through September 30, 2000, there were approximately 2,500 employees who had moved to severance status as part of these initiatives and approximately 3,500 additional employees who had been notified. The remaining 2,300 positions have been identified and the employees in these positions will be notified by March 31, 2001. Cash payments applied to the restructuring reserve in the third quarter of 2000 were approximately $81 million primarily related to severance costs, and noncash reductions were $39 million, primarily related to restricted stock accelerations. The remaining restructuring reserve balance was $430 million at September 30, 2000. 8 Note Four - Trading Activities Trading-Related Revenue Trading account profits represent the net amount earned from the Corporation's trading positions, which include trading account assets and liabilities as well as derivative-dealer positions. These transactions include positions to meet customer demand as well as for the Corporation's own trading account. Trading positions are taken in a diverse range of financial instruments and markets. The profitability of these trading positions is largely dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements. Trading account profits, as reported in the Consolidated Statement of Income, includes neither the net interest recognized on interest-earning and interest-bearing trading positions, nor the related funding charge or benefit. Trading account profits and trading-related net interest income ("trading-related revenue") are presented in the table below as they are both considered in evaluating the overall profitability of the Corporation's trading positions. Trading-related revenue is derived from foreign exchange spot, forward and cross-currency contracts, fixed income and equity securities and derivative contracts in interest rates, equities, credit and commodities. Three Months Ended Nine Months Ended September 30 September 30 ---------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------- Trading account profits - as reported $372 $313 $1,567 $1,208 Net interest income 252 161 735 476 ----------------------------------------------------------------------------------------- Total trading-related revenue $624 $474 $2,302 $1,684 ----------------------------------------------------------------------------------------- Trading-related revenue by product Foreign exchange contracts $110 $140 $400 $452 Interest rate contracts 88 104 571 444 Fixed income 118 84 360 380 Equities 302 116 925 338 Commodities and other 6 30 46 70 ----------------------------------------------------------------------------------------- Total trading-related revenue $624 $474 $2,302 $1,684 ========================================================================================= 9 Trading Account Assets and Liabilities The fair value of the components of trading account assets and liabilities at September 30, 2000 and December 31,1999 were: Fair Value --------------------------- September 30 December 31 (Dollars in millions) 2000 1999 ---------------------------------------------------------------------------------------------------------- Trading account assets U.S. Treasury securities $4,994 $ 6,793 Securities of other U.S. Government agencies and corporations 4,790 3,554 Certificates of deposit, bankers' acceptances and commercial paper 3,294 3,039 Corporate debt 3,164 2,993 Foreign sovereign debt 12,074 9,532 Mortgage-backed securities 6,740 6,748 Equity securities 5,652 2,856 Other 6,490 2,945 ---------------------------------------------------------------------------------------------------------- Total $47,198 $38,460 ========================================================================================================== Trading account liabilities U.S. Treasury securities $12,806 $8,414 Corporate debt 2,708 - Foreign sovereign debt 2,680 3,490 Equity securities 6,870 7,840 Other 290 1,214 ---------------------------------------------------------------------------------------------------------- Total $25,354 $20,958 ========================================================================================================== See Note Seven for additional information on derivative-dealer positions, including credit risk. Note Five - Loans and Leases Loans and leases at September 30, 2000 and December 31, 1999 were: September 30, 2000 December 31, 1999 --------------------- -------------------- (Dollars in millions) Amount Percent Amount Percent --------------------------------------------------------------------------------------------------- Commercial - domestic $149,566 37.2 % $143,450 38.7 % Commercial - foreign 30,482 7.6 27,978 7.5 Commercial real estate - domestic 26,275 6.5 24,026 6.5 Commercial real estate - foreign 248 .1 325 .1 --------------------------------------------------------------------------------------------------- Total commercial 206,571 51.3 195,779 52.8 --------------------------------------------------------------------------------------------------- Residential mortgage 94,114 23.4 81,860 22.1 Home equity lines 20,666 5.1 17,273 4.7 Direct/Indirect consumer 41,915 10.4 42,161 11.4 Consumer finance 25,446 6.3 22,326 6.0 Bankcard 11,691 2.9 9,019 2.4 Foreign consumer 2,189 .5 2,244 .6 --------------------------------------------------------------------------------------------------- Total consumer 196,021 48.7 174,883 47.2 --------------------------------------------------------------------------------------------------- Total loans and leases $402,592 100.0 % $370,662 100.0 % =================================================================================================== 10 The table below summarizes the changes in the allowance for credit losses for the three months and nine months ended September 30, 2000 and 1999: Three Months Nine Months Ended September 30 Ended September 30 ----------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------- Balance, beginning of period $ 6,815 $ 7,096 $ 6,828 $ 7,122 ------------------------------------------------------------------------------------------------------------- Loans and leases charged off (586) (600) (1,776) (1,938) Recoveries of loans and leases previously charged off 151 140 451 439 ------------------------------------------------------------------------------------------------------------- Net charge-offs (435) (460) (1,325) (1,499) ------------------------------------------------------------------------------------------------------------- Provision for credit losses 435 450 1,325 1,470 Other, net (76) (10) (89) (17) ------------------------------------------------------------------------------------------------------------- Balance, September 30 $ 6,739 $ 7,076 $ 6,739 $ 7,076 ============================================================================================================= The following table presents the recorded investment in specific loans that were considered individually impaired at September 30, 2000 and December 31, 1999: September 30 December 31 (Dollars in millions) 2000 1999 ------------------------------------------------------------------- Commercial - domestic $2,574 $1,133 Commercial - foreign 587 503 Commercial real estate - domestic 313 449 Commercial real estate - foreign 1 - ------------------------------------------------------------------- Total impaired loans $3,475 $2,085 =================================================================== A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Due to their homogeneous nature, consumer loans and certain smaller business loans are generally evaluated as a group based on individual loan type. Commercial and commercial real estate loans are generally evaluated individually due to a general lack of uniformity among individual loans within each loan type and business segment. Loans that have been identified as impaired are measured by management for impairment in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). Impaired loans are measured based on the present value of payments expected to be received, observable market prices or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral. If the recorded investment in impaired loans exceeds the measure of estimated fair value, a valuation allowance is established as a component of the allowance for credit losses. At September 30, 2000 and December 31, 1999, nonperforming loans including certain loans which were considered impaired totaled $4.2 billion and $3.0 billion, respectively. Foreclosed properties amounted to $226 million and $163 million at September 30, 2000 and December 31, 1999, respectively. 11 Note Six - Short-Term Borrowings and Long-Term Debt During 2000, Bank of America Corporation issued $6.2 billion in senior and subordinated long-term debt, domestically and internationally, with maturities ranging from 2002 to 2015. Of the $6.2 billion issued, $4.6 billion was converted from fixed rates ranging from 7.32 percent to 8.42 percent to floating rates through interest rate swaps at spreads ranging from nine to 59 basis points over three-month London InterBank Offered Rate (LIBOR) and 45 to 130 basis points over one-month LIBOR. The remaining $1.6 billion bears interest at floating rates ranging primarily from eight to 43 basis points over three-month LIBOR and 22 to 29 basis points over one-month LIBOR. At September 30, 2000, Bank of America Corporation had the authority to issue approximately $13.9 billion of corporate debt and other securities under its existing shelf registration statements. During 2000, Bank of America, N.A. issued $14.0 billion in senior long-term bank notes having maturities ranging from 2001 to 2013. Of the $14.0 billion issued, $5.1 billion bears interest at spreads ranging from zero to 15 basis points above three-month LIBOR, $4.1 billion bears interest at spreads ranging from 287 to 272 basis points below the prime rate, $3.1 billion bears interest at fixed rates ranging from 6.45 percent to 7.40 percent, $1.0 billion bears interest at spreads ranging from 14 to 28 basis points above the Fed Funds rate and $695 million bears interest at spreads ranging from five to 12 basis points above one-month LIBOR. Bank of America, N.A. maintains a domestic program to offer up to a maximum of $50.0 billion, at any one time, of bank notes with fixed or floating rates and maturities ranging from seven days or more from date of issue. Short-term bank notes outstanding under this program totaled $21.3 billion at September 30, 2000 compared to $15.2 billion at December 31, 1999. These short-term bank notes, along with Treasury tax and loan notes and term federal funds purchased, are reflected in other short-term borrowings in the Consolidated Balance Sheet. Long-term debt under current and former programs totaled $17.5 billion at September 30, 2000 compared to $10.1 billion at December 31, 1999. Bank of America Corporation and Bank of America, N.A. maintain a joint Euro medium-term note program to offer up to $20.0 billion of senior, or in the case of Bank of America Corporation, subordinated notes exclusively to non-United States residents. The notes bear interest at fixed or floating rates and may be denominated in U.S. dollars or foreign currencies. Bank of America Corporation uses foreign currency contracts to convert certain foreign-denominated debt into U.S. dollars. Bank of America Corporation's notes outstanding under this program totaled $5.2 billion at September 30, 2000 compared to $4.5 billion at December 31, 1999. Bank of America, N.A.'s notes outstanding under this program totaled $1.4 billion at September 30, 2000. Bank of America, N.A. had no notes outstanding under this program at December 31, 1999. Of the $20.0 billion authorized at September 30, 2000, Bank of America Corporation and Bank of America, N.A. had remaining authority to issue in the aggregate of debt securities under the current program approximately $4.8 billion and $8.6 billion, respectively. At September 30, 2000 and December 31, 1999, $2.7 billion and $3.3 billion, respectively, were outstanding under the former BankAmerica Euro medium-term note program. No additional debt securities will be offered under that program. Subsequent to September 30, 2000, the Corporation allocated $2 billion of the joint Euro medium-term note program to be used exclusively for secondary offerings to non-United States residents for a shelf registration statement filed in Japan. In addition, the Corporation filed a 300 billion yen (approximately U.S. $3 billion) shelf registration statement in Japan to be used exclusively for primary offerings to non-United States residents. 12 Note Seven - Commitments and Contingencies Credit Extension Commitments The Corporation enters into commitments to extend credit, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. The commitments shown below have been reduced by amounts collateralized by cash and amounts participated to other financial institutions. The following table summarizes outstanding commitments to extend credit: September 30 December 31 (Dollars in millions) 2000 1999 --------------------------------------------------------------------------------------- Credit card commitments $ 70,873 $ 67,394 Other loan commitments 251,764 246,827 Standby letters of credit and financial guarantees 32,259 32,993 Commercial letters of credit 4,068 3,690 Derivatives Credit Risk Associated with Derivative-Dealer Activities The table on the following page presents the notional or contract amounts at September 30, 2000 and December 31, 1999 and the credit risk amounts (the net replacement cost of contracts in a gain position) of the Corporation's derivative-dealer positions which are primarily executed in the over-the-counter market for trading purposes. This table should be read in conjunction with Note Eleven of the Corporation's 1999 Annual Report on Form 10-K. The notional or contract amounts indicate the total volume of transactions and significantly exceed the amount of the Corporation's credit or market risk associated with these instruments. Credit risk associated with derivatives is measured as the net replacement cost should the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts and any collateral underlying the contracts proves to be of no value. The credit risk amounts presented in the following table do not consider the value of any collateral but generally take into consideration the effects of legally enforceable master netting agreements. 13 Derivative-Dealer Positions September 30, 2000 December 31, 1999 -------------------------------------------------------- Contract/ Credit Contract/ Credit (Dollars in millions) Notional Risk Notional Risk -------------------------------------------------------------------------------------------------- Interest rate contracts Swaps $3,743,305 $ 2,854 $2,597,886 $ 4,936 Futures and forwards 1,061,897 76 644,795 50 Written options 459,808 - 560,070 - Purchased options 469,975 1,007 638,517 1,515 Foreign exchange contracts Swaps 55,036 1,130 55,278 918 Spot, futures and forwards 784,268 2,199 537,719 2,861 Written options 46,582 - 28,450 - Purchased options 32,077 352 26,820 368 Equity contracts Swaps 18,106 697 11,128 904 Futures and forwards 32,858 20 21,421 3 Written options 21,882 - 24,232 - Purchased options 34,026 4,147 28,251 4,012 Other contracts Swaps 7,263 1,757 1,950 165 Futures and forwards 2,631 140 1,075 33 Written options 11,781 - 4,636 - Purchased options 10,108 884 3,965 229 Credit derivatives 27,424 135 19,028 61 -------------------------------------------------------------------------------------------------- Net replacement cost $15,398 $16,055 ================================================================================================== The table above includes both long and short derivative-dealer positions. The average fair value of derivative-dealer assets for the nine months ended September 30, 2000 and for the year ended December 31, 1999 was $18.6 billion and $16.0 billion, respectively. The average fair value of derivative-dealer liabilities for the nine months ended September 30, 2000 and for the year ended December 31, 1999 was $19.3 billion and $16.5 billion, respectively. The fair value of derivative-dealer assets at September 30, 2000 and December 31, 1999 was $15.4 billion and $16.1 billion, respectively. The fair value of derivative-dealer liabilities at September 30, 2000 and December 31, 1999 was $18.9 billion and $16.2 billion, respectively. See Note Four for a discussion of trading-related revenue. During the nine months ended September 30, 2000 and 1999, there were no significant credit losses associated with derivative contracts. At September 30, 2000 and December 31, 1999, there were no nonperforming derivative positions that were material to the Corporation. In addition to credit risk management activities, the Corporation uses credit derivatives to generate revenue by taking on exposure to underlying credits. The Corporation also provides credit derivatives to sophisticated customers who wish to hedge existing credit exposures or take on additional credit exposure to generate revenue. The Corporation's credit derivative positions at September 30, 2000 and December 31, 1999 consisted of credit default swaps and total return swaps. 14 Asset and Liability Management (ALM) Activities The table below outlines the status of the Corporation's ALM activity at September 30, 2000 and December 31, 1999. It presents the notional amount and fair value of the Corporation's open and closed ALM contracts. This table should be read in conjunction with the "Market Risk Management" section on pages 42 through 46 and Note Eleven of the Corporation's 1999 Annual Report on Form 10-K. September 30, 2000 December 31, 1999 ---------------------------------------------------------------- Notional Fair Notional Fair (Dollars in millions) Amount Value Amount Value -------------------------------------------------------------------------------------------------------------- Open interest rate contracts Receive fixed swaps $59,334 $(843) $63,002 $(1,747) Pay fixed swaps 19,728 (54) 25,701 115 -------------------------------------------------------------------------------------------------------------- Net open receive fixed 39,606 (897) 37,301 (1,632) Basis swaps 7,627 (4) 7,971 (6) -------------------------------------------------------------------------------------------------------------- Total net swap position 47,233 (901) 45,272 (1,638) Option products 31,274 (111) 35,134 5 Futures and forwards 1,454 (4) 931 3 -------------------------------------------------------------------------------------------------------------- Total open interest rate contracts(1) (1,016) (1,630) -------------------------------------------------------------------------------------------------------------- Closed interest rate contracts Swap positions 113 174 Option products 99 82 Futures and forwards (19) (21) -------------------------------------------------------------------------------------------------------------- Total closed interest rate contracts(2) 193 235 -------------------------------------------------------------------------------------------------------------- Net interest rate contract position (823) (1,395) -------------------------------------------------------------------------------------------------------------- Open foreign exchange contracts(1) 5,916 (299) 6,231 (30) -------------------------------------------------------------------------------------------------------------- Total ALM contracts $(1,122) $(1,425) ============================================================================================================== (1) Fair value represents the net unrealized losses on open contracts. (2) Represents the unamortized net realized deferred gains associated with closed contracts. When-Issued Securities At September 30, 2000, the Corporation had commitments to purchase and sell when-issued securities of $21.9 billion and $27.4 billion, respectively. At December 31, 1999, the Corporation had commitments to purchase and sell when-issued securities of $12.0 billion and $16.8 billion, respectively. Litigation In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, substantial money damages are asserted against the Corporation and its subsidiaries and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. The Corporation and certain present and former officers and directors have been named as defendants in a number of actions filed in several federal courts that have been consolidated for pretrial purposes before a Missouri federal court. The amended complaint in the consolidated actions alleges, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. and related entities until mid-October 1998, in violation of various provisions of federal and state laws. The amended complaint also alleges that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals and alleges a scheme to have NationsBank gain control over the newly merged entity. The Missouri federal court has certified classes consisting generally of persons who were stockholders of NationsBank or 15 BankAmerica on September 30, 1998, or were entitled to vote on the Merger, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. The amended complaint substantially survived a motion to dismiss, and discovery is underway. Claims against certain director-defendants were dismissed with leave to replead. Similar class actions (including one limited to California residents raising the claim that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals) were filed in California state court, alleging violations of the California Corporations Code and other state laws. The action on behalf of California residents was certified but was dismissed. The Court of Appeals reversed the dismissal. A Petition for Review is pending in the Supreme Court of California. The remaining California actions have been consolidated, but have not been certified as class actions. The Missouri federal court has enjoined prosecution of those consolidated class actions as a class action. The plaintiffs who were enjoined have appealed that injunction to the United States Court of Appeals for the Eighth Circuit. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the losses, if any, resulting from the final outcome thereof, will not be material in the aggregate to the Corporation's financial position or results of operations. Note Eight - Shareholders' Equity and Earnings Per Common Share On July 26, 2000, the Corporation's Board of Directors (the Board) authorized a new stock repurchase program of up to 100 million shares of the Corporation's common stock at an aggregate cost of up to $7.5 billion. On June 23, 1999, the Board authorized the repurchase of up to 130 million shares of the Corporation's common stock at an aggregate cost of up to $10.0 billion. Through September 30, 2000, the Corporation had repurchased 128 million shares of its common stock in open market repurchases and under accelerated share repurchase programs at an average per-share price of $57.18 which reduced shareholders' equity by $7.3 billion. The remaining buyback authority for common stock under the 1999 program totaled $2.7 billion or two million shares at September 30, 2000. Earnings per common share is computed by dividing net income available to common shareholders by the weighted average common shares issued and outstanding. For diluted earnings per common share, net income available to common shareholders can be affected by the conversion of the registrant's convertible preferred stock. Where the effect of this conversion would have been dilutive, net income available to common shareholders is adjusted by the associated preferred dividends. This adjusted net income is divided by the weighted average number of common shares issued and outstanding for each period plus amounts representing the dilutive effect of stock options outstanding and the dilution resulting from the conversion of the registrant's convertible preferred stock, if applicable. The effect of convertible preferred stock is excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. 16 The calculation of earnings per common share and diluted earnings per common share for the three months and nine months ended September 30, 2000 and 1999 is presented below: Three Months Ended Nine Months Ended September 30 September 30 (Shares in thousands; dollars in millions, --------------------------------------------------------- except per share information) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Earnings per common share Net income $1,829 $2,151 $6,132 $5,980 Preferred stock dividends (1) (2) (4) (5) ------------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders $1,828 $2,149 $6,128 $5,975 ------------------------------------------------------------------------------------------------------------------------------- Average common shares issued and outstanding 1,639,392 1,722,307 1,654,013 1,734,401 ------------------------------------------------------------------------------------------------------------------------------- Earnings per common share $1.11 $ 1.25 $3.70 $ 3.45 =============================================================================================================================== Diluted earnings per common share Net income available to common shareholders $1,828 $2,149 $6,128 $5,975 Preferred stock dividends 1 2 4 5 ------------------------------------------------------------------------------------------------------------------------------- Net income available to common shareholders and assumed conversions $1,829 $2,151 $6,132 $5,980 ------------------------------------------------------------------------------------------------------------------------------- Average common shares issued and outstanding 1,639,392 1,722,307 1,654,013 1,734,401 ------------------------------------------------------------------------------------------------------------------------------- Incremental shares from assumed conversions: Convertible preferred stock 2,914 3,058 2,944 3,058 Stock options 18,726 29,781 17,791 36,233 ------------------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 21,640 32,839 20,735 39,291 ------------------------------------------------------------------------------------------------------------------------------- Total dilutive average common shares issued and outstanding 1,661,031 1,755,146 1,674,748 1,773,692 ------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 1.10 $ 1.23 $ 3.66 $ 3.37 ================================================================================================================================ Note Nine - Business Segment Information During the first quarter of 2000, the Corporation realigned its business segments to report the results of the Corporation's operations through three business segments: Consumer and Commercial Banking, Asset Management and Global Corporate and Investment Banking. In the third quarter of 2000, the Corporation continued to realign its business segments to report its results of operations through four business segments, which now include Equity Investments as a reporting segment. Consumer and Commercial Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels and commercial lending and treasury management services to middle market companies with annual revenue between $10 million and $500 million. Asset Management offers customized asset management and credit, financial advisory, fiduciary and trust services, and banking services. It also provides management of equity, fixed income, cash and alternative investments to individuals, corporations and a wide array of institutional clients and full service and discount brokerage services. Global Corporate and Investment Banking provides a diversified range of financial products such as investment banking, trade finance, treasury management, capital markets, leasing and financial advisory services to domestic and international corporations, financial institutions and government entities. Equity Investments includes Principal Investing, which formerly was a component of Global Corporate and Investment Banking. Principal Investing makes both direct and indirect equity investments in a wide variety of transactions. Equity Investments also includes the Corporation's strategic technology and alliances investment portfolio in addition to other parent company investments. The following tables include total revenue, net income and average total assets for the three months and nine months ended September 30, 2000 and 1999, respectively, for each business segment. Certain prior period amounts have been reclassified between segments to conform to the current period presentation. 17 For the three months ended September 30 Consumer and Global Corporate and Commercial Banking (2) Asset Management (2) Investment Banking (2) ---------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ 3,416 $ 3,398 $ 159 $ 149 $ 1,049 $ 987 Noninterest income 1,726 2,031 396 353 1,140 1,018 -------------------------------------------------------------------------------------------------------------------------------- Total revenue 5,142 5,429 555 502 2,189 2,005 Provision for credit losses 300 367 - 40 114 31 Gains (losses) on sales of securities - 41 - - (8) (4) Amortization of intangibles 165 173 6 6 41 40 Other noninterest expense 2,728 2,836 298 314 1,150 1,122 -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,949 2,094 251 142 876 808 Income tax expense 769 791 97 51 284 265 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,180 $ 1,303 $ 154 $ 91 $ 592 $ 543 ================================================================================================================================ Average total assets $316,985 $288,296 $24,343 $20,393 $252,131 $209,303 ================================================================================================================================ -------------------------------------------------------------------------------------------------------------------------------- For the three months ended September 30 Equity Investments (2) Corporate Other ---------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ (37) $ (23) $ 85 $ 92 Noninterest income 383 326 - - -------------------------------------------------------------------------------------------------------------------------------- Total revenue 346 303 85 92 Provision for credit losses - 12 21 - Gains on sales of securities - - 19 7 Amortization of intangibles 3 3 - - Merger and restructuring charges - - 550 - Other noninterest expense 22 37 (3) (5) -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 321 251 (464) 104 Income tax expense 125 97 (171) 44 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 196 $ 154 $ (293) $ 60 ================================================================================================================================ Average total assets $5,532 $3,742 $86,026 $89,714 ================================================================================================================================ (1) Net interest income is presented on a taxable-equivalent basis. (2) There were no material intersegment revenues among the four business segments. 18 -------------------------------------------------------------------------------------------------------------------------------- For the nine months ended September 30 Consumer and Global Corporate and Commercial Banking (2) Asset Management (2) Investment Banking (2) ------------------------------------------------------------------------------------ (Dollars in millions) 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ 10,188 $ 10,323 $ 472 $ 426 $ 3,171 $ 2,942 Noninterest income 5,138 5,401 1,227 1,176 3,773 3,311 -------------------------------------------------------------------------------------------------------------------------------- Total revenue 15,326 15,724 1,699 1,602 6,944 6,253 Provision for credit losses 986 1,112 11 80 288 260 Gains (losses) on sales of securities 1 42 - - (6) 6 Amortization of intangibles 503 523 18 19 121 119 Other noninterest expense 8,114 8,433 903 904 3,651 3,347 -------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 5,724 5,698 767 599 2,878 2,533 Income tax expense 2,252 2,149 295 222 991 874 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,472 $ 3,549 $ 472 $ 377 $ 1,887 $ 1,659 ================================================================================================================================ Average total assets $308,345 $289,228 $23,339 $19,984 $243,636 $215,179 ================================================================================================================================ -------------------------------------------------------------------------------------------------------------------------------- For the nine months ended September 30 Equity Investments (2) Corporate Other ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ (99) $ (65) $ 244 $ 285 Noninterest income 1,053 585 - - ------------------------------------------------------------------------------------------------------------------- Total revenue 954 520 244 285 Provision for credit losses 3 18 37 - Gains on sales of securities - - 28 178 Amortization of intangibles 8 8 - - Merger and restructuring charges - - 550 200 Other noninterest expense 73 90 55 (7) ------------------------------------------------------------------------------------------------------------------- Income before income taxes 870 404 (370) 270 Income tax expense 337 154 (138) 125 ------------------------------------------------------------------------------------------------------------------- Net income $ 533 $ 250 $ (232) $ 145 =================================================================================================================== Average total assets $5,134 $3,627 $89,144 $84,134 =================================================================================================================== (1) Net interest income is presented on a taxable-equivalent basis. (2) There were no material intersegment revenues among the four business segments. A reconciliation of the segments' net income to consolidated net income follows: Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------- Segments' net income $2,122 $2,091 $6,364 $5,835 Adjustments, net of taxes: Earnings associated with unassigned capital 52 53 155 176 Gains on sales of securities 12 4 18 110 Merger and restructuring charges (346) - (346) (145) Other (11) 3 (59) 4 ----------------------------------------------------------------------------------------------------------- Consolidated net income $1,829 $2,151 $6,132 $5,980 =========================================================================================================== 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 the Corporation. This could cause results or performance to differ materially from those expressed in our forward-looking statements. Words such as "expects", "anticipates", "believes", "estimates", variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers of the Corporation's Form 10-Q should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed throughout this report, as well as those discussed in the Corporation's 1999 Annual Report on Form 10-K. These statements are representative only on the date hereof, and the Corporation undertakes no obligation to update any forward-looking statements made. The possible events or factors include the following: the Corporation's loan growth is dependent on economic conditions, as well as various discretionary factors, such as decisions to securitize, sell, or purchase certain loans or loan portfolios; syndications or participations of loans; retention of residential mortgage loans; and the management of borrower, industry, product and geographic concentrations and the mix of the loan portfolio. The rate of nonperforming assets, charge-offs and provision expense can be affected by local, regional and international economic and market conditions, concentrations of borrowers, industries, products and geographic locations, the mix of the loan portfolio and management's judgments regarding the collectibility of loans. Liquidity requirements may change as a result of fluctuations in assets and liabilities and off-balance sheet exposures, which will impact the capital and debt financing needs of the Corporation and the mix of funding sources. Decisions to purchase, hold or sell securities are also dependent on liquidity requirements and market volatility, as well as on- and off-balance sheet positions. Factors that may impact interest rate risk include local, regional and international economic conditions, levels, mix, maturities, yields or rates of assets and liabilities, utilization and effectiveness of interest rate contracts and the wholesale and retail funding sources of the Corporation. The Corporation is also exposed to the potential of losses arising from adverse changes in market rates and prices which can adversely impact the value of financial products, including securities, loans, deposits, debt and derivative financial instruments, such as futures, forwards, swaps, options and other financial instruments with similar characteristics. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, state regulators and the Office of Thrift Supervision, whose policies and regulations could affect the Corporation's results. Other factors that may cause actual results to differ from the forward-looking statements include the following: projected business increases following process changes and productivity and investment initiatives are lower than expected or do not pay for severance or other related costs as quickly as anticipated; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions, such as investment banking firms, investment advisory firms, brokerage firms, investment companies and insurance companies, as well as other entities which offer financial services, located both within and outside the United States and through alternative delivery channels such as the Internet; interest rate, market and monetary fluctuations; inflation; market volatility; general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates; introduction and acceptance of new banking-related products, services and enhancements; fee pricing strategies; mergers and acquisitions and their integration into the Corporation; and management's ability to manage these and other risks. 20 Overview The Corporation is a Delaware corporation, a bank holding company and a financial holding company, and it is headquartered in Charlotte, North Carolina. The Corporation provides a diversified range of banking and nonbanking financial services and products both domestically and internationally through four major business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking, and Equity Investments. At September 30, 2000, the Corporation had $672 billion in assets and approximately 146,000 full-time equivalent employees. The remainder of management's discussion and analysis of the Corporation's results of operations and financial condition should be read in conjunction with the consolidated financial statements and related notes presented on pages 2 through 19. Refer to Table One for selected financial data for the three months and nine months ended September 30, 2000 and 1999 and Table Thirteen for the three quarters ending September 30, 2000. Key performance highlights for the nine months ended September 30, 2000 compared to the same period in 1999: (diamond) Net income totaled $6.1 billion, or $3.66 per common share (diluted), an increase of $152 million, or $0.29 per common share (diluted). Excluding merger and restructuring charges for both periods, net income increased $353 million, or $0.42 per common share (diluted). (diamond) Cash basis ratios on an operating basis measure performance excluding goodwill and other intangible assets and their related amortization expense. Cash basis diluted earnings per common share were $4.26, an increase of $0.43 per share. Return on average tangible common shareholders' equity was 28.68 percent, an increase of 20 basis points. The cash basis efficiency ratio was 50.84 percent, an improvement of 152 basis points, primarily due to a seven percent increase in noninterest income. (diamond) The return on average common shareholders' equity was 17.46 percent, an increase of 27 basis points. Excluding merger and restructuring charges, the return on average common shareholders' equity increased 84 basis points to 18.45 percent. (diamond) Total revenue includes net interest income on a taxable-equivalent basis and noninterest income. Total revenue was $25.2 billion, an increase of $783 million. >> Net interest income remained essentially unchanged at $14.0 billion. Managed loan growth, particularly in consumer products, and higher levels of core deposits and equity were partially offset by spread compression, the impact of securitizations and asset sales, the cost of share repurchases and deterioration in auto lease residual values. Average managed loans and leases were $417.4 billion, a $41.1 billion increase, primarily due to a 17 percent increase in consumer loans and leases. Average core deposits grew to $298.9 billion, an $8.6 billion increase. The net interest yield was 3.21 percent, a 31 basis point decline. The decrease was primarily due to spread compression, an increase in lower spread trading-related earning assets and the cost of share repurchases. >> Noninterest income was $11.2 billion, a $718 million increase. The increase in noninterest income was partially offset by a $681 million decrease in other income to $464 million, reflecting a third quarter 2000 charge of $186 million related to the deterioration of auto lease residual values, the absence of securitization gains and lower loan sales gains in 2000, and a gain on the sale of certain businesses in 1999. Consumer and Commercial Banking experienced a $185 million, or 13 percent, increase in card income to $1.6 billion as successful marketing campaigns in 2000 led to higher purchase volume and number of accounts. Income from investment and brokerage services increased $81 million to $1.1 billion in the Asset Management segment as a result of new asset management business and market growth combined with productivity increases in consumer brokerage. Global Corporate and Investment Banking had significant increases in trading account profits and 21 investment banking income. Trading account profits increased $359 million, or 30 percent, to $1.6 billion driven by higher revenues from interest rate contracts and equities, partially offset by decreases in foreign exchange contracts and fixed income activities. Investment banking income increased $129 million to $1.1 billion, or 13 percent, primarily attributable to growth in equity underwriting. Equity Investments had equity investment gains of $1.0 billion, reflecting an increase of $478 million, and included gains in both the principal investing and strategic technology and alliances areas. (diamond) The provision for credit losses was $.3 billion, a $145 million decrease. Net charge-offs were $1.3 billion, or 0.45 percent of average loans and leases. The resulting decrease of $174 million, or 10 basis points, was driven primarily by lower losses on bankcard loans. Nonperforming assets were $4.4 billion, or 1.09 percent of loans, leases and foreclosed properties at September 30, 2000, a $1.2 billion, or 23 basis point increase from December 31, 1999. The increase reflects a rise in nonperforming loans in the commercial - domestic portfolio, primarily in the financial services, theater and paging industries. Nonperforming loans also increased in real estate secured consumer finance loans, resulting from growth and seasoning in that portfolio. The allowance for credit losses totaled $6.7 billion and $6.8 billion at September 30, 2000 and December 31, 1999, respectively. (diamond) Noninterest expense was unchanged at $13.4 billion, reflecting higher revenue-related incentive compensation and spending on projects to improve sales and service, partially offset by cost reductions resulting from recent mergers. Employee-Related Matters Bank of America Pension Plan The Corporation and the BankAmerica 401(k) retirement plans were combined effective June 30, 2000. With the introduction of the revised Bank of America retirement plan, qualified BankAmerica employees who are currently active had a one-time opportunity to transfer certain assets in their 401(k) plan account to their Bank of America Pension Plan (pension plan) account effective August 4, 2000. The total amount of 401(k) plan assets transferred to the pension plan was $1.3 billion. The pension plan (which is a cash balance type of pension plan) has a balance guarantee feature, applied at the time a benefit payment is made from the plan, that protects the transferred portion of participants' accounts from future market downturns. The Corporation is responsible for funding any shortfall on the guarantee feature. Productivity and Investment Initiatives As part of its productivity and investment initiatives announced on July 28, 2000, the Corporation recorded a pre-tax restructuring charge of $550 million ($346 million after-tax) in the third quarter of 2000 which is included in merger and restructuring charges in the Consolidated Statement of Income. As part of these initiatives and in order to reallocate resources, the Corporation announced that it would eliminate 9,000 to 10,000 positions, or six to seven percent of its work force, over a twelve-month period. Of the $550 million restructuring charge, approximately $475 million will be used to cover severance and related costs and $75 million for other costs related to process change and channel consolidation. Over half of the severance and related costs are related to management positions which were eliminated in a review of span of control and management structure. The restructuring charge includes severance and related payments for 8,300 positions, which are company-wide and across all levels. The difference between the 8,300 positions and the 10,000 positions initially announced is expected to come from normal attrition. Through September 30, 2000, there were approximately 2,500 employees who had moved to severance status as part of these initiatives and approximately 3,500 additional employees who had been notified. The remaining 2,300 positions have been identified and the employees in these positions will be notified by March 31, 2001. Cash payments applied to the restructuring reserve in the third quarter of 2000 were approximately $81 million primarily related to severance costs, and noncash reductions were $39 million, primarily related to restricted stock accelerations. The remaining restructuring reserve balance was $430 million at September 30, 2000. Additionally, processes are being reviewed across the Corporation to ensure that it is organized around its customers and their needs. Significant process changes, primarily in the infrastructure of the 22 operations are expected in consumer real estate, commercial loan processing and servicing and branch support. The savings that are identified are targeted for reinvestment in areas that the Corporation believes provide the best growth opportunities. Among these areas are e-commerce, asset management and private banking, card and payment businesses and the investment banking platform. 23 Table One Selected Financial Data ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30 Nine Months Ended September 30 ------------------------------------------------------------------ (Dollars in millions, except per share information) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Operating Basis (1) ------------------- Income statement Interest income $ 11,265 $ 9,294 $ 32,088 $ 27,701 Interest expense 6,672 4,744 18,340 13,939 Net interest income 4,593 4,550 13,748 13,762 Net interest income (taxable-equivalent basis) 4,672 4,603 13,976 13,911 Provision for credit losses 435 450 1,325 1,470 Gains on sales of securities 11 44 23 226 Noninterest income 3,645 3,728 11,191 10,473 Other noninterest expense 4,410 4,526 13,446 13,436 Income before income taxes 3,404 3,346 10,191 9,555 Income tax expense 1,229 1,195 3,713 3,430 Net income 2,175 2,151 6,478 6,125 Net income available to common shareholders 2,174 2,149 6,474 6,120 ---------------------------------------------------------------------------------------------------------------------------- Performance ratios Return on average assets 1.26 % 1.40 % 1.29 % 1.34 % Return on average common shareholders' equity 18.15 18.40 18.45 17.61 Efficiency ratio 53.01 54.34 53.42 55.10 Shareholder value added $ 953 $ 971 $ 2,916 $ 2,624 ---------------------------------------------------------------------------------------------------------------------------- Per common share data Earnings $ 1.33 $ 1.25 $ 3.91 $ 3.53 Diluted earnings 1.31 1.23 3.87 3.45 ---------------------------------------------------------------------------------------------------------------------------- Cash basis financial data (2) Earnings $ 2,390 $ 2,373 $ 7,128 $ 6.794 Earnings per common share 1.46 1.38 4.31 3.91 Diluted earnings per common share 1.44 1.35 4.26 3.83 Return on average tangible assets 1.42 % 1.58 % 1.45 % 1.52 % Return on average tangible common shareholders' equity 27.81 29.48 28.68 28.48 Efficiency ratio 50.43 51.67 50.84 52.36 ---------------------------------------------------------------------------------------------------------------------------- As Reported ----------- Income statement Merger and restructuring charges $ 550 $ - $ 550 $ 200 Income before income taxes 2,854 3,346 9,641 9,355 Income tax expense 1,025 1,195 3,509 3,375 Net income 1,829 2,151 6,132 5,980 Net income available to common shareholders 1,828 2,149 6,128 5,975 Average common shares issued and outstanding (in thousands) 1,639,392 1,722,307 1,654,013 1,734,401 ---------------------------------------------------------------------------------------------------------------------------- Performance ratios Return on average assets 1.06 % 1.40 % 1.22 % 1.31 % Return on average common shareholders' equity 15.25 18.40 17.46 17.19 Total equity to total assets (period-end) 6.98 7.39 6.98 7.39 Total average equity to total average assets 6.97 7.59 7.01 7.60 Dividend payout ratio 44.83 36.02 40.38 39.20 ---------------------------------------------------------------------------------------------------------------------------- Per common share data Earnings $ 1.11 $ 1.25 $ 3.70 $ 3.45 Diluted earnings 1.10 1.23 3.66 3.37 Cash dividends paid .50 .45 1.50 1.35 Book value 28.69 26.79 28.69 26.79 ---------------------------------------------------------------------------------------------------------------------------- Cash basis financial data (2) Earnings $ 2,044 $ 2,373 $ 6,782 $ 6,649 Earnings per common share 1.25 1.38 4.10 3.83 Diluted earnings per common share 1.23 1.35 4.05 3.75 Return on average tangible assets 1.21 % 1.58 % 1.38 % 1.49 % Return on average tangible common shareholders' equity 23.78 29.48 27.28 27.87 Ending tangible equity to tangible assets 5.09 5.22 5.09 5.22 ---------------------------------------------------------------------------------------------------------------------------- Balance sheet (period-end) Total loans and leases $ 402,592 $ 360,236 $ 402,592 $ 360,236 Total assets 671,725 620,652 671,725 620,652 Total deposits 353,988 337,011 353,988 337,011 Long-term debt 69,412 54,352 69,412 54,352 Trust preferred securities 4,955 4,955 4,955 4,955 Common shareholders' equity 46,785 45,811 46,785 45,811 Total shareholders' equity 46,859 45,889 46,859 45,889 ---------------------------------------------------------------------------------------------------------------------------- Risk-based capital ratios (period-end) Tier 1 capital 7.32 % 7.71 % 7.32 % 7.71 % Total capital 10.80 11.39 10.80 11.39 Leverage ratio 6.06 6.59 6.06 6.59 ---------------------------------------------------------------------------------------------------------------------------- Market price per share of common stock Closing $ 52.38 $ 55.69 $ 52.38 55.69 High 57.63 76.38 61.00 76.38 Low 43.63 53.25 42.31 53.25 ============================================================================================================================ (1) Operating basis excludes merger and restructuring charges. (2) Cash basis calculations exclude goodwill and other intangible assets and their related amortization expense. 24 Business Segment Operations The Corporation provides a diversified range of banking and nonbanking financial services and products through its various subsidiaries. During the first quarter of 2000, the Corporation realigned its business segments to report the results of the Corporation's operations through three business segments: Consumer and Commercial Banking, Asset Management, and Global Corporate and Investment Banking. In the third quarter of 2000, the Corporation continued to realign its business segments to report its results of operations through four business segments, which now include Equity Investments as a reporting segment. The business segments summarized in Table Two are primarily managed with a focus on various performance measures including total revenue, net income, return on average equity and efficiency. These performance measures are also presented on a cash basis which excludes the impact of goodwill and other intangible assets and their related amortization expense. Total revenue includes net interest income on a taxable-equivalent basis and noninterest income. The net interest yield of the business segments reflects the results of a funds transfer pricing process which derives net interest income by matching assets and liabilities with similar interest rate sensitivity and maturity characteristics. Equity is allocated to each business segment based on an assessment of its inherent risk. Shareholder value added (SVA) is a new performance measure that is better aligned with the Corporation's growth strategy orientation and strengthens the Corporation's focus on generating shareholder value. SVA is defined as cash basis operating earnings less a charge for the use of capital. The capital charge is calculated by multiplying 12 percent (management's estimate of the shareholder's minimum required rate of return on capital invested) by average total common shareholders' equity (at the Corporation level) and by average allocated equity (at the business segment level). See Note Nine of the consolidated financial statements for additional business segment information and reconciliations to consolidated amounts. Additional information on noninterest income can be found in the "Noninterest Income" section beginning on page 41. Certain prior period amounts have been reclassified between segments and their components (presented after Table Two) to conform to the current period presentation. 25 -------------------------------------------------------------------------------------------------------------------------------- Table Two Business Segment Summary -------------------------------------------------------------------------------------------------------------------------------- For the three months ended September 30 Consumer and Global Corporate and Commercial Banking Asset Management Investment Banking Equity Investments ---------------------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 3,416 $ 3,398 $ 159 $ 149 $ 1,049 $ 987 $ (37) $ (23) Noninterest income 1,726 2,031 396 353 1,140 1,018 383 326 -------------------------------------------------------------------------------------------------------------------------------- Total revenue 5,142 5,429 555 502 2,189 2,005 346 303 Net income 1,180 1,303 154 91 592 543 196 154 Cash basis earnings 1,345 1,476 160 97 633 583 199 157 Shareholder value added 617 757 106 45 203 181 140 115 Net interest yield 4.69 % 5.17 % 2.68 % 3.03 % 1.95 % 2.20 % n/m n/m Average equity to average assets 7.61 8.26 7.29 8.35 5.65 6.34 35.60 % 37.25 % Return on average equity 19.4 21.7 34.5 21.1 16.5 16.2 39.7 43.9 Return on tangible equity 27.5 31.3 39.8 25.3 19.5 19.4 41.8 47.3 Efficiency ratio 56.3 55.4 54.6 63.7 54.4 58.0 6.9 13.1 Cash basis efficiency ratio 53.1 52.2 53.6 62.5 52.5 56.0 6.2 12.2 Average: Total loans and leases $265,267 $237,575 $22,634 $18,754 $114,580 $105,090 $ 450 $ 306 Total deposits 254,980 251,288 11,438 10,561 73,550 63,697 18 28 Total assets 316,985 288,296 24,343 20,393 252,131 209,303 5,532 3,742 ================================================================================================================================ -------------------------------------------------------------------------------------------------------------------------------- For the nine months ended September 30 Consumer and Global Corporate and Commercial Banking Asset Management Investment Banking Equity Investments --------------------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 10,188 $ 10,323 $ 472 $ 426 $ 3,171 $ 2,942 $ (99) $ (65) Noninterest income 5,138 5,401 1,227 1,176 3,773 3,311 1,053 585 -------------------------------------------------------------------------------------------------------------------------------- Total revenue 15,326 15,724 1,699 1,602 6,944 6,253 954 520 Net income 3,472 3,549 472 377 1,887 1,659 533 250 Cash basis earnings 3,975 4,072 490 396 2,008 1,778 541 258 Shareholder value added 1,807 1,946 331 244 769 578 379 139 Net interest yield 4.84 % 5.26 % 2.79 % 2.98 % 2.07 % 2.17 % n/m n/m Average equity to average assets 7.83 8.19 7.54 8.47 5.66 6.22 35.10 % 36.75 % Return on average equity 19.2 20.0 35.8 29.8 18.3 16.6 39.5 25.1 Return on tangible equity 27.4 29.3 41.3 35.2 21.5 19.8 41.9 27.5 Efficiency ratio 56.2 57.0 54.3 57.7 54.3 55.4 8.5 18.6 Cash basis efficiency ratio 52.9 53.6 53.2 56.5 52.6 53.5 7.7 17.1 Average: Total loans and leases $257,379 $234,817 $21,714 $18,360 $110,896 $109,394 $ 428 $ 293 Total deposits 254,813 251,246 11,374 11,680 70,003 65,150 13 10 Total assets 308,345 289,228 23,339 19,984 243,636 215,179 5,134 3,627 ================================================================================================================================ n/m = not meaningful -------------------------------------------------------------------------------------------------------------------------------- Consumer and Commercial Banking The Corporation's market share in the consumer and commercial businesses is significant across the fastest growing regions of the United States. The Corporation continues its strategy of focusing entirely on the customer in terms of sales and service. The results in 2000 also reflect the Corporation's continued focus on Card Services as a growth area as the consumer credit and debit card businesses experienced double-digit increases in both volume and in new accounts compared to 1999. The Corporation also experienced success in the middle market banking business by providing more investment banking services to its commercial customer base. Consumer and Commercial Banking provides a wide array of products and services to individuals, small businesses and middle market companies through multiple delivery channels. 26 - ------------------------------------------------------------------------------------------------------- Consumer and Commercial Banking ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $3,416 $3,398 $10,188 $10,323 Noninterest income 1,726 2,031 5,138 5,401 --------------------------------------------------------------------------------------------------- Total revenue 5,142 5,429 15,326 15,724 Cash basis earnings 1,345 1,476 3,975 4,072 Shareholder value added 617 757 1,807 1,946 Cash basis efficiency ratio 53.1 % 52.2 % 52.9 % 53.6 % - ------------------------------------------------------------------------------------------------------- (diamond) Strong card income and higher service charges for the nine months ended September 30, 2000 were offset by lower mortgage servicing income and lower gains on loan sales and securitizations. Included in the 2000 results was a third quarter charge related to the deterioration of auto lease residual values of $257 million, of which $71 million impacted net interest income and $186 million impacted other income included in noninterest income. >> Annualized loan growth of 10 percent had a positive effect on net interest income. This strong loan growth was more than offset by spread compression. >> Card income grew 13 percent as a result of successful marketing campaigns in 2000 and service charges were up four percent. These increases were offset by lower mortgage servicing income reflecting an adjustment to mortgage servicing rights in the prior year and 1999 gains on loan sales and securitizations. (diamond) Cash basis earnings for the nine months ended September 30, 2000 rose two percent, excluding auto lease residual charges in 2000 and 1999. >> Noninterest expense was down four percent over the prior year due to lower personnel expense, professional fees and equipment expense. >> The provision for credit losses decreased primarily due to improved credit quality in the credit card portfolio. The major components of Consumer and Commercial Banking are Banking Regions, Consumer Products and Commercial Banking. Banking Regions Banking Regions serves approximately 30 million consumer households in 21 states and the District of Columbia and overseas through its extensive network of approximately 4,500 banking centers, 14,000 ATMs, telephone and Internet channels on www.bankofamerica.com. Banking Regions provides a wide array of products and services, including deposit products such as checking, money market savings accounts, time deposits and IRAs, and credit products such as home equity, personal auto loans and auto leasing. Banking Regions also includes small business banking providing treasury management, credit services, community investment, debit card, e-commerce and brokerage services to over two million small business relationships across the franchise. 27 - ---------------------------------------------------------------------------------------------------------- Banking Regions ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $2,165 $2,142 $6,341 $6,358 Noninterest income 916 895 2,632 2,517 --------------------------------------------------------------------------------------------------- Total revenue 3,081 3,037 8,973 8,875 Cash basis earnings 836 782 2,275 2,175 Shareholder value added 497 427 1,251 1,118 Cash basis efficiency ratio 56.2 % 60.1 % 58.6 % 61.5 % - ---------------------------------------------------------------------------------------------------------- (diamond) Total revenue for the nine months ended September 30, 2000 increased one percent primarily due to a rise in noninterest income while net interest income remained essentially unchanged. >> Loan growth, primarily in home equity lending, and deposit growth had a positive effect on net interest income but was offset by spread compression and 1999 loan sales. >> Noninterest income increased five percent primarily due to a 47 percent increase in card income driven by a substantial rise in debit card income and an increase in consumer service charges of three percent throughout all Banking Regions. (diamond) Cash basis earnings increased five percent for the nine months ended September 30, 2000, primarily attributable to a decrease in noninterest expense driven by merger-related savings and lower merger transition costs. Consumer Products Consumer Products provides specialized services such as the origination and servicing of residential mortgage loans, issuance and servicing of credit cards, direct banking via telephone and Internet, student lending and certain insurance services. Consumer Products also provides auto loans, retail finance programs to dealerships and lease financing of new and used cars. - ------------------------------------------------------------------------------------------------------- Consumer Products ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------- Net interest income $ 752 $ 741 $2,312 $2,392 Noninterest income 551 911 1,803 2,249 - ---------------------------------------------------------------------------------------------------- Total revenue 1,303 1,652 4,115 4,641 Cash basis earnings 302 474 1,073 1,234 Shareholder value added 41 234 310 534 Cash basis efficiency ratio 47.8 % 39.6 % 43.9 % 42.1 % - ------------------------------------------------------------------------------------------------------- (diamond) Card Services experienced a nine percent increase in noninterest income as the consumer credit and debit card lines of the Card Services business had double-digit increases in both volume and in new accounts compared to the prior year due to successful marketing campaigns in 2000. In addition, noninterest income grew 33 percent in the Community Development Banking Group. These increases were offset by higher auto lease residual charges, lower mortgage servicing income and gains on loan sales and securitizations in 1999. 28 (diamond) A decrease in expense resulted in a two percent increase in cash basis earnings for the nine months ended September 30, 2000, excluding auto lease residual charges in 2000 and 1999. >> Noninterest expense decreased eight percent and was driven by expense reduction initiatives. >> The provision for credit losses decreased primarily due to improved credit quality in the credit card portfolio. (diamond) Net interest income remained essentially unchanged year-over-year as loan growth was offset by spread compression. Commercial Banking Commercial Banking provides commercial lending and treasury management services to middle market companies with annual revenue between $10 million and $500 million. These services are available through relationship manager teams as well as through alternative channels such as the telephone via the commercial service center and the Internet by accessing Bank of America Direct. - ------------------------------------------------------------------------------------------------------- Commercial Banking ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $499 $515 $1,535 $1,573 Noninterest income 259 225 703 635 --------------------------------------------------------------------------------------------------- Total revenue 758 740 2,238 2,208 Cash basis earnings 207 220 627 663 Shareholder value added 79 96 246 294 Cash basis efficiency ratio 49.5 % 48.2 % 47.0 % 46.3 % - ---------------------------------------------------------------------------------------------------------- (diamond) Total revenue for the nine months ended September 30, 2000 increased one percent due to an eleven percent increase in noninterest income, partially offset by a two percent decrease in net interest income. >> The increase in noninterest income was attributable to higher middle marketing investment banking fees and higher corporate service charges. >> Net interest income decreased primarily due to spread compression. (diamond) Higher noninterest income was offset by increased provision for credit losses and noninterest expense, resulting in a five percent decline in cash basis earnings for the nine months ended September 30, 2000. >> The provision for credit losses rose as a result of liquidation of businesses in the commercial finance portfolio as well as growth in the commercial banking loan portfolio. >> Noninterest expense increased three percent primarily due to higher expenses related to the increase in the middle market investment banking business. Asset Management The Corporation's strategy to focus on and grow the asset management business is evident in the results for 2000. The 21 percent growth in assets under management since September 30, 1999 and the six percent growth in revenue for the nine months ended September 30, 2000 reveal that customers are buying more investment products from the Corporation's asset management group. 29 Assets under management rose $47 billion to $275 billion at September 30, 2000 compared to September 30, 1999. The Nations Funds family of funds reached $100 billion in mutual fund assets during the third quarter of 2000, driven by increases in equity, fixed income and money market funds. Asset Management includes the Private Bank, Banc of America Capital Management and Banc of America Investment Services, Inc. The Private Bank offers financial solutions to high-net-worth clients and foundations in the U.S. and internationally by providing customized asset management and credit, financial advisory, fiduciary, trust and banking services. Banc of America Capital Management offers management of equity, fixed income, cash, and alternative investments; manages the assets of individuals, corporations, municipalities, foundations and universities, and public and private institutions; and provides advisory services to the Corporation's affiliated family of mutual funds. Banc of America Investment Services, Inc. provides both full-service and discount brokerage services through investment professionals located throughout the franchise and a brokerage web site that provides customers a wide array of market analyses, investment research and self-help tools, account information and transaction capabilities. On June 15, 2000, the Corporation entered into an agreement, effective January 2, 2001, to acquire the remaining 50 percent of Marsico Capital Management LLC (Marsico) for a total investment of $1.1 billion. The Corporation acquired the first 50 percent in 1999. Marsico is a Denver-based investment management firm specializing in large capitalization growth stocks. Marsico manages almost $17 billion in assets and has experienced compounded annual revenue growth of approximately 460 percent since its inception in 1997. The Corporation expects Marsico to benefit its marketing of investment capabilities to financial intermediaries and institutional clients. - ---------------------------------------------------------------------------------------------------------- Asset Management ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $159 $149 $ 472 $ 426 Noninterest income 396 353 1,227 1,176 --------------------------------------------------------------------------------------------------- Total revenue 555 502 1,699 1,602 Cash basis earnings 160 97 490 396 Shareholder value added 106 45 331 244 Cash basis efficiency ratio 53.6 % 62.5 % 53.2 % 56.5 % - ---------------------------------------------------------------------------------------------------------- (diamond) Total revenue increased six percent for the nine months ended September 30, 2000. The increase was attributable to increases in both net interest income and noninterest income. >> Net interest income increased 11 percent due to strong loan growth in the commercial loan portfolio. >> Noninterest income increased four percent primarily due to increased investment and brokerage fees driven by new asset management business and market growth combined with productivity increases in consumer brokerage, partially offset by gains in 1999 on the disposition of certain businesses. (diamond) Cash basis earnings increased 24 percent for the nine months ended September 30, 2000 due to the increase in total revenue, partially offset by one-time business divestiture expenditures in 2000. Global Corporate and Investment Banking The Corporation continues to focus on the investment banking business and continues to see success in building investment banking capabilities off of its strong corporate banking base. This success is 30 evident in the 13 percent growth in investment banking income in 2000 and Banc of America Securities LLC's top ten league table rankings in all key product areas. Global Corporate and Investment Banking provides a broad array of financial products such as investment banking, trade finance, treasury management, capital markets, leasing and financial advisory services to domestic and international corporations, financial institutions and government entities. Clients are supported through offices in 37 countries in four distinct geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and Latin America. Products and services provided include loan origination, merger and acquisition advisory, debt and equity underwriting and trading, cash management, derivatives, foreign exchange, leasing, leveraged finance, project finance, real estate finance, senior bank debt, structured finance and trade services. - ---------------------------------------------------------------------------------------------------------- Global Corporate and Investment Banking ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $1,049 $ 987 $3,171 $2,942 Noninterest income 1,140 1,018 3,773 3,311 --------------------------------------------------------------------------------------------------- Total revenue 2,189 2,005 6,944 6,253 Cash basis earnings 633 583 2,008 1,778 Shareholder value added 203 181 769 578 Cash basis efficiency ratio 52.5 % 56.0 % 52.6 % 53.5 % - ---------------------------------------------------------------------------------------------------------- (diamond) For the nine months ended September 30, 2000, total revenue increased 11 percent and was led by growth in noninterest income. This growth was the result of the success in investment banking activities and an increase in trading account profits driven by very favorable market conditions in the first quarter of 2000. >> Noninterest income increased 14 percent due to continued growth in equity-related trading, equity underwriting and advisory services. >> Net interest income increased eight percent as a result of higher trading-related activities and an increase in the domestic commercial loan portfolio. (diamond) For the nine months ended September 30, 2000, cash basis earnings increased 13 percent. The increase was primarily due to the higher revenue discussed above and was partially offset by an increase in noninterest expense of nine percent resulting from higher revenue-related incentive compensation and gains on sales of other assets in the prior year. Global Corporate and Investment Banking offers clients a comprehensive range of global capabilities through four components: Global Credit Products, Global Capital Raising, Global Markets, and Global Treasury Services. Global Credit Products Global Credit Products provides credit and lending services and includes the corporate industry-focused portfolio, real estate, leasing and project finance. 31 - ------------------------------------------------------------------------------------------------------- Global Credit Products ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $599 $621 $1,858 $1,880 Noninterest income 160 121 448 429 --------------------------------------------------------------------------------------------------- Total revenue 759 742 2,306 2,309 Cash basis earnings 321 356 956 1,015 Shareholder value added 61 111 204 279 Cash basis efficiency ratio 20.9 % 24.2 % 22.1 % 23.6 % - ------------------------------------------------------------------------------------------------------- (diamond) For the nine months ended September 30, 2000, total revenue remained essentially unchanged. >> Noninterest income increased four percent mainly due to a rise in corporate service charges. >> The increase in noninterest income was offset by a decrease in net interest income due to lower interest recoveries and the reduction in the international loan portfolio offset by domestic loan growth. (diamond) Noninterest expense declined six percent for the nine months ended September 30, 2000 mainly due to merger-related savings. Offsetting this decrease was a rise in the provision for credit losses driven by the charge-off of a single fraud-related credit in the second quarter of 2000 and credit deterioration, resulting in a six percent decline in cash basis earnings. Global Capital Raising Global Capital Raising includes the Corporation's investment banking activities. Through a separate subsidiary, Banc of America Securities LLC, Global Capital Raising underwrites and makes markets in equity securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities. Banc of America Securities LLC also provides correspondent clearing services for other securities broker/dealers, traditional brokerage services to high-net-worth individuals and prime-brokerage services. Debt and equity securities research, loan syndications, mergers and acquisitions advisory services, private placements and equity derivatives are also provided through Banc of America Securities LLC. - ---------------------------------------------------------------------------------------------------------- Global Capital Raising ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $108 $ 68 $ 362 $ 135 Noninterest income 637 435 1,927 1,393 --------------------------------------------------------------------------------------------------- Total revenue 745 503 2,289 1,528 Cash basis earnings 156 35 482 154 Shareholder value added 61 (35) 222 (38) Cash basis efficiency ratio 70.7 % 91.7 % 71.7 % 85.5 % - ---------------------------------------------------------------------------------------------------------- (diamond) Total revenue grew 50 percent for the nine months ended September 30, 2000 due to the continued growth and success of the investment banking platform. 32 >> Net interest income was up $227 million primarily due to higher equity-related trading activities. >> Noninterest income rose 38 percent driven by a substantial increase in equity-related trading account profits and higher investment banking income. The growth in investment banking income was driven by the equity platform while fixed income remained flat reflecting market conditions. (diamond) Cash basis earnings more than tripled with an increase of $328 million for the nine months ended September 30, 2000. These results were led by the increase in revenue partially offset by higher noninterest expense, which was driven by higher revenue-related incentive compensation. Global Markets Global Markets provides business solutions for a global customer base using interest rate derivatives, foreign exchange products, commodity derivatives and mortgage-related products. In support of these activities, the businesses will take positions in these products and capitalize on market-making activities. The Global Markets business also takes an active role in the trading of fixed income securities in all of the regions in which Global Corporate and Investment Banking transacts business and is a primary dealer in the U.S., as well as in several international locations. - ---------------------------------------------------------------------------------------------------------- Global Markets ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $189 $131 $502 $461 Noninterest income 154 265 825 926 --------------------------------------------------------------------------------------------------- Total revenue 343 396 1,327 1,387 Cash basis earnings 90 98 378 433 Shareholder value added 45 39 241 243 Cash basis efficiency ratio 59.2 % 65.5 % 55.0 % 53.9 % - ---------------------------------------------------------------------------------------------------------- (diamond) Net interest income increased nine percent for the nine months ended September 30, 2000. This was offset by an 11 percent decrease in noninterest income, resulting in a four percent decrease in total revenue. >> The increase in net interest income was driven by balance sheet strategies in interest rate contract trading. >> Noninterest income declined due to a decrease in trading account profits and other income. The decrease in trading account profits was partially offset by the increase in net interest income while the decrease in other income was driven by a reduction in an equity investment in the prior year. (diamond) A decrease in noninterest expense of three percent was offset by the decrease in noninterest income noted above. This resulted in a 13 percent decline in cash basis earnings for the nine months ended September 30, 2000. The decrease in noninterest expense was a result of a decline in revenue-related incentive compensation. 33 Global Treasury Services Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and public and private companies of all sizes manage their operations and cash flows on a local, regional, national and global level. - ---------------------------------------------------------------------------------------------------------- Global Treasury Services ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $ 153 $ 167 $ 449 $ 466 Noninterest income 189 197 573 563 --------------------------------------------------------------------------------------------------- Total revenue 342 364 1,022 1,029 Cash basis earnings 66 94 192 176 Shareholder value added 36 66 102 94 Cash basis efficiency ratio 76.2 % 60.9 % 75.6 % 72.7 % - ---------------------------------------------------------------------------------------------------------- (diamond) Noninterest income increased two percent for the nine months ended September 30, 2000 driven by an increase in corporate service charges. Offsetting this increase was a four percent decline in net interest income due to interest rate positions on U.S. deposits and narrower spreads on offshore deposits. The result was a one percent decline in revenue. (diamond) The increase in cash basis earnings of nine percent for the nine months ended September 30, 2000 was led by the increase in noninterest income and a lower provision expense driven by credit upgrades and declining emerging markets exposure in Trade Finance. Equity Investments Equity Investments includes Principal Investing, which formerly was a component of Global Corporate and Investment Banking. Principal Investing is comprised of a diversified portfolio of companies at all stages of the business cycle, from start-up to buyout. Investments are made on both a direct and indirect basis in the U.S. and overseas. Direct investing activity focuses on playing an active role in the strategic and financial direction of the portfolio company as well as providing broad business experience and access to the Corporation's global resources. Indirect investments represent passive limited partnership stakes in funds managed by experienced third party private equity investors who act as general partners. Equity Investments also includes the Corporation's strategic technology and alliances investment portfolio in addition to other parent company investments. 34 - ------------------------------------------------------------------------------------------------------- Equity Investments ----------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 ----------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------- Net interest income $ (37) $ (23) $ (99) $ (65) Noninterest income 383 326 1,053 585 --------------------------------------------------------------------------------------------------- Total revenue 346 303 954 520 Cash basis earnings 199 157 541 258 Shareholder value added 140 115 379 139 Cash basis efficiency ratio 6.2 % 12.2 % 7.7 % 17.1 % - ---------------------------------------------------------------------------------------------------------- (diamond) For the nine months ended September 30, 2000, both revenue and cash basis earnings were up substantially. Total revenue growth was 83 percent and cash basis earnings increased 110 percent. >> Equity investment gains increased $478 million to $1.0 billion and included principal investing gains of $808 million and gains in the strategic technology and alliances area of $231 million. 35 Results of Operations Net Interest Income An analysis of the Corporation's net interest income on a taxable-equivalent basis and average balance sheet for the most recent five quarters and for the nine months ended September 30, 2000 and 1999 is presented in Tables Three and Four, respectively. As reported, net interest income on a taxable-equivalent basis was $4.7 billion for the three months ended September 30, 2000, an increase of $69 million compared to the same period in 1999. For the nine months ended September 30, 2000 and 1999, net interest income on a taxable-equivalent basis was $14.0 billion and $13.9 billion, respectively. Management also reviews "core net interest income" which adjusts reported net interest income for the impact of trading-related activities, securitizations, asset sales and divestitures. For purposes of internal analysis, management combines trading-related net interest income with trading account profits, as discussed in the "Noninterest Income" section on page 41, as trading strategies are typically evaluated on total revenue. The determination of core net interest income also requires adjustment for the impact of securitizations (primarily home equity and credit card), asset sales (primarily residential and commercial real estate loans) and divestitures. Net interest income associated with assets that have been securitized is predominantly offset in noninterest income, as the Corporation takes on the role of servicer and records servicing income and gains on securitizations, where appropriate. The table below provides a reconciliation between net interest income on a taxable-equivalent basis presented in Tables Three and Four and core net interest income for the three months and nine months ended September 30, 2000 and 1999, respectively. --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 -------------------------- Increase/ ------------------------- Increase/ (Dollars in millions) 2000 1999 (Decrease) 2000 1999 (Decrease) --------------------------------------------------------------------------------------------------------------------------------- Net interest income As reported (1) $ 4,672 $ 4,603 1.50 % $ 13,976 $ 13,911 0.47 % Less: Trading-related net interest income (252) (161) (735) (476) Add: Impact of securitizations, asset sales and divestitures 133 38 565 133 --------------------------------------------------------------------------------------------------------------------------------- Core net interest income $ 4,553 $ 4,480 1.63 % $ 13,806 $ 13,568 1.75 % --------------------------------------------------------------------------------------------------------------------------------- Average earning assets As reported $ 597,248 $528,564 12.99 % $ 581,029 $527,450 10.16 % Less: Trading-related earning assets (124,538) (82,082) (118,199) (81,304) Add: Earning assets securitized, sold and divested 14,162 4,213 19,334 4,562 --------------------------------------------------------------------------------------------------------------------------------- Core average earning assets $ 486,872 $450,695 8.03 % $ 482,164 $450,708 6.98 % --------------------------------------------------------------------------------------------------------------------------------- Net interest yield on earning assets (1,2) As reported 3.12 % 3.46 % (34)bp 3.21 % 3.52 % (31)bp Add: Impact of trading-related activities 0.61 0.48 13 0.61 0.50 11 Impact of securitizations, asset sales and divestitures 0.01 - 1 0.02 - 2 --------------------------------------------------------------------------------------------------------------------------------- Core net interest yield on earning assets 3.74 % 3.94 % (20)bp 3.84 % 4.02 % (18)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 $4.6 billion and $13.8 billion for the three months and nine months ended September 30, 2000, respectively, an increase of $73 million and $238 million over the corresponding periods in 1999. For both periods, managed loan growth, particularly in consumer products, and higher levels of core deposits and equity were partially offset by spread compression, the cost of share repurchases and deterioration in auto lease residual values. Core average earning assets were $486.9 billion and $482.2 billion for the three months and nine months ended September 30, 2000, respectively, an increase of $36.2 billion and $31.5 billion over the same periods in 1999, primarily reflecting managed loan growth of 13 percent and 11 percent, respectively. Managed consumer loans increased 17 percent for both the three months and nine months 36 ended September 30, 2000, led by growth in residential mortgages, consumer finance loans and home equity lines. Loan growth is dependent on economic conditions, as well as various discretionary factors such as decisions to securitize certain loan portfolios and the management of borrower, industry, product and geographic concentrations. The core net interest yield decreased 20 basis points to 3.74 percent and 18 basis points to 3.84 percent for the three months and nine months ended September 30, 2000, respectively, mainly due to spread compression, the cost of share repurchases and deterioration in auto lease residual values. Provision for Credit Losses The provision for credit losses totaled $435 million and $1.3 billion for the three months and nine months ended September 30, 2000, respectively, compared to $450 million and $1.5 billion for the comparable 1999 periods. The decrease in the provision for credit losses was primarily due to a reduction in the inherent risk and size of the Corporation's emerging markets portfolio and a change in the composition of the loan portfolio from commercial and consumer foreign to more consumer loans secured by residential real estate. Total net charge-offs were $435 million and $1.3 billion for the three months and nine months ended September 30, 2000, respectively, compared to $460 million and $1.5 billion for the comparable 1999 periods. The decrease in net charge-offs was driven primarily by lower losses on bankcard loans. For additional information on the allowance for credit losses, certain credit quality ratios and credit quality information on specific loan categories see the "Credit Risk Management and Credit Portfolio Review" section beginning on page 48. Gains on Sales of Securities Gains on sales of securities were $11 million and $23 million for the three months and nine months ended September 30, 2000, respectively, compared to $44 million and $226 million in the respective periods of 1999. Securities gains were lower in 2000 as a result of continued unfavorable market conditions for certain debt securities. 37 Table Three Quarterly Average Balances and Interest Rates - Taxable-Equivalent Basis ----------------------------------------------------------------------------------------------------------------------- Third Quarter 2000 ----------------------------------------------------------- Interest Average Income/ Yield/ Average (Dollars in millions) Balance Expense Rate Balance ---------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,700 $ 83 6.97 % $ 4,578 Federal funds sold and securities purchased under agreements to resell 40,763 633 6.20 43,983 Trading account assets 53,793 749 5.55 48,874 Securities: Available-for-sale (1) 82,333 1,254 6.08 84,054 Held-to-maturity 1,395 30 8.59 1,406 ---------------------------------------------------------------------------------------------------------------------- Total securities 83,728 1,284 6.12 85,460 ---------------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 151,903 3,173 8.31 148,034 Commercial - foreign 29,845 555 7.39 29,068 Commercial real estate - domestic 26,113 597 9.09 25,497 Commercial real estate - foreign 235 5 8.30 376 ---------------------------------------------------------------------------------------------------------------------- Total commercial 208,096 4,330 8.28 202,975 ---------------------------------------------------------------------------------------------------------------------- Residential mortgage 94,380 1,759 7.45 91,825 Home equity lines 20,185 466 9.18 19,067 Direct/Indirect consumer 41,905 848 8.06 41,757 Consumer finance 25,049 559 8.93 24,123 Bankcard 10,958 344 12.49 9,429 Foreign consumer 2,190 48 8.79 2,228 ---------------------------------------------------------------------------------------------------------------------- Total consumer 194,667 4,024 8.25 188,429 ---------------------------------------------------------------------------------------------------------------------- Total loans and leases 402,763 8,354 8.26 391,404 ---------------------------------------------------------------------------------------------------------------------- Other earning assets 11,501 241 8.39 8,191 ---------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 597,248 11,344 7.57 582,490 ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 24,191 25,605 Other assets, less allowance for credit losses 63,578 64,493 ---------------------------------------------------------------------------------------------------------------------- Total assets $685,017 $672,588 ---------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $ 23,195 78 1.33 $ 23,936 NOW and money market deposit accounts 99,710 740 2.96 100,186 Consumer CDs and IRAs 77,864 1,083 5.53 77,384 Negotiated CDs, public funds and other time deposits 8,598 140 6.46 7,361 ---------------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 209,367 2,041 3.88 208,867 ---------------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 18,845 286 6.03 15,823 Governments and official institutions 11,182 177 6.30 9,885 Time, savings and other 25,972 364 5.58 27,697 ---------------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 55,999 827 5.87 53,405 ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 265,366 2,868 4.30 262,272 ---------------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 136,007 2,223 6.51 135,817 Trading account liabilities 24,233 237 3.88 20,532 Long-term debt (5) 74,022 1,344 7.26 69,779 ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 499,628 6,672 5.32 488,400 ---------------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 91,368 91,154 Other liabilities 46,286 45,922 Shareholders' equity 47,735 47,112 ---------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $685,017 $672,588 ---------------------------------------------------------------------------------------------------------------------- Net interest spread 2.25 Impact of noninterest-bearing sources .87 ---------------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,672 3.12 % ---------------------------------------------------------------------------------------------------------------------- 38 -------------------------------------------------------------------- Second Quarter 2000 First Quarter 2000 -------------------------------------------------------------------- Interest Interest Income/ Yield/ Average Income/ Yield/ (Dollars in millions) Expense Rate Balance Expense Rate -------------------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 79 7.02 % $ 4,504 $ 75 6.65 % Federal funds sold and securities purchased under agreements to resell 595 5.43 45,459 575 5.07 Trading account assets 702 5.77 39,733 542 5.47 Securities: Available-for-sale (1) 1,270 6.05 86,878 1,332 6.15 Held-to-maturity 27 7.68 1,333 24 7.19 -------------------------------------------------------------------------------------------------------------------------------- Total securities 1,297 6.08 88,211 1,356 6.16 -------------------------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 3,023 8.21 145,362 2,824 7.81 Commercial - foreign 515 7.12 27,927 486 6.99 Commercial real estate - domestic 563 8.88 24,664 517 8.43 Commercial real estate - foreign 8 9.15 344 8 9.29 -------------------------------------------------------------------------------------------------------------------------------- Total commercial 4,109 8.14 198,297 3,835 7.78 -------------------------------------------------------------------------------------------------------------------------------- Residential mortgage 1,696 7.40 85,427 1,566 7.34 Home equity lines 422 8.91 17,573 377 8.62 Direct/Indirect consumer 867 8.36 41,858 887 8.52 Consumer finance 545 9.03 22,798 486 8.53 Bankcard 279 11.87 8,404 234 11.22 Foreign consumer 48 8.81 2,227 50 9.00 -------------------------------------------------------------------------------------------------------------------------------- Total consumer 3,857 8.21 178,287 3,600 8.10 -------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 7,966 8.17 376,584 7,435 7.93 -------------------------------------------------------------------------------------------------------------------------------- Other earning assets 176 8.53 8,679 174 8.11 -------------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 10,815 7.45 563,170 10,157 7.24 -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,830 Other assets, less allowance for credit losses 62,019 -------------------------------------------------------------------------------------------------------------------------------- Total assets $651,019 -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings 78 1.32 $24,237 78 1.29 NOW and money market deposit accounts 734 2.94 98,424 679 2.78 Consumer CDs and IRAs 1,034 5.38 76,074 983 5.20 Negotiated CDs, public funds and other time deposits 111 6.09 6,966 103 5.93 -------------------------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 1,957 3.77 205,701 1,843 3.60 -------------------------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 232 5.92 14,180 188 5.33 Governments and official institutions 151 6.12 8,745 124 5.72 Time, savings and other 380 5.51 26,382 340 5.17 -------------------------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 763 5.74 49,307 652 5.31 -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,720 4.17 255,008 2,495 3.93 -------------------------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 1,990 5.89 131,517 1,802 5.51 Trading account liabilities 189 3.70 23,013 181 3.16 Long-term debt (5) 1,207 6.92 64,256 1,084 6.75 -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 6,106 5.02 473,794 5,562 4.72 -------------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 90,366 Other liabilities 40,829 Shareholders' equity 46,030 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $651,019 -------------------------------------------------------------------------------------------------------------------------------- Net interest spread 2.43 2.52 Impact of noninterest-bearing sources .81 .75 -------------------------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,709 3.24 % $4,595 3.27 % -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- Fourth Quarter 1999 -------------------------------------------------------------- Interest Average Income/ Yield/ Average (Dollars in millions) Balance Expense Rate Balance -------------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,512 $ 73 6.33 % $ 5,018 Federal funds sold and securities purchased under agreements to resell 39,700 458 4.60 33,074 Trading account assets 38,453 544 5.63 37,453 Securities: Available-for-sale (1) 85,009 1,301 6.10 78,779 Held-to-maturity 1,433 25 7.25 1,482 -------------------------------------------------------------------------------------------------------------------------- Total securities 86,442 1,326 6.12 80,261 -------------------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 140,674 2,707 7.64 136,149 Commercial - foreign 27,430 453 6.56 28,348 Commercial real estate - domestic 24,345 506 8.23 25,056 Commercial real estate - foreign 306 6 8.96 295 -------------------------------------------------------------------------------------------------------------------------- Total commercial 192,755 3,672 7.56 189,848 -------------------------------------------------------------------------------------------------------------------------- Residential mortgage 79,783 1,450 7.26 80,015 Home equity lines 16,882 345 8.12 16,316 Direct/Indirect consumer 42,442 888 8.30 42,740 Consumer finance 21,340 440 8.18 19,923 Bankcard 8,578 245 11.32 8,923 Foreign consumer 2,430 54 8.77 3,635 -------------------------------------------------------------------------------------------------------------------------- Total consumer 171,455 3,422 7.94 171,552 -------------------------------------------------------------------------------------------------------------------------- Total loans and leases 364,210 7,094 7.74 361,400 -------------------------------------------------------------------------------------------------------------------------- Other earning assets 10,247 193 7.51 11,358 -------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 543,564 9,688 7.09 528,564 -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,467 25,905 Other assets, less allowance for credit losses 61,712 56,979 -------------------------------------------------------------------------------------------------------------------------- Total assets $630,743 $611,448 -------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Domestic interest-bearing deposits: Savings $25,082 80 1.27 $26,037 NOW and money market deposit accounts 97,481 639 2.60 96,402 Consumer CDs and IRAs 74,653 932 4.95 73,429 Negotiated CDs, public funds and other time deposits 6,825 98 5.73 6,609 -------------------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 204,041 1,749 3.40 202,477 -------------------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 14,305 178 4.93 13,668 Governments and official institutions 7,121 99 5.53 7,185 Time, savings and other 24,993 298 4.72 25,500 -------------------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 46,419 575 4.91 46,353 -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 250,460 2,324 3.68 248,830 -------------------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 120,858 1,638 5.38 114,934 Trading account liabilities 19,223 190 3.92 15,677 Long-term debt (5) 59,972 995 6.63 59,283 -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 450,513 5,147 4.54 438,724 -------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 91,453 88,168 Other liabilities 41,985 38,117 Shareholders' equity 46,792 46,439 -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $630,743 $611,448 -------------------------------------------------------------------------------------------------------------------------- Net interest spread 2.55 Impact of noninterest-bearing sources .77 -------------------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $4,541 3.32 % -------------------------------------------------------------------------------------------------------------------------- --------------------------------- Third Quarter 1999 --------------------------------- Interest Income/ Yield/ (Dollars in millions) Expense Rate ------------------------------------------------------------------------------------------ Earning assets Time deposits placed and other short-term investments $ 69 5.50 % Federal funds sold and securities purchased under agreements to resell 440 5.30 Trading account assets 483 5.14 Securities: Available-for-sale (1) 1,208 6.12 Held-to-maturity 26 7.02 ------------------------------------------------------------------------------------------ Total securities 1,234 6.13 ------------------------------------------------------------------------------------------ Loans and leases (2): Commercial - domestic 2,488 7.25 Commercial - foreign 494 6.93 Commercial real estate - domestic 517 8.19 Commercial real estate - foreign 7 8.80 ------------------------------------------------------------------------------------------ Total commercial 3,506 7.33 ------------------------------------------------------------------------------------------ Residential mortgage 1,431 7.14 Home equity lines 321 7.79 Direct/Indirect consumer 875 8.13 Consumer finance 433 8.62 Bankcard 256 11.38 Foreign consumer 86 9.36 ------------------------------------------------------------------------------------------ Total consumer 3,402 7.89 ------------------------------------------------------------------------------------------ Total loans and leases 6,908 7.59 ------------------------------------------------------------------------------------------ Other earning assets 213 7.40 ------------------------------------------------------------------------------------------ Total earning assets (3) 9,347 7.03 ------------------------------------------------------------------------------------------ Cash and cash equivalents Other assets, less allowance for credit losses ------------------------------------------------------------------------------------------ Total assets ------------------------------------------------------------------------------------------ Interest-bearing liabilities Domestic interest-bearing deposits: Savings 82 1.25 NOW and money market deposit accounts 579 2.38 Consumer CDs and IRAs 898 4.85 Negotiated CDs, public funds and other time deposits 94 5.66 ------------------------------------------------------------------------------------------ Total domestic interest-bearing deposits 1,653 3.24 ------------------------------------------------------------------------------------------ Foreign interest-bearing deposits (4): Banks located in foreign countries 160 4.65 Governments and official institutions 90 4.99 Time, savings and other 295 4.57 ------------------------------------------------------------------------------------------ Total foreign interest-bearing deposits 545 4.66 ------------------------------------------------------------------------------------------ Total interest-bearing deposits 2,198 3.50 ------------------------------------------------------------------------------------------ Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 1,437 4.96 Trading account liabilities 189 4.78 Long-term debt (5) 920 6.21 ------------------------------------------------------------------------------------------ Total interest-bearing liabilities (6) 4,744 4.30 ------------------------------------------------------------------------------------------ Noninterest-bearing sources: Noninterest-bearing deposits Other liabilities Shareholders' equity ------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity ------------------------------------------------------------------------------------------ Net interest spread 2.73 Impact of noninterest-bearing sources .73 ------------------------------------------------------------------------------------------ Net interest income/yield on earning assets $4,603 3.46 % ------------------------------------------------------------------------------------------ (1) The average balance and yield on available-for-sale securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes taxable-equivalent basis adjustments of $79, $78 and $71 in the third, second and first quarters of 2000 and $66 and $53 in the fourth and third quarters of 1999, respectiely. Interest income also includes the impact of risk management interest rate contracts, which (decreased) increased interest income on the underlying assets $(13), $(11) and $7 in the third, second and first quarters of 2000 and $57 and $103 in the fourth and third quarters of 1999, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which (increased) decreased interest expense on the underlying liabilities $(16), $(5) and $(8) for the third, second and first quarters of 2000 and $(2) and $6 in the fourth and third quarters of 1999, respectively. 39 ---------------------------------------------------------------------------------------------------------------------------- Table Four Nine-Month Average Balances and Interest Rates - Taxable-Equivalent Basis ---------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30 ---------------------------------------------------------------- 2000 ---------------------------------------------------------------- Interest Average Income/ Yield/ Average (Dollars in millions) Balance Expense Rate Balance ---------------------------------------------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 4,594 $ 237 6.88 % $ 5,523 Federal funds sold and securities purchased under agreements to resell 43,392 1,803 5.54 29,742 Trading account assets 47,490 1,993 5.60 39,459 Securities: Available-for-sale (1) 84,414 3,856 6.09 76,377 Held-to-maturity 1,378 81 7.83 1,621 ---------------------------------------------------------------------------------------------------------------------------- Total securities 85,792 3,937 6.12 77,998 ---------------------------------------------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 148,446 9,020 8.12 137,551 Commercial - foreign 28,950 1,555 7.17 30,030 Commercial real estate - domestic 25,427 1,677 8.81 25,934 Commercial real estate - foreign 318 21 8.99 290 ---------------------------------------------------------------------------------------------------------------------------- Total commercial 203,141 12,273 8.07 193,805 ---------------------------------------------------------------------------------------------------------------------------- Residential mortgage 90,558 5,021 7.40 78,667 Home equity lines 18,946 1,265 8.92 15,906 Direct/Indirect consumer 41,840 2,602 8.31 42,216 Consumer finance 23,994 1,590 8.84 17,880 Bankcard 9,602 857 11.92 10,183 Foreign consumer 2,215 147 8.86 3,645 ---------------------------------------------------------------------------------------------------------------------------- Total consumer 187,155 11,482 8.19 168,497 ---------------------------------------------------------------------------------------------------------------------------- Total loans and leases 390,296 23,755 8.13 362,302 ---------------------------------------------------------------------------------------------------------------------------- Other earning assets 9,465 591 8.34 12,426 ---------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 581,029 32,316 7.42 527,450 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 25,205 25,867 Other assets, less allowance for credit losses 63,364 58,835 ---------------------------------------------------------------------------------------------------------------------------- Total assets $669,598 $612,152 ============================================================================================================================ Interest-bearing liabilities Domestic interest-bearing deposits: Savings $ 23,787 234 1.31 $ 23,174 NOW and money market deposit accounts 99,442 2,153 2.89 99,041 Consumer CDs and IRAs 77,110 3,100 5.37 73,794 Negotiated CDs, public funds and other time deposits 7,645 354 6.18 6,586 ---------------------------------------------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 207,984 5,841 3.75 202,595 ---------------------------------------------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 16,292 706 5.79 16,973 Governments and official institutions 9,942 452 6.07 8,141 Time, savings and other 26,681 1,084 5.42 26,274 ---------------------------------------------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 52,915 2,242 5.66 51,388 ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 260,899 8,083 4.14 253,983 ---------------------------------------------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 134,451 6,015 5.98 114,562 Trading account liabilities 22,599 607 3.59 14,189 Long-term debt (5) 69,370 3,635 6.99 56,766 ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 487,319 18,340 5.03 439,500 ---------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits 90,964 87,710 Other liabilities 44,353 38,405 Shareholders' equity 46,962 46,537 ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $669,598 $612,152 ============================================================================================================================ Net interest spread 2.39 Impact of noninterest-bearing sources .82 ---------------------------------------------------------------------------------------------------------------------------- Net interest income/yield on earning assets $13,976 3.21 % ============================================================================================================================ ---------------------------------------------------------------------------------------- ---------------------------- 1999 ---------------------------- Interest Income/ Yield/ (Dollars in millions) Expense Rate ---------------------------------------------------------------------------------------- Earning assets Time deposits placed and other short-term investments $ 222 5.39 % Federal funds sold and securities purchased under agreements to resell 1,208 5.43 Trading account assets 1,558 5.27 Securities: Available-for-sale (1) 3,508 6.13 Held-to-maturity 87 7.13 ---------------------------------------------------------------------------------------- Total securities 3,595 6.15 ---------------------------------------------------------------------------------------- Loans and leases (2): Commercial - domestic 7,405 7.20 Commercial - foreign 1,444 6.43 Commercial real estate - domestic 1,609 8.30 Commercial real estate - foreign 19 8.69 ------------------------------------------------------------------------------------- Total commercial 10,477 7.23 ---------------------------------------------------------------------------------------- Residential mortgage 4,217 7.15 Home equity lines 923 7.75 Direct/Indirect consumer 2,581 8.17 Consumer finance 1,230 9.20 Bankcard 889 11.67 Foreign consumer 262 9.60 ---------------------------------------------------------------------------------------- Total consumer 10,102 8.01 ---------------------------------------------------------------------------------------- Total loans and leases 20,579 7.59 ---------------------------------------------------------------------------------------- Other earning assets 688 7.38 ---------------------------------------------------------------------------------------- Total earning assets (3) 27,850 7.05 ---------------------------------------------------------------------------------------- Cash and cash equivalents Other assets, less allowance for credit losses ---------------------------------------------------------------------------------------- Total assets ======================================================================================== Interest-bearing liabilities Domestic interest-bearing deposits: Savings 220 1.27 NOW and money market deposit accounts 1,735 2.34 Consumer CDs and IRAs 2,602 4.71 Negotiated CDs, public funds and other time deposits 263 5.33 ---------------------------------------------------------------------------------------- Total domestic interest-bearing deposits 4,820 3.18 ---------------------------------------------------------------------------------------- Foreign interest-bearing deposits (4): Banks located in foreign countries 624 4.91 Governments and official institutions 301 4.94 Time, savings and other 933 4.71 ---------------------------------------------------------------------------------------- Total foreign interest-bearing deposits 1,858 4.83 ---------------------------------------------------------------------------------------- Total interest-bearing deposits 6,678 3.52 ---------------------------------------------------------------------------------------- Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 4,188 4.89 Trading account liabilities 468 4.41 Long-term debt (5) 2,605 6.12 ---------------------------------------------------------------------------------------- Total interest-bearing liabilities (6) 13,939 4.24 ---------------------------------------------------------------------------------------- Noninterest-bearing sources: Noninterest-bearing deposits Other liabilities Shareholders' equity ---------------------------------------------------------------------------------------- Total liabilities and shareholders' equity ======================================================================================== Net interest spread 2.81 Impact of noninterest-bearing sources .71 ---------------------------------------------------------------------------------------- Net interest income/yield on earning assets $13,911 3.52 % ======================================================================================== (1) The average balance and yield on available-for-sale securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes taxable-equivalent basis adjustments of $228 and $149 for the nine months ended September 30, 2000 and 1999, respectively. Interest income also includes the impact of risk management interest rate contracts, which (decreased) increased interest income on the underlying assets $(17) and $249 for the nine months ended September 30, 2000 and 1999, respectively. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) Long-term debt includes trust preferred securities. (6) Interest expense includes the impact of risk management interest rate contracts, which (increased) decreased interest expense on the underlying liabilities $(29) and $118 for the nine months ended September 30, 2000 and 1999, respectively. 40 Noninterest Income As presented in Table Five, noninterest income decreased $83 million and increased $718 million to $3.6 billion and $11.2 billion for the three months and nine months ended September 30, 2000, respectively, from the comparable 1999 periods. The decrease in noninterest income for the three months ended September 30, 2000 primarily reflects declines in other income and mortgage servicing income partially offset by increases in equity investment gains, trading account profits and investment and brokerage services. The increase in noninterest income for the nine months ended September 30, 2000 reflects increases in equity investment gains, trading account profits, card income, service charges, investment and brokerage services and investment banking income. These increases were partially offset by declines in other income and mortgage servicing income. Table Five Noninterest Income ----------------------------------------------------------------------------------------------------------------------------- Three Months Increase/ Nine Months Ended September 30 (Decrease) Ended September 30 ---------------------------------------------------------------------------- (Dollars in millions) 2000 1999 Amount Percent 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Consumer service charges $ 684 $ 644 $40 6.2 % $1,948 $1,881 Corporate service charges 489 480 9 1.9 1,457 1,372 ----------------------------------------------------------------------------------------------------------------------------- Total service charges 1,173 1,124 49 4.4 3,405 3,253 ----------------------------------------------------------------------------------------------------------------------------- Consumer investment and brokerage services 357 355 2 .6 1,108 1,000 Corporate investment and brokerage services 114 63 51 81.0 340 311 ----------------------------------------------------------------------------------------------------------------------------- Total investment and brokerage services 471 418 53 12.7 1,448 1,311 ----------------------------------------------------------------------------------------------------------------------------- Mortgage servicing income 144 206 (62) (30.1) 408 463 Investment banking income 376 363 13 3.6 1,146 1,017 Equity investment gains 422 339 83 24.5 1,119 628 Card income 594 557 37 6.6 1,634 1,448 Trading account profits 372 313 59 18.8 1,567 1,208 Other income 93 408 (315) (77.2) 464 1,145 ----------------------------------------------------------------------------------------------------------------------------- Total $3,645 $3,728 $(83) (2.2)% $11,191 $10,473 ----------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ Increase/ (Decrease) ----------------------- (Dollars in millions) Amount Percent ------------------------------------------------------------------------ Consumer service charges $67 3.6 % Corporate service charges 85 6.2 ------------------------------------------------------------------------ Total service charges 152 4.7 ------------------------------------------------------------------------ Consumer investment and brokerage services 108 10.8 Corporate investment and brokerage services 29 9.3 ------------------------------------------------------------------------ Total investment and brokerage services 137 10.5 ------------------------------------------------------------------------ Mortgage servicing income (55) (11.9) Investment banking income 129 12.7 Equity investment gains 491 78.2 Card income 186 12.8 Trading account profits 359 29.7 Other income (681) (59.5) ------------------------------------------------------------------------ Total $ 718 6.9 % ------------------------------------------------------------------------ The following section discusses the noninterest income results of the Corporation's four business segments, as well as other income for the total Corporation. For additional business segment information, see "Business Segment Operations" beginning on page 25. Consumer and Commercial Banking (diamond) Noninterest income for Consumer and Commercial Banking decreased $263 million to $5.1 billion for the nine months ended September 30, 2000. The increase in card income as a result of successful marketing campaigns and higher service charges were offset by a charge in the third quarter related to the deterioration in auto lease residual values, lower mortgage servicing income and lower gains on loan sales and securitizations, causing a five percent decrease in noninterest income for the nine months ended September 30, 2000. >> Card income includes merchant discount, credit card and debit card fees and interchange income. Card income increased $185 million to $1.6 billion primarily due to increased purchase volume and number of accounts in both the credit card and debit card portfolios resulting in higher interchange income, fee income from the credit card portfolio and servicing income from securitized credit card receivables. Growth in income for the core portfolio is being generated through traditional marketing channels, expanding relationships with existing customers and leveraging the franchise network. Card income included revenue from the securitized portfolio of $159 million for the nine months ended September 30, 2000. Card income included revenue and gains from the securitized portfolio of $149 million for the nine months ended September 30, 1999. 41 (diamond) Service charges include deposit account service charges, non-deposit service charges and fees, bankers' acceptances and letters of credit fees and fees on factored accounts receivable. Service charges increased $94 million to $2.6 billion for the nine months ended September 30, 2000 due to an increase in both consumer and corporate service charges. Consumer service charges increased $64 million primarily due to overdraft charges and general banking service fees. Corporate service charges increased $30 million primarily attributable to overdraft charges and bankers' acceptances and letters of credit fee income. (diamond) Mortgage servicing income decreased $55 million to $408 million for the nine months ended September 30, 2000, primarily reflecting an adjustment in the prior year to mortgage servicing rights to reflect lower expected mortgage prepayments. The average managed portfolio of mortgage loans serviced increased $40.8 billion to $325.5 billion. Total production of first mortgage loans originated through the Corporation decreased $20.6 billion to $40.5 billion, reflecting a slowdown in refinancings as a result of a general increase in levels of interest rates. First mortgage loan origination volume was composed of approximately $16.4 billion of retail loans and $24.1 billion of correspondent and wholesale loans. >> In conducting its mortgage production activities, the Corporation is exposed to interest rate risk for the periods between the loan commitment date and the loan funding date. To manage this risk, the Corporation enters into various financial instruments including forward delivery contracts, Euro dollar futures and option contracts. The notional amount of such contracts was $8.1 billion at September 30, 2000 with associated net unrealized losses of $32 million. At December 31, 1999, the notional amount of such contracts was $2.7 billion with associated net unrealized gains of $18 million. These contracts have an average expected maturity of less than 90 days. To manage risk associated with changes in prepayment rates and the impact on mortgage servicing rights, the Corporation uses various financial instruments including options and certain swap contracts. At September 30, 2000, deferred net gains from mortgage servicing rights hedging activity were $181 million, comprised of unamortized realized deferred gains of $231 million and unrealized losses of $50 million on closed and open positions, respectively. At December 31, 1999, deferred net losses from mortgage servicing rights hedging activity were $20 million, comprised of unamortized realized deferred gains of $313 million and unrealized losses of $333 million on closed and open positions, respectively. Notional amounts of hedge instruments used for mortgage servicing rights hedging activities were $48.1 billion and $43.4 billion at September 30, 2000 and December 31, 1999, respectively. Asset Management (diamond) Noninterest income for Asset Management increased $51 million to $1.2 billion for the nine months ended September 30, 2000. The increase was primarily attributable to increased investment and brokerage services, partially offset by gains in 1999 on the disposition of certain businesses. >> Investment and brokerage services include personal and institutional asset management fees and consumer brokerage fees. Income from investment and brokerage services increased $81 million to $1.1 billion. This increase was primarily attributable to higher revenue from consumer investment and brokerage services reflecting new asset management business and market growth combined with productivity increases in consumer brokerage. 42 Global Corporate and Investment Banking (diamond) Noninterest income for Global Corporate and Investment Banking increased $462 million to $3.8 billion for the nine months ended September 30, 2000. The increase was due to increases in trading account profits, investment banking income and corporate service charges. >> Trading account profits represent the net amount earned from the Corporation's trading positions, which include trading account assets and liabilities as well as derivative-dealer positions. These transactions include positions to meet customer demand as well as for the Corporation's own trading account. Trading positions are taken in a diverse range of financial instruments and markets. The profitability of these trading positions is largely dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements. Trading account profits, as reported in the Consolidated Statement of Income, includes neither the net interest recognized on interest-earning and interest-bearing trading positions, nor the related funding charge or benefit. Trading account profits, as well as trading-related net interest income ("trading-related revenue"), are presented in the table below as they are both considered in evaluating the overall profitability of the Corporation's trading positions. Trading-related revenue is derived from foreign exchange spot, forward and cross-currency contracts, fixed income and equity securities and derivative contracts in interest rates, equities, credit and commodities. Trading-related revenue increased $618 million to $2.3 billion for the nine months ended September 30, 2000, primarily due to interest rate contracts and equities (including equity derivatives), partially offset by decreases in foreign exchange contracts, fixed income and commodities and other contracts. Revenue from equities increased $587 million to $925 million. The increase reflects continued growth of this business through enhanced client deal activity and volatility in equity markets. Income from interest rate contracts increased $127 million to $571 million. The increase was primarily attributable to market volatility driven by interest rate uncertainty, coupled with stronger client activity in domestic and international markets. Foreign exchange revenue decreased $52 million to $400 million due primarily to reduced volatility in the current year. Fixed income decreased $20 million to $360 million primarily attributable to spread widening and a decline in customer demand. - ---------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30 September 30 --------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------- Trading account profits - as reported $372 $313 $1,567 $1,208 Net interest income 252 161 735 476 - ---------------------------------------------------------------------------------------------------- Total trading-related revenue $624 $474 $2,302 $1,684 - ---------------------------------------------------------------------------------------------------- Trading-related revenue by product Foreign exchange contracts $110 $140 $400 $452 Interest rate contracts 88 104 571 444 Fixed income 118 84 360 380 Equities 302 116 925 338 Commodities and other 6 30 46 70 - ---------------------------------------------------------------------------------------------------- Total trading-related revenue $624 $474 $2,302 $1,684 - ---------------------------------------------------------------------------------------------------- 43 (diamond) Investment banking income increased $129 million to $1.1 billion for the nine months ended September 30, 2000. The increase primarily reflects an increase of $150 million to $489 million in securities underwriting fees, attributable to continued growth in equity underwriting. Advisory services fees increased $51 million to $227 million primarily attributable to strong revenue from a higher volume of merger and acquisition deals in the first quarter. Syndication fees increased $27 million to $384 million, reflecting the Corporation's continued strong position as a lead arranger on syndications. Investment banking income by major activity follows: - ------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30 September 30 --------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------ Investment banking income Securities underwriting $160 $119 $489 $339 Syndications 130 167 384 357 Advisory services 69 52 227 176 Other 17 25 46 145 - ------------------------------------------------------------------------------ Total $376 $363 $1,146 $1,017 - ------------------------------------------------------------------------------ (diamond) Corporate service charges increased $59 million to $780 million for the nine months ended September 30, 2000, driven by an increase in non-deposit and deposit account service charges, partially offset by a decline in bankers' acceptances and letters of credit fees. Equity Investments (diamond) Noninterest income for Equity investments increased $468 million to $1.1 billion for the nine months ended September 30, 2000. This increase was driven by strong equity investment gains. >> Equity investment gains increased $478 million to $1.0 billion and included principal investing gains of $808 million and gains in the strategic technology and alliances area of $231 million. Other Income Other income for the Corporation decreased $681 million to $464 million for the nine months ended September 30, 2000 reflecting a $186 million charge related to the deterioration of auto lease residual values in the third quarter, the absence of securitization gains and lower loan sales gains in 2000, and a gain on the sale of certain businesses in 1999. 44 Other Noninterest Expense As presented in Table Six, the Corporation's other noninterest expense decreased $116 million and increased $10 million to $4.4 billion and $13.4 billion for the three months and nine months ended September 30, 2000, respectively, from the comparable 1999 periods. The decrease for the three months ended was primarily attributable to declines in professional fees, personnel and equipment expenses. The increase for the nine months ended was primarily attributable to increases in personnel, other general operating and occupancy expenses, partially offset by decreases in professional fees, equipment, data processing and marketing expenses. - ----------------------------------------------------------------------------------------------------------------------------------- Table Six Other Noninterest Expense - ----------------------------------------------------------------------------------------------------------------------------------- Three Months Increase/ Nine Months Increase/ (Decrease) (Decrease) Ended September 30 Ended September 30 -------------------------------------------------------------------------------------------------- (Dollars in millions) 2000 1999 Amount Percent 2000 1999 Amount Percent - ----------------------------------------------------------------------------------------------------------------------------------- Personnel $2,298 $2,336 $ (38) (1.6)% $7,143 $6,930 $213 3.1 % Occupancy 419 417 2 .5 1,248 1,208 40 3.3 Equipment 285 313 (28) (8.9) 882 1,010 (128) (12.7) Marketing 147 145 2 1.4 398 439 (41) (9.3) Professional fees 100 160 (60) (37.5) 298 452 (154) (34.1) Amortization of intangibles 215 222 (7) (3.2) 650 669 (19) (2.8) Data processing 167 164 3 1.8 495 568 (73) (12.9) Telecommunications 127 131 (4) (3.1) 391 407 (16) (3.9) Other general operating 509 498 11 2.2 1,529 1,364 165 12.1 General administrative and other 143 140 3 2.1 412 389 23 5.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total $4,410 $4,526 $ (116) (2.6)% $13,446 $13,436 $10 .1 % - ----------------------------------------------------------------------------------------------------------------------------------- (diamond) Personnel expense decreased $38 million and increased $213 million to $2.3 billion and $7.1 billion for the three months and nine months ended September 30, 2000, respectively. The decrease for the three months ended September 30, 2000 was primarily attributable to lower revenue-related incentive compensation. The increase for the nine months ended September 30, 2000 was primarily attributable to higher employee benefits and higher revenue-related incentive compensation from the first half of the year. (diamond) Equipment expense decreased $28 million and $128 million to $285 million and $882 million for the three months and nine months ended September 30 2000, respectively. For the three months ended September 30, 2000 the decrease primarily reflects a decline in depreciation expense, partially offset by an increase in rental expense. For the nine months ended September 30, 2000 the decrease reflects a decline in repairs and maintenance expense and a reduction in purchases of non-capitalized equipment. (diamond) Marketing expense decreased $41 million to $398 million for the nine months ended September 30, 2000, primarily due to timing differences related to the underlying marketing efforts across the Corporation. (diamond) Professional fees declined $60 million and $154 million to $100 million and $298 million for the three months and nine months ended September 30, 2000, respectively. For both periods, the declines primarily reflect lower consulting fees. (diamond) Data processing expense decreased $73 million to $495 million for the nine months ended September 30, 2000. The decrease primarily reflects declines in software-related expense, item processing and check clearing expense from the first half of the year. (diamond) Other general operating expense increased $165 million to $1.5 billion for the nine months ended September 30, 2000. The increase primarily reflects litigation costs from the first quarter related to pre-Merger lawsuits. 45 Income Taxes The Corporation's income tax expense for the three months and nine months ended September 30, 2000 was $1.0 billion and $3.5 billion, respectively, for an effective tax rate of 35.9 percent and 36.4 percent, respectively. Excluding merger and restructuring charges, the effective tax rate for the three months and nine months ended September 30, 2000 was 36.1 percent and 36.4 percent, respectively. The Corporation's income tax expense for the three months and nine months ended September 30, 1999 was $1.2 billion and $3.4 billion, respectively, for an effective tax rate of 35.7 percent and 36.1 percent, respectively. Excluding merger and restructuring charges, the effective tax rate for the three months and nine months ended September 30, 1999 was 35.7 percent and 35.9 percent, respectively. Balance Sheet Review and Liquidity Risk Management The Corporation utilizes an integrated approach in managing its Balance Sheet which includes management of interest rate sensitivity, credit risk, liquidity risk and its capital position. Going forward, the Corporation's goal is to keep risk-weighted assets relatively flat over the next two years as reductions in categories with lower returns offset underlying core growth. The discussion of average balances below compares the nine months ended September 30, 2000 to the same period in 1999. With the exception of average managed loans, the average balances discussed below can be derived from Table Four. In looking at the Corporation's assets, average loans and leases, the Corporation's primary use of funds, increased $28.0 billion to $390.3 billion for the nine months ended September 30, 2000. Adjusting for securitizations, sales and divestitures, average managed loans and leases increased $41.1 billion to $417.4 billion for the nine months ended September 30, 2000. This increase was primarily due to a strong $31.0 billion, or 17 percent, consumer loan growth. The majority of consumer loan growth occurred in residential real estate secured loan products including residential mortgages, home equity lines and consumer finance. Average managed residential mortgages increased $20.2 billion to $94.3 billion, reflecting increased originations and subsequent retention of adjustable-rate mortgages on the Balance Sheet. Average managed consumer finance loans increased $6.6 billion to $32.3 billion. Average managed home equity lines increased $3.1 billion to $18.9 billion, reflecting the impact of new marketing programs and lower prepayments. Average managed commercial loans increased $10.0 billion to $207.1 billion for the nine months ended September 30, 2000. Domestic commercial loans reflected growth of $9.9 billion to $152.4 billion, due to strong growth in the Consumer and Commercial Banking and Asset Management business segments. This domestic growth was partially offset by strategic reductions in foreign commercial loans of $1.1 billion. The average securities portfolio for the nine months ended September 30, 2000 increased $7.8 billion to $85.8 billion, representing 13 percent of total uses of funds for the nine months ended September 30, 2000. See the following "Securities" section for additional information on the securities portfolio. Average other assets and cash and cash equivalents increased $3.9 billion to $88.6 billion for the nine months ended September 30, 2000 due largely to increases in the average balances of derivative-dealer assets and mortgage servicing rights. At September 30, 2000, cash and cash equivalents were $24.4 billion, a decrease of $2.6 billion from December 31, 1999. During the nine months ended September 30, 2000, net cash provided by operating activities was $2.8 billion, net cash used in investing activities was $27.9 billion and net cash provided by financing activities was $22.5 billion. For further information on cash flows, see the Consolidated Statement of Cash Flows of the consolidated financial statements. 46 On the liability side of the Balance Sheet, average levels of customer-based funds increased $8.6 billion to $298.9 billion for the nine months ended September 30, 2000 primarily due to increases in consumer time deposits and noninterest-bearing demand deposits. As a percentage of total sources, average levels of customer-based funds decreased to 45 percent for the nine months ended September 30, 2000 from 47 percent. Average levels of market-based funds increased $29.8 billion for the nine months ended September 30, 2000 to $210.0 billion. In addition, average levels of long-term debt increased $12.6 billion to $69.4 billion for the nine months ended September 30, 2000 mainly the result of borrowings to fund earning asset growth, business development opportunities, build liquidity, repay maturing debt and fund share repurchases. In conjunction with its funding activities, the Corporation carefully monitors its liquidity position - the ability to fulfill its cash requirements. The Corporation assesses its liquidity requirements and modifies its assets and liabilities accordingly. This process, coupled with the Corporation's ability to raise capital and debt financing, is designed to cover the liquidity needs of the Corporation. The Corporation also takes into consideration the ability of its subsidiary banks to pay dividends to the Corporation. For additional information on the dividend capabilities of subsidiary banks, see Note Twelve of the Corporation's 1999 Annual Report on Form 10-K. Management believes that the Corporation's sources of liquidity are more than adequate to meet its cash requirements. Securities The securities portfolio at September 30, 2000 consisted of available-for-sale securities totaling $79.7 billion compared to $81.7 billion at December 31, 1999. Held-to-maturity securities totaled $1.4 billion at both September 30, 2000 and December 31, 1999. The valuation allowance for available-for-sale and marketable equity securities is included in shareholders' equity. At September 30, 2000 the valuation allowance consists of unrealized losses of $1.6 billion, net of related income taxes of $877 million, primarily reflecting market valuation adjustments of $2.5 billion pre-tax net unrealized losses on available-for-sale securities and $32 million pre-tax net unrealized gains on marketable equity securities. At December 31, 1999 the valuation allowance reflects unrealized losses of $2.5 billion, net of related income taxes of $1.1 billion, primarily reflecting market valuation adjustments of $3.8 billion pre-tax net unrealized losses on available-for-sale securities and $248 million pre-tax net unrealized gains on marketable equity securities. At September 30, 2000 and December 31, 1999, the market value of the Corporation's held-to-maturity securities reflected pre-tax net unrealized losses of $73 million and $152 million, respectively. The estimated average duration of the available-for-sale securities portfolio was 4.01 years at September 30, 2000 compared to 4.05 years at December 31, 1999. Capital Resources and Capital Management Shareholders' equity at September 30, 2000 was $46.9 billion compared to $44.4 billion at December 31, 1999, an increase of $2.5 billion. The increase was in part due to net earnings (net income less dividends) of $3.7 billion, partially offset by the repurchase of 50 million shares of common stock for approximately $2.4 billion. The remaining increase of $1.2 billion was due to changes in net unrealized gains on available-for-sale and marketable equity securities, the issuance of restricted stock and the exercise of employee stock options. On July 26, 2000, the Corporation's Board of Directors (the Board) authorized a new stock repurchase program of up to 100 million shares of the Corporation's common stock at an aggregate cost of up to $7.5 billion. 47 On June 23, 1999, the Board authorized the repurchase of up to 130 million shares of the Corporation's common stock at an aggregate cost of up to $10.0 billion. Through September 30, 2000, the Corporation had repurchased 128 million shares of its common stock in open market repurchases and under accelerated share repurchase programs at an average per-share price of $57.18 which reduced shareholders' equity by $7.3 billion. The remaining buyback authority for common stock under the 1999 program totaled $2.7 billion or two million shares at September 30, 2000. Presented below are the regulatory risk-based capital ratios and capital amounts for the Corporation and Bank of America, N.A. at September 30, 2000 and December 31, 1999. The Corporation and Bank of America, N.A. were considered "well-capitalized" at September 30, 2000. - --------------------------------------------------------------------------------------------------- September 30, 2000 December 31, 1999 ------------------------------------------------------------ (Dollars in millions) Ratio Amount Ratio Amount - --------------------------------------------------------------------------------------------------- Tier 1 Capital Bank of America Corporation 7.32 % $40,696 7.35 % $38,651 Bank of America, N.A. 7.78 39,721 7.78 38,616 Total Capital Bank of America Corporation 10.80 60,063 10.88 57,192 Bank of America, N.A. 10.80 55,129 10.91 54,132 Leverage Bank of America Corporation 6.06 40,696 6.26 38,651 Bank of America, N.A. 6.64 39,721 6.74 38,616 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- The regulatory capital guidelines measure capital in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. Under the regulatory capital guidelines, Total Capital consists of three tiers of capital. Tier 1 Capital includes common shareholders' equity and qualifying preferred stock less goodwill and other adjustments. Tier 2 Capital consists of preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 Capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank's risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 Capital less investments in unconsolidated banking and finance subsidiaries represents qualifying total capital, at least 50 percent of which must consist of Tier 1 Capital. Risk-based capital ratios are calculated by dividing Tier 1 and Total Capital by risk-weighted assets. In calculating risk-weighed assets, assets and off-balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. At September 30, 2000, the Corporation had no subordinated debt that qualified as Tier 3 Capital. At September 30, 2000, the regulatory risk-based capital ratios of the Corporation and Bank of America, N.A. exceeded the regulatory minimums of four percent for Tier 1 risk-based capital ratio, eight percent for total risk-based capital ratio and the leverage guidelines of 100 to 200 basis points above the minimum ratio of three percent. Credit Risk Management and Credit Portfolio Review The following section discusses credit risk in the loan portfolio. The Corporation's primary credit exposure is concentrated in its loans and leases portfolio, which totaled $402.6 billion and $370.7 billion at September 30, 2000 and December 31, 1999, respectively. In an effort to minimize the adverse impact of any single event or set of occurrences, the Corporation strives to maintain a diverse credit portfolio. Table Seven presents the distribution of loans and leases, nonperforming assets and net charge-offs by 48 category. Additional information on the Corporation's real estate, industry and foreign exposure can be found in the Concentrations of Credit Risk section beginning on page 53. - ----------------------------------------------------------------------------------------------------------------------------------- Table Seven Distribution of Loans and Leases, Nonperforming Assets and Net Charge-offs ---------------------------------------------------------------------------------------------------------------------------------- Loans and Leases Nonperforming Assets -------------------------------------------------------------------------------- September 30 December 31 September 30 December 31 2000 1999 2000 1999 -------------------------------------------------------------------------------- (Dollars in millions) Amount Percent Amount Percent Amount Amount ---------------------------------------------------------------------------------------------------------------------------------- Commercial - domestic $149,566 37.2 % $143,450 38.7 % $1,950 $1,163 Commercial - foreign 30,482 7.6 27,978 7.5 564 486 Commercial real estate - domestic 26,275 6.5 24,026 6.5 136 191 Commercial real estate - foreign 248 .1 325 .1 1 3 ---------------------------------------------------------------------------------------------------------------------------------- Total commercial 206,571 51.3 195,779 52.8 2,651 1,843 ---------------------------------------------------------------------------------------------------------------------------------- Residential mortgage 94,114 23.4 81,860 22.1 502 529 Home equity lines 20,666 5.1 17,273 4.7 47 46 Direct/Indirect consumer 41,915 10.4 42,161 11.4 19 19 Consumer finance 25,446 6.3 22,326 6.0 951 598 Bankcard 11,691 2.9 9,019 2.4 - - Foreign consumer 2,189 .5 2,244 .6 7 7 ---------------------------------------------------------------------------------------------------------------------------------- Total consumer 196,021 48.7 174,883 47.2 1,526 1,199 ---------------------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 4,177 3,042 ---------------------------------------------------------------------------------------------------------------------------------- Foreclosed properties 226 163 ---------------------------------------------------------------------------------------------------------------------------------- Total $402,592 100.0 % $370,662 100.0 % $4,403 $3,205 ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming assets as a percentage of: Total assets .65 % .51 % Loans, leases and foreclosed properties 1.09 .86 Loans past due 90 days or more and not classified as nonperforming $503 $ 521 --------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- Net Charge-offs(1) ------------------------------------------------------------------------------------------------ Three Months Ended September 30 Nine Months Ended September 30 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------ (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent ---------------------------------------------------------------------------------------------------------------------------------- Commercial - domestic $185 .48 % $192 .56 % $583 .52 % $520 .51 % Commercial - foreign 23 .30 9 .13 52 .24 122 .54 Commercial real estate - domestic (2) n/m 1 .03 10 .05 (7) n/m Commercial real estate - foreign - .21 - - (2) n/m 1 .37 ---------------------------------------------------------------------------------------------------------------------------------- Total commercial 206 .39 202 .42 643 0.42 636 .44 ---------------------------------------------------------------------------------------------------------------------------------- Residential mortgage 6 .03 10 .05 14 .02 22 .04 Home equity lines 2 .04 1 .01 8 .05 8 .06 Direct/Indirect consumer 61 .57 82 .77 213 .68 260 .83 Consumer finance 68 1.08 67 1.35 184 1.02 157 1.18 Bankcard 79 2.89 93 4.11 237 3.30 401 5.26 Other consumer - domestic 12 n/m (1) n/m 24 n/m (1) n/m Foreign consumer 1 .20 6 .67 2 .14 16 .58 ---------------------------------------------------------------------------------------------------------------------------------- Total consumer 229 .47 258 .60 682 .49 863 .68 ---------------------------------------------------------------------------------------------------------------------------------- Total $435 .43 % $460 .51 % $1,325 .45 % $1,499 .55 % ---------------------------------------------------------------------------------------------------------------------------------- Managed bankcard net charge-offs and ratios(2) $216 4.15 % $233 4.83 % $710 4.79 % $821 5.66 % ---------------------------------------------------------------------------------------------------------------------------------- n/m = not meaningful (1) Percentage amounts are calculated as annualized net charge-offs divided by average oustanding loans and leases during the period for each loan category. (2) Includes both on-balance sheet and securitized loans. - -------------------------------------------------------------------------------- 49 Commercial Portfolio At September 30, 2000 and December 31, 1999, total commercial loans outstanding totaled $206.6 billion and $195.8 billion, respectively, or 51 percent and 53 percent of total loans and leases, respectively, of which 85 percent and 86 percent, respectively, were domestic. Commercial - domestic loans outstanding totaled $149.6 billion and $143.5 billion at September 30, 2000 and December 31, 1999, or 37 percent and 39 percent of total loans and leases, respectively. The Corporation had commercial - - domestic loan net charge-offs of $583 million, or 0.52 percent of average commercial - domestic loans for the nine months ended September 30, 2000, compared to $520 million, or 0.51 percent of average commercial - domestic loans for the same period in 1999. Net charge-offs increased primarily due to a single fraud-related credit charged off in the second quarter of 2000. Nonperforming commercial - domestic loans were $2.0 billion, or 1.30 percent of commercial - domestic loans at September 30, 2000, compared to $1.2 billion, or 0.81 percent of commercial - domestic loans at December 31, 1999. The increase was primarily due to commercial - domestic loans in the financial services, theater and paging industries. Commercial - domestic loans past due 90 days or more and still accruing interest were $151 million at September 30, 2000, compared to $135 million at December 31, 1999, or 0.10 percent and 0.09 percent of commercial - domestic loans, respectively. In connection with decisions to exit certain businesses and sell certain loans, approximately $864 million in commercial - domestic loans, net of related reserves of $84 million, were transferred to assets held-for-sale during the third quarter of 2000. This transfer included approximately $63 million in loans that would be classified as nonperforming loans had they not been transferred to assets held-for-sale. Subsequent to September 30, 2000, approximately $376 million of these loans were sold to a third party. Commercial - foreign loans outstanding totaled $30.5 billion and $28.0 billion at September 30, 2000 and December 31, 1999, respectively, or eight percent of total loans and leases at both points in time. The Corporation had commercial - foreign loan net charge-offs for the nine months ended September 30, 2000 of $52 million, or 0.24 percent of average commercial - foreign loans, compared to $122 million, or 0.54 percent of average commercial - foreign loans for the same period in 1999. Nonperforming commercial - foreign loans were $564 million, or 1.85 percent of commercial - foreign loans at September 30, 2000, compared to $486 million, or 1.74 percent at December 31, 1999. Commercial - foreign loans past due 90 days or more and still accruing interest were $60 million at September 30, 2000, compared to $58 million at December 31, 1999, or 0.20 percent and 0.21 percent of commercial - foreign loans, respectively. For additional information see the Regional Foreign Exposure discussion beginning on page 55. Commercial real estate - domestic loans totaled $26.3 billion and $24.0 billion at September 30, 2000 and December 31, 1999, respectively, or seven percent of total loans and leases at both points in time. Net charge-offs remained negligible at $10 million, or 0.05 percent of average commercial real estate - domestic loans for the nine months ended September 30, 2000. Nonperforming commercial real estate - domestic loans were $136 million at September 30, 2000, compared to $191 million at December 31, 1999. At September 30, 2000, commercial real estate - domestic loans past due 90 days or more and still accruing interest were $5 million, or 0.02 percent of total commercial real estate - domestic loans, compared to $6 million, or 0.02 percent at December 31, 1999. Table Nine displays commercial real estate loans by geographic region and property type, including the portion of such loans which are nonperforming, and other real estate credit exposures. Table Ten presents aggregate commercial loan and lease exposures by certain significant industries. Consumer Portfolio At September 30, 2000 and December 31, 1999, total consumer loans outstanding totaled $196.0 billion and $174.9 billion, respectively, or 49 percent and 47 percent of total loans and leases, respectively, of which approximately 67 percent were secured by first and second mortgages on residential real estate. Additional information on components of, and changes in the Corporation's consumer loan portfolio can be found in the average earning asset discussion within the "Net Interest Income" section on page 36 and "Balance Sheet Review and Liquidity Risk Management" section on page 46. 50 Residential mortgage loans increased to $94.1 billion at September 30, 2000, compared to $81.9 billion at December 31, 1999. Net charge-offs on residential mortgage loans remained negligible at $14 million, or 0.02 percent of average residential mortgage loans for the nine months ended September 30, 2000. Nonperforming residential mortgage loans decreased $27 million to $502 million at September 30, 2000 compared to December 31, 1999. Consumer bankcard receivables increased to $11.7 billion at September 30, 2000, compared to $9.0 billion at December 31, 1999. Net charge-offs on bankcard receivables for the nine months ended September 30, 2000 decreased $164 million from the same period in 1999 to $237 million, or 3.30 percent of average bankcard receivables. The decrease resulted from portfolio sales in 1999 and continued declines in delinquency levels and bankruptcy filing rates. Bankcard loans past due 90 days or more and still accruing interest were $139 million, or 1.20 percent of bankcard receivables at September 30, 2000, compared to $138 million, or 1.53 percent at December 31, 1999. Consumer finance loans outstanding totaled $25.4 billion and $22.3 billion at September 30, 2000 and December 31, 1999, respectively, or six percent of total loans and leases at both points in time. The Corporation had consumer finance net charge-offs of $184 million, or 1.02 percent of average consumer finance loans for the nine months ended September 30, 2000, compared to $157 million, or 1.18 percent for the nine months ended September 30, 1999. Consumer finance nonperforming loans increased to $951 million at September 30, 2000 from $598 million at December 31, 1999 reflecting continued growth and seasoning in this portfolio. Other domestic consumer loans, which include direct and indirect consumer loans and home equity lines of credit increased to $62.6 billion at September 30, 2000, compared to $59.4 billion at December 31, 1999. Direct and indirect consumer loan charge-offs were $213 million, or 0.68 percent of average direct and indirect consumer loans outstanding, for the nine months ended September 30, 2000, compared to $260 million, or 0.83 percent of the average balance outstanding, for the comparable period in 1999. Home equity line charge-offs remained negligible at $8 million, or .05 percent of average home equity lines outstanding, for the nine months ended September 30, 2000. Excluding bankcard, total consumer loans past due 90 days or more and still accruing interest were $148 million, or 0.07 percent of total consumer loans at September 30, 2000, compared to $184 million or 0.11 percent at December 31, 1999. In 1999, the Federal Financial Institutions Examination Council (FFIEC) issued The Uniform Classification and Account Management Policy (the Policy) which provides guidance for and promotes consistency among banks on the treatment of delinquent and bankruptcy-related consumer loans. The Corporation is required to implement the Policy by December 31, 2000 and expects to be in full compliance with the Policy by that date. The Corporation estimates additional charge-offs in the consumer portfolio, primarily within the consumer finance products, of approximately $100 million in the fourth quarter to comply with the Policy. Nonperforming Assets As presented in Table Seven, nonperforming assets increased to $4.4 billion, or 1.09 percent of loans, leases and foreclosed properties at September 30, 2000 from $3.2 billion or 0.86 percent at December 31, 1999. Nonperforming loans increased to $4.2 billion at September 30, 2000 from $3.0 billion at December 31, 1999, primarily due to an increase in commercial - domestic nonperforming loans and higher real estate secured consumer finance nonperformers as discussed above. The allowance coverage of nonperforming loans was 161 percent at September 30, 2000 compared to 224 percent at December 31, 1999. Foreclosed properties increased to $226 million at September 30, 2000 compared to $163 million at December 31, 1999. 51 The Corporation expects credit quality to continue to deteriorate, which will affect both nonperforming loans and net charge-off levels. In November 2000, one large commercial credit in the consumer services industry was classified as nonperforming. As a result of this and other deterioration in credit quality, the Corporation believes the increase in nonperforming loans in the fourth quarter will exceed the 13 percent growth experienced in the third quarter. The potential charge-off related to this single credit, combined with the additional $100 million in charge-offs related to the implementation of the new FFIEC policy (discussed above), and further weakness in the economy could all contribute to net charge-off amounts more than double those recorded in the third quarter. As a result of fourth quarter charge-offs at this level, the Corporation at this time believes its net charge-offs for the year as a percentage of average loans and leases will be approximately 60 basis points. The Corporation anticipates recording a provision for loan losses in an amount at least equal to its net charge-offs in the fourth quarter. The Corporation believes its size, geographic reach, product and industry mix afford a level of diversification which provides protection from a single customer, industry or geographic credit problem. In order to respond when deterioration of a credit occurs, internal loan workout units are devoted to providing specialized expertise and full-time management and/or collection of certain nonperforming assets as well as certain performing loans. Management believes concerted collection strategies and a proactive approach to managing overall problem assets have expedited the disposition, collection and renegotiation of nonperforming and other lower-quality assets. As part of this process, management routinely evaluates all reasonable alternatives, including the sale of assets individually or in groups, and selects the optimal strategy. Note Five of the consolidated financial statements provides the reported investment in specific loans considered to be impaired at September 30, 2000 and December 31, 1999. The Corporation's investment in specific loans that were considered to be impaired at September 30, 2000 was $3.5 billion, compared to $2.1 billion at December 31, 1999. Commercial - domestic impaired loans increased $1.4 billion to $2.6 billion at September 30, 2000, compared to December 31, 1999. Commercial - foreign impaired loans increased $84 million to $587 million at September 30, 2000 compared to December 31, 1999. Commercial real estate - domestic impaired loans decreased $136 million to $313 million at September 30, 2000, compared to December 31, 1999. Allowance for Credit Losses The Corporation performs periodic and systematic detailed reviews of its loan and lease portfolios to identify risks inherent in and to assess the overall collectibility of those portfolios. Certain homogeneous loan portfolios are evaluated collectively based on individual loan type while remaining portfolios are reviewed on an individual loan basis. These detailed reviews, combined with historical loss experience and other factors, result in the identification and quantification of specific allowances for credit losses and loss factors which are used in determining the amount of the allowance and related provision for credit losses. The actual amount of incurred credit losses that may be confirmed may vary from the estimate of incurred losses due to changing economic conditions or changes in industry or geographic concentrations. The Corporation has procedures in place to monitor differences between estimated and actual incurred credit losses. These procedures include detailed periodic assessments by senior management of both individual loans and credit portfolios and the models used to estimate incurred credit losses in those portfolios. Portions of the allowance for credit losses are assigned to cover the estimated probable incurred losses in each loan and lease category based on the results of the Corporation's detailed review process as described above. Further assignments are made based on general and specific economic conditions, as well as performance trends within specific portfolio segments and individual concentrations of credit, including geographic and industry concentrations. The assigned portion of the allowance for credit losses continues to be weighted toward the commercial loan portfolio, which reflects a higher level of nonperforming loans and the potential for higher individual losses. The remaining unassigned portion of the allowance for credit losses, determined separately from the procedures outlined above, addresses certain industry and geographic concentrations, including global economic conditions. This procedure helps to minimize the risk related to the margin of imprecision inherent in the estimation of the assigned allowance for credit losses. Due to the subjectivity involved in the determination of the unassigned portion of the allowance for credit losses, the relationship of the unassigned component to the total allowance for credit losses may fluctuate from period to period. Management evaluates the adequacy of the allowance for credit losses based on the combined total of the assigned and unassigned components and believes that the allowance for credit losses reflects management's best estimate of incurred credit losses as of the balance sheet date. The nature of the process by which the Corporation determines the appropriate allowance for credit losses requires the exercise of considerable judgment. After review of all relevant matters affecting loan collectibility, management believes that the allowance for credit losses is appropriate given its analysis of estimated incurred credit losses at September 30, 2000. Table Eight provides the changes in the allowance for credit losses for the three months and nine months ended September 30, 2000 and 1999. 52 - ------------------------------------------------------------------------------------------------------------------------------------ Table Eight Allowance For Credit Losses - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Nine Months Ended September 30 Ended September 30 --------------------------------------------------------------- (Dollars in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $ 6,815 $ 7,096 $ 6,828 $ 7,122 - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases charged off Commercial - domestic (214) (213) (671) (597) Commercial - foreign (33) (14) (80) (132) Commercial real estate - domestic (3) (6) (25) (13) Commercial real estate - foreign (1) - (1) (1) - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial (251) (233) (777) (743) - ------------------------------------------------------------------------------------------------------------------------------------ Residential mortgage (8) (11) (22) (26) Home equity lines (4) (4) (14) (17) Direct/Indirect consumer (102) (125) (357) (392) Consumer finance (112) (101) (294) (283) Bankcard (92) (120) (277) (459) Other consumer - domestic (16) 1 (32) 1 Foreign consumer (1) (7) (3) (19) - ------------------------------------------------------------------------------------------------------------------------------------ Total consumer (335) (367) (999) (1,195) - ------------------------------------------------------------------------------------------------------------------------------------ Total loans and leases charged off (586) (600) (1,776) (1,938) - ------------------------------------------------------------------------------------------------------------------------------------ Recoveries of loans and leases previously charged off Commercial - domestic 29 21 88 77 Commercial - foreign 10 5 28 10 Commercial real estate - domestic 5 5 15 20 Commercial real estate - foreign 1 - 3 - - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial 45 31 134 107 - ------------------------------------------------------------------------------------------------------------------------------------ Residential mortgage 2 1 8 4 Home equity lines 2 3 6 9 Direct/Indirect consumer 41 43 144 132 Consumer finance 44 34 110 126 Bankcard 13 27 40 58 Other consumer - domestic 4 - 8 - Foreign consumer - 1 1 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total consumer 106 109 317 332 - ------------------------------------------------------------------------------------------------------------------------------------ Total recoveries of loans and leases previously charged off 151 140 451 439 - ------------------------------------------------------------------------------------------------------------------------------------ Net charge-offs (435) (460) (1,325) (1,499) - ------------------------------------------------------------------------------------------------------------------------------------ Provision for credit losses 435 450 1,325 1,470 Other, net (76) (10) (89) (17) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30 $ 6,739 $ 7,076 $ 6,739 $ 7,076 - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases outstanding at September 30 $402,592 $360,236 $402,592 $360,236 Allowance for credit losses as a percentage of loans and leases outstanding at September 30 1.67 % 1.96 % 1.67 % 1.96 % Average loans and leases outstanding during the period $402,763 $361,400 $390,296 $362,302 Annualized net charge-offs as a percentage of average outstanding loans and leases during the period .43 % .51 % .45 % .55 % Allowance for credit losses as a percentage of nonperforming loans at end of period 161.32 251.85 161.32 251.85 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Concentrations of Credit Risk In an effort to minimize the adverse impact of any single event or set of occurrences, the Corporation strives to maintain a diverse credit portfolio as outlined in Tables Seven, Nine, Ten and Eleven. 53 The Corporation maintains an extremely diverse commercial loan portfolio, representing 51 percent of total loans and leases, with the largest concentration in commercial real estate, which represents seven percent of total loans and leases. The exposure presented in Table Nine represents credit extensions for real estate-related purposes to borrowers or counterparties who are primarily in the real estate development or investment business and for which the ultimate repayment of the credit is dependent on the sale, lease, rental or refinancing of the real estate. The exposure included in the table does not include credit extensions which were made on the general creditworthiness of the borrower for which real estate was obtained as security and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. Accordingly, the exposure presented does not include commercial loans secured by owner-occupied real estate, except where the borrower is a real estate developer. Table Nine Commercial Real Estate Loans, Foreclosed Properties and Other Real Estate Credit Exposure - ------------------------------------------------------------------------------------------------------------------- September 30, 2000 Loans Other ------------------------------------- Foreclosed Credit (Dollars in millions) Outstanding Nonperforming Properties (1) Exposure (2) - -------------------------------------------------------------------------------------------------------------------- By Geographic Region (3) California $5,879 $ 9 $4 $ 653 Southwest 3,918 15 2 476 Northwest 2,745 3 - 70 Midwest 2,698 31 22 238 Florida 2,638 25 1 266 Mid-Atlantic 1,621 11 - 433 Carolinas 1,337 8 1 57 Midsouth 1,242 3 2 86 Northeast 1,035 21 - 890 Other states 2,144 10 39 131 Non-US 248 1 - 5 Geographically diversified 1,018 - - - - ------------------------------------------------------------------------------------------------------------------ Total $26,523 $137 $71 $3,305 - ------------------------------------------------------------------------------------------------------------------ By Property Type Apartments $4,837 $10 $ - $ 698 Office buildings 4,944 11 2 700 Shopping centers/retail 3,271 23 17 544 Residential 2,715 21 8 268 Industrial/warehouse 2,206 11 1 56 Land and land development 1,256 5 7 176 Hotels/motels 1,185 16 - 111 Miscellaneous commercial 712 4 12 9 Unsecured 828 2 - 17 Multiple use 719 1 - 72 Non-US 248 1 - 5 Other 3,602 32 24 649 - ------------------------------------------------------------------------------------------------------------------ Total $26,523 $137 $71 $3,305 - ------------------------------------------------------------------------------------------------------------------ (1) Foreclosed properties include commercial real estate loans only. (2) Other credit exposure include letters of credit and loans held for sale. (3) Distribution based on geographic location of collateral. - ------------------------------------------------------------------------------------------------------------------ 54 Table Ten below presents aggregate commercial loan and lease exposures by certain significant industries at September 30, 2000. Total commercial loans outstanding, excluding commercial real estate loans, comprised 45 percent of total loans and leases at September 30, 2000. No commercial industry concentration is greater than three percent of total loans and leases. -------------------------------------------------------------------------------- Table Ten Significant Industry Loans and Leases (1) -------------------------------------------------------------------------------- September 30, 2000 Percent of Total (Dollars in millions) Outstanding Loans and Leases -------------------------------------------------------------------------------- Transportation $11,653 2.9 % Media 10,431 2.6 Equipment and general manufacturing 9,224 2.3 Telecommunications 8,750 2.2 Business services 8,439 2.1 Healthcare 7,392 1.8 Retail 7,303 1.8 Agribusiness 7,224 1.8 Autos 6,456 1.6 Oil and gas 5,931 1.5 -------------------------------------------------------------------------------- (1) Includes only non-real estate commercial loans and leases. -------------------------------------------------------------------------------- Regional Foreign Exposure Through its credit and market risk management activities, the Corporation has been devoting particular attention to those countries negatively impacted by global economic pressure. These include certain Asian countries as well as countries within Latin America and Eastern Europe that have experienced currency and other economic problems. In connection with its efforts to maintain a diversified portfolio, the Corporation limits its exposure to any one geographic region or country and monitors this exposure on a continuous basis. Table Eleven sets forth selected regional foreign exposure at September 30, 2000. At September 30, 2000, the Corporation's total exposure to these select countries was $33.6 billion, an increase of $5.8 billion from December 31, 1999, primarily due to increased levels of Japanese government securities and Korean exposure in financial institutions partially offset by decreased exposure in Pakistan due to the sale of the Pakistan business. The Corporation's total exposure to these select foreign markets has declined $3.1 billion and $13.2 billion since December 31, 1998 and 1997, respectively. Table Eleven is based on the Federal Financial Institutions Examination Council's instructions for periodic reporting of foreign exposure. The table has been expanded to include "Gross Local Country Claims" as defined in the table below and may not be consistent with disclosures by other financial institutions. 55 - ---------------------------------------------------------------------------------------------------------------------------- Table Eleven Regional Foreign Exposure - ---------------------------------------------------------------------------------------------------------------------------- Increase Increase Total Gross Other Total (Decrease) (Decrease) Cross- Local Cross- Exposure from from Border Country Border September 30, June 30, December 31, (Dollars in millions) Loans Claims (1) Claims (2) 2000 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Region/Country Asia China $ 71 $ 127 $ 154 $ 352 $ 2 $ (4) Hong Kong 65 4,563 258 4,886 6 567 India 850 1,202 195 2,247 (95) 263 Indonesia 329 63 76 468 (86) (54) Japan 110 1,100 7,915 9,125 2,297 5,324 Korea (South) 275 1,070 1,120 2,465 522 327 Malaysia 10 471 32 513 (13) (77) Pakistan 11 - 9 20 (200) (303) Philippines 174 155 149 478 (272) (25) Singapore 173 1,089 345 1,607 201 315 Taiwan 197 760 145 1,102 (64) 141 Thailand 60 344 90 494 (51) (114) Other 3 126 9 138 - (12) - ---------------------------------------------------------------------------------------------------------------------------- Total 2,328 11,070 10,497 23,895 2,247 6,348 - ---------------------------------------------------------------------------------------------------------------------------- Central and Eastern Europe Russian Federation - 1 5 6 2 (12) Turkey 187 - 119 306 78 88 Other 87 50 90 227 33 (8) - ---------------------------------------------------------------------------------------------------------------------------- Total 274 51 214 539 113 68 - ---------------------------------------------------------------------------------------------------------------------------- Latin America Argentina 512 404 212 1,128 (136) (10) Brazil 940 634 927 2,501 49 (7) Chile 690 269 57 1,016 (73) 17 Colombia 219 18 65 302 (108) (190) Mexico 1,196 156 2,068 3,420 (82) (455) Venezuela 147 46 237 430 (23) 17 Other 159 - 194 353 (177) 6 - ---------------------------------------------------------------------------------------------------------------------------- Total 3,863 1,527 3,760 9,150 (550) (622) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 6,465 $ 12,648 $ 14,471 $ 33,584 $ 1,810 $ 5,794 - ---------------------------------------------------------------------------------------------------------------------------- (1) Includes the following claims by the Corporation's foreign offices on local country residents regardless of the currency: loans, accrued interest receivable, acceptances, time deposits placed, trading account assets, other interest-earning investments, other short-term monetary assets, unused commitments, standby letters of credit, commercial letters of credit, formal guarantees, and available-for-sale (at fair value) and held-to-maturity (at cost) securities. (2) All instruments in (1) that are cross-border claims excluding loans but including derivative-dealer assets (at fair value) and available-for-sale (at fair value) and held-to-maturity (at cost) securities that are collateralized by U.S. Treasury securities as follows: Mexico - $1,174, Venezuela - $182, Philippines - $20 and Latin America Other - $82. Held-to-maturity securities (at cost) amounted to $772 with a fair value of $687. - ---------------------------------------------------------------------------------------------------------------------------- International Developments In recent years, a number of countries in Asia, Latin America and Central and Eastern Europe experienced economic difficulties due to a combination of structural problems and negative market reaction that resulted from increased awareness of these problems. While each country's situation is unique, many share common factors such as: (1) government actions which restrain normal functioning of free markets in physical goods, capital and/or currencies; (2) perceived weaknesses of the banking systems; and (3) perceived overvaluation of local currencies and/or pegged exchange rate systems. These factors resulted in capital movement out of these countries or in reduced capital inflows; accordingly, many of these countries experienced liquidity problems in addition to the structural problems. 56 Moreover, since the Asian Crisis in 1997, contagion impact of problems in one country into other emerging markets has been both quick to spread and quick to be reversed to more normal conditions. Since 1999 and into the first and second quarters of 2000, many of the Asian economies had been showing signs of recovery from prior problems, slowly implementing structural reforms. However, during the third quarter of 2000, the combination of slower pace of reform implementation, new domestic problems and tighter global market conditions has led to some loss of confidence in the region's financial markets. Similar conditions are also affecting asset valuation in Latin America, where an economic recovery is proving sustainable in only a few of the largest markets, while in others it is faltering. In addition to domestic problems inherent to these countries individually, the strength or weakness of the U.S. economy, as well as the position of asset holders in the developed markets, is significantly affecting both liquidity and asset valuations in the emerging markets. As a result, the lessening of risks observed earlier in the year is now in doubt. Where appropriate, the Corporation has adjusted its activities (including its borrower selection) in light of the risks and opportunities discussed above. Throughout 1999, the Corporation continued to reduce its exposure in Asia, Latin America and Central and Eastern Europe, adjusting to the changing economic conditions. Accordingly, during the third quarter of 2000, the Corporation has sharply decreased exposure in the higher-risk countries in Latin America and Asia, corresponding with the rapid changes in economic activity in those countries. The Corporation will continue to monitor and adjust its foreign activities on a country-by-country basis depending on management's judgment of the likely developments in each country and will take action as deemed appropriate. Market Risk Management In the normal course of conducting its business activities, the Corporation is exposed to market risks including price and liquidity risk. Market risk is the potential of loss arising from adverse changes in market rates and prices, such as interest rates (interest rate risk), foreign currency exchange rates (foreign exchange risk), commodity prices (commodity risk) and prices of equity securities (equity risk). Financial products that expose the Corporation to market risk include securities, loans, deposits, debt and derivative financial instruments such as futures, forwards, swaps, options and other financial instruments with similar characteristics. Liquidity risk arises from the possibility that the Corporation may not be able to satisfy current or future financial commitments or that the Corporation may be more reliant on alternative funding sources such as long-term debt. Market risk is managed by the Corporation's Finance Committee, which formulates policy based on desirable levels of market risk. In setting desirable levels of market risk, the Finance Committee considers the impact on both earnings and capital of the current outlook in market rates, potential changes in market rates, world and regional economies, liquidity, business strategies and other factors. 57 Trading Portfolio The table below sets forth the calculated value-at-risk (VAR) amounts for the twelve months ended September 30, 2000 and 1999. The amounts are calculated on a pre-tax basis. The Corporation performs the VAR calculation for each major trading portfolio segment on a daily basis. It then calculates the combined VAR across these portfolio segments using two different sets of assumptions. The first calculation assumes that each portfolio segment experiences adverse price movements at the same time (i.e., the price movements are perfectly correlated). The second calculation assumes that these adverse price movements within the major portfolio segments do not occur at the same time (i.e., they are uncorrelated). Average interest rate VAR was modestly lower and average foreign exchange VAR was marginally higher in the twelve months ended September 30, 2000 as compared with the twelve months ended September 30, 1999. This general stability reflects continued emphasis on customer led trading activities and less reliance on proprietary trading. Equity VAR was significantly higher in the twelve months ended September 30, 2000 than in the twelve months ended September 30, 1999. This increase in equity risk taking reflects growth in cash and derivatives trading activities as well as the expansion of trading into the European cash equity markets. For additional discussion of market risk associated with the trading portfolio, the VAR model and how the Corporation manages its exposure to market risk, see pages 42 and 43 of the Corporation's 1999 Annual Report on Form 10-K. The composition of the trading portfolio and the related fair value are included in Note Four of the consolidated financial statements. - ---------------------------------------------------------------------------------------------------------------------------------- Trading Activities Market Risk - ---------------------------------------------------------------------------------------------------------------------------------- Twelve Months Ended September 30, 2000 Twelve Months Ended September 30, 1999 ---------------------------------------------------------------------------------------- (U.S. dollar equivalents in millions) Average VAR High VAR (1) Low VAR (1) Average VAR High VAR (1) Low VAR (1) - ---------------------------------------------------------------------------------------------------------------------------------- Based on perfect positive correlation Interest rate $75.3 $88.3 $59.7 $88.8 $126.8 $69.1 Foreign currency 14.5 23.5 8.1 13.0 19.8 7.9 Commodities 2.6 6.9 0.6 2.1 5.4 0.9 Equity 31.4 46.9 17.5 9.3 22.3 1.0 Based on zero correlation Interest rate 26.2 31.6 21.5 26.2 41.2 18.6 Foreign currency 12.2 21.7 6.9 10.6 18.2 6.1 Commodities 2.2 6.6 0.5 1.7 4.9 0.6 Equity 29.5 39.8 16.5 8.4 21.1 1.0 - ---------------------------------------------------------------------------------------------------------------------------------- (1) The high and low for the entire trading account may not equal the sum of the individual components as the highs or lows of the components occurred on different trading days. - ---------------------------------------------------------------------------------------------------------------------------------- Asset and Liability Management Activities Non-Trading Portfolio The Corporation's Asset and Liability Management (ALM) process is used to manage interest rate risk through the structuring of balance sheet and off-balance sheet portfolios and identifying and linking such off-balance sheet positions to specific assets and liabilities. Interest rate risk represents the only material market risk exposure to the Corporation's non-trading on-balance sheet financial instruments. Available-for-sale securities had an unrealized loss of $2.5 billion at September 30, 2000, compared to an unrealized loss of $3.8 billion at December 31, 1999. The expected maturities, unrealized gains and losses and weighted average effective yield and rate associated with the Corporation's other significant non-trading on-balance sheet financial instruments at September 30, 2000 were not significantly different from those at December 31, 1999. For a discussion of non-trading on-balance sheet financial instruments, see page 43 and Table Eighteen on page 44 of the "Market Risk Management" section of the Corporation's 1999 Annual Report on Form 10-K. Interest Rate and Foreign Exchange Contracts Risk management interest rate contracts and foreign exchange contracts are utilized in the ALM process. Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards, allow the Corporation to effectively manage its interest rate risk position. In addition, the Corporation uses foreign currency contracts to manage the foreign exchange risk associated 58 with foreign-denominated assets and liabilities, as well as the Corporation's equity investments in foreign subsidiaries. As reflected in Table Twelve, the notional amount of the Corporation's receive fixed and pay fixed interest rate swaps at September 30, 2000 was $59.3 billion and $19.7 billion, respectively. The receive fixed interest rate swaps are primarily converting variable-rate commercial loans to fixed-rate. The net receive fixed position at September 30, 2000 was $39.6 billion notional compared to $37.3 billion notional at December 31, 1999. The Corporation had $7.6 billion notional and $8.0 billion notional of basis swaps at September 30, 2000 and December 31, 1999, respectively, linked primarily to loans and long-term debt. The Corporation had $31.3 billion notional and $35.1 billion notional of option products at September 30, 2000 and December 31, 1999, respectively. In addition, open foreign exchange contracts at September 30, 2000 had a notional amount of $5.9 billion compared to $6.2 billion at December 31, 1999. Table Twelve also summarizes the expected maturity and the average estimated duration, weighted average receive and pay rates and the net unrealized gains and losses at September 30, 2000 and December 31, 1999 of the Corporation's open ALM interest rate swaps, as well as the expected maturity and net unrealized gains and losses at September 30, 2000 and December 31, 1999 of the Corporation's open ALM basis swaps, options, futures and forward rate and foreign exchange contracts. Unrealized gains and losses are based on the last repricing and will change in the future primarily based on movements in one-, three- and six-month LIBOR rates. The ALM swap portfolio had a net unrealized loss of $0.9 billion and $1.6 billion at September 30, 2000 and December 31, 1999, respectively. The ALM option products had a net unrealized loss of $111 million at September 30, 2000 and a net unrealized gain of $5 million at December 31, 1999. At September 30, 2000 and December 31, 1999, open foreign exchange contracts had a net unrealized loss of $299 million and $30 million, respectively. The amount of unamortized net realized deferred gains associated with closed ALM swaps was $113 million and $174 million at September 30, 2000 and December 31, 1999, respectively. The amount of unamortized net realized deferred gains associated with closed ALM options was $99 million and $82 million at September 30, 2000 and December 31, 1999, respectively. The amount of unamortized net realized deferred losses associated with closed ALM futures and forward contracts was $19 million and $21 million at September 30, 2000 and December 31, 1999, respectively. There were no unamortized net realized deferred gains or losses associated with closed foreign exchange contracts at September 30, 2000 and December 31, 1999. Management believes the fair value of the ALM interest rate and foreign exchange portfolios should be viewed in the context of the overall balance sheet, and the value of any single component of the balance sheet or off-balance sheet positions should not be viewed in isolation. For a discussion of the Corporation's management of risk associated with mortgage production and servicing activities, see the "Noninterest Income" section on page 42. See Note Seven of the consolidated financial statements for information on the Corporation's ALM contracts. 59 Table Twelve Asset and Liability Management Interest Rate and Foreign Exchange Contracts - ------------------------------------------------------------------------------------------------------------------------------------ September 30, 2000 Expected Maturity -------------------------------------------------------------------------------- Average (Dollars in millions, average Fair After Estimated estimated duration in years) Value Total 2000 2001 2002 2003 2004 2004 Duration - ------------------------------------------------------------------------------------------------------------------------------------ Open interest rate contracts Total receive fixed swaps $(843) 3.70 Notional value $59,334 $542 $3,867 $2,651 $13,015 $7,051 $32,208 Weighted average receive rate 6.36% 6.36% 6.26% 7.18% 5.64% 6.27% 6.62% Total pay fixed swaps (54) 3.20 Notional value $19,728 $895 $4,358 $2,474 $2,520 $ 727 $8,754 Weighted average pay rate 6.87% 6.79% 6.44% 7.21% 7.10% 7.43% 6.88% Basis swaps (4) Notional value $7,627 $ - $ 587 $1,669 $5,219 $ - $ 152 - -------------------------------------------------- Total swaps (901) - -------------------------------------------------- Option products (111) Notional amount 31,274 3,850 2,087 868 3,950 7,882 12,637 Futures and forward rate contracts (4) Notional amount 1,454 1,454 - - - - - - -------------------------------------------------- Total open interest rate contracts (1,016) Closed interest rate contracts(1) 193 - -------------------------------------------------- Net interest rate contract position (823) - -------------------------------------------------- Open foreign exchange contracts (299) Notional amount 5,916 55 1,072 1,396 238 573 2,582 - -------------------------------------------------- Total ALM contracts $(1,122) ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 Expected Maturity -------------------------------------------------------------------------------- Average (Dollars in millions, average Fair After Estimated estimated duration in years) Value Total 2000 2001 2002 2003 2004 2004 Duration - ------------------------------------------------------------------------------------------------------------------------------------ Open interest rate contracts Total receive fixed swaps $(1,747) 2.75 Notional amount $63,002 $13,539 $11,493 $1,637 $12,894 $7,104 $16,335 Weighted average receive rate 6.15% 5.98% 6.43% 6.88% 5.60% 6.57% 6.28% Total pay fixed swaps 115 2.11 Notional amount $25,701 $6,893 $8,232 $3,175 $2,475 $ 719 $4,207 Weighted average pay rate 6.68% 6.84% 6.57% 6.23% 7.10% 7.46% 6.61% Basis swaps (6) Notional amount $7,971 $ 743 $ 601 $1,669 $4,958 $ - $ - - -------------------------------------------------- Total swaps (1,638) - -------------------------------------------------- Option products 5 Notional amount 35,134 505 2,088 868 1,950 15,661 14,062 Futures and forward rate contracts 3 Notional amount 931 931 - - - - - - -------------------------------------------------- Total open interest rate contracts (1,630) Closed interest rate contracts(1) 235 - -------------------------------------------------- Net interest rate contract position (1,395) - -------------------------------------------------- Open foreign exchange contracts (30) Notional amount 6,231 273 1,499 2,552 112 623 1,172 - -------------------------------------------------- Total ALM contracts $(1,425) ==================================================================================================================================== (1) Represents the unamortized net realized deferred gains associated with closed contracts. As a result, no notional amount is reflected for expected maturity. - ------------------------------------------------------------------------------------------------------------------------------------ 60 - ------------------------------------------------------------------------------------------------------------------------------ Table Thirteen Selected Quarterly Financial Data - ------------------------------------------------------------------------------------------------------------------------------ 2000 Quarters --------------------------------------------------------------- (Dollars in millions, except per share information) Third Second First - ------------------------------------------------------------------------------------------------------------------------------ Income statement Interest income $ 11,265 $ 10,737 $ 10,086 Interest expense 6,672 6,106 5,562 Net interest income 4,593 4,631 4,524 Net interest income (taxable-equivalent basis) 4,672 4,709 4,595 Provision for credit losses 435 470 420 Gains on sales of securities 11 6 6 Noninterest income 3,645 3,500 4,046 Merger and restructuring charges 550 - - Other noninterest expense 4,410 4,413 4,623 Income before income taxes 2,854 3,254 3,533 Income tax expense 1,025 1,191 1,293 Net income 1,829 2,063 2,240 Net income available to common shareholders 1,828 2,061 2,239 Average common shares issued and outstanding (in thousands) 1,639,392 1,653,495 1,669,311 - ------------------------------------------------------------------------------------------------------------------------------ Performance ratios Return on average assets 1.06% 1.23% 1.38% Return on average common shareholders' equity 15.25 17.63 19.59 Total equity to total assets (period-end) 6.98 6.75 6.90 Total average equity to total average assets 6.97 7.00 7.07 Efficiency ratio 53.01 53.77 53.49 Dividend payout ratio 44.83 39.94 37.16 Shareholder value added $ 953 $ 878 $ 1,086 - ------------------------------------------------------------------------------------------------------------------------------ Per common share data Earnings $ 1.11 $ 1.25 $ 1.34 Diluted earnings 1.10 1.23 1.33 Cash dividends paid .50 .50 .50 Book value 28.69 27.82 27.28 - ------------------------------------------------------------------------------------------------------------------------------ Cash basis financial data (1) Earnings $ 2,044 $ 2,281 $ 2,457 Earnings per common share 1.25 1.38 1.47 Diluted earnings per common share 1.23 1.36 1.46 Return on average tangible assets 1.21% 1.39% 1.55% Return on average tangible common shareholders' equity 23.78 27.51 30.83 Efficiency ratio 50.43 51.12 50.98 Ending tangible equity to tangible assets 5.09 4.85 4.90 - ------------------------------------------------------------------------------------------------------------------------------ Balance sheet (period-end) Total loans and leases $ 402,592 $ 400,817 $ 382,085 Total assets 671,725 679,538 656,113 Total deposits 353,988 356,664 351,626 Long-term debt 69,412 69,245 62,059 Trust preferred securities 4,955 4,955 4,955 Common shareholders' equity 46,785 45,786 45,222 Total shareholders' equity 46,859 45,861 45,299 - ------------------------------------------------------------------------------------------------------------------------------ Risk-based capital ratios (period-end) Tier 1 capital 7.32% 7.40% 7.42% Total capital 10.80 11.03 11.00 Leverage ratio 6.06 6.11 6.17 - ------------------------------------------------------------------------------------------------------------------------------ Market price per share of common stock Closing $ 52.38 $ 43.00 $ 52.44 High 57.63 61.00 55.19 Low 43.63 42.98 42.31 ============================================================================================================================== (1) Cash basis calculations exclude goodwill and other intangible assets and their related amortization expense. - ------------------------------------------------------------------------------------------------------------------------------ 61 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- See "Management's Discussion and Analysis of Results of Operations and Financial Condition - Market Risk Management" on page 57 and the sections referenced therein for Quantitative and Qualitative Disclosures about Market Risk. - -------------------------------------------------------------------------------- Part II. Other Information - -------------------------------------------------------------------------------- Item 1. Legal Litigation Proceedings In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, substantial money damages are asserted against the Corporation and its subsidiaries and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. The Corporation and certain present and former officers and directors have been named as defendants in a number of actions filed in several federal courts that have been consolidated for pretrial purposes before a Missouri federal court. The amended complaint in the consolidated actions alleges, among other things, that the defendants failed to disclose material facts about BankAmerica's losses relating to D.E. Shaw Securities Group, L.P. and related entities until mid-October 1998, in violation of various provisions of federal and state laws. The amended complaint also alleges that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals and alleges a scheme to have NationsBank gain control over the newly merged entity. The Missouri federal court has certified classes consisting generally of persons who were stockholders of NationsBank or BankAmerica on September 30, 1998, or were entitled to vote on the Merger, or who purchased or acquired securities of the Corporation or its predecessors between August 4, 1998 and October 13, 1998. The amended complaint substantially survived a motion to dismiss, and discovery is underway. Claims against certain director-defendants were dismissed with leave to replead. Similar class actions (including one limited to California residents raising the claim that the proxy statement-prospectus of August 4, 1998, falsely stated that the Merger would be one of equals) were filed in California state court, alleging violations of the California Corporations Code and other state laws. The action on behalf of California residents was certified but was dismissed. The Court of Appeals reversed the dismissal. A Petition for Review is pending in the Supreme Court of California. The remaining California actions have been consolidated, but have not been certified as class actions. The Missouri federal court has enjoined prosecution of those consolidated class actions as a class action. The plaintiffs who were enjoined have appealed that injunction to the United States Court of Appeals for the Eighth Circuit. The Corporation believes the actions lack merit and will defend them vigorously. The amount of any ultimate exposure cannot be determined with certainty at this time. Management believes that the actions and proceedings and the losses, if any, resulting from the final outcome thereof, will not be material in the aggregate to the Corporation's financial position or results of operations. 62 Item 6. Exhibits a) Exhibits and Reports on -------- Form 8-K Exhibit 11 - Earnings Per Share Computation - included in Note 8 of the consolidated financial statements Exhibit 12(a) - Ratio of Earnings to Fixed Charges Exhibit 12(b) - Ratio of Earnings to Fixed Charges and Preferred Dividends Exhibit 27 - Financial Data Schedule b) Reports on Form 8-K ------------------- The following reports on Form 8-K were filed by the Corporation during the quarter ended September 30, 2000: Current Report on Form 8-K dated July 17, 2000 and filed July 21, 2000, Items 5 and 7. Current Report on Form 8-K dated July 26, 2000 and filed July 31, 2000, Items 5 and 7. Current Report on Form 8-K dated September 19, 2000 and filed September 22, 2000, Items 5 and 7. 63 - -------------------------------------------------------------------------------- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bank of America Corporation --------------------------- Registrant Date: November 14, 2000 /s/ Marc D. Oken ----------------- ------------------------------------- MARC D. OKEN Executive Vice President and Principal Financial Executive (Duly Authorized Officer and Chief Accounting Officer) 64 Bank of America Corporation Form 10-Q Index to Exhibits - -------------------------------------------------------------------------------- Exhibit Description - ------- ----------- 11 Earnings Per Share Computation - included in Note 8 of the consolidated financial statements 12(a) Ratio of Earnings to Fixed Charges 12(b) Ratio of Earnings to Fixed Charges and Preferred Dividends 27 Financial Data Schedule 65