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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-6523
Exact name of registrant as specified in its charter:
Bank of America Corporation
State of incorporation:
Delaware
IRS Employer Identification Number:
56-0906609
Address of principal executive offices:
Bank of America Corporate Center
Charlotte, North Carolina 28255
Registrant's telephone number, including area code:
(888) 279-3457
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
On April 30, 2001, there were 1,602,899,713 shares of Bank of America
Corporation Common Stock outstanding.
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Bank of America Corporation
March 31, 2001 Form 10-Q
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INDEX
Page
Part I Item 1. Financial Statements:
Financial Consolidated Statement of Income for the Three 2
Information Months Ended March 31, 2001 and 2000
Consolidated Balance Sheet at March 31, 3
2001 and December 31, 2000
Consolidated Statement of Changes in 4
Shareholders' Equity for the Three
Months Ended March 31, 2001 and 2000
Consolidated Statement of Cash Flows for the 5
Three Months Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results 19
of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures about 64
Market Risk
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Part II
Other Item 1. Legal Proceedings 64
Information
Item 2. Changes in Securities and Use of Proceeds 65
Item 6. Exhibits and Reports on Form 8-K 65
Signature 66
Index to Exhibits 67
Part I. Financial Information
Item 1. Financial Statements
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Income
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Three Months
Ended March 31
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(Dollars in millions, except per share information) 2001 2000
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Interest income
Interest and fees on loans and leases $ 7,659 $ 7,395
Interest and dividends on securities 846 1,311
Federal funds sold and securities purchased under agreements to resell 435 575
Trading account assets 846 536
Other interest income 455 250
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Total interest income 10,241 10,067
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Interest expense
Deposits 2,713 2,495
Short-term borrowings 1,377 1,802
Trading account liabilities 290 181
Long-term debt 1,222 1,084
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Total interest expense 5,602 5,562
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Net interest income 4,639 4,505
Provision for credit losses 835 420
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Net interest income after provision for credit losses 3,804 4,085
Gains (losses) on sales of securities (8) 6
Noninterest income
Consumer service charges 694 618
Corporate service charges 499 475
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Total service charges 1,193 1,093
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Consumer investment and brokerage services 379 364
Corporate investment and brokerage services 136 121
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Total investment and brokerage services 515 485
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Mortgage banking income 151 128
Investment banking income 346 397
Equity investment gains 147 563
Card income 573 484
Trading account profits(1) 699 743
Other income 156 172
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Total noninterest income 3,780 4,065
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Other noninterest expense
Personnel 2,401 2,534
Occupancy 433 418
Equipment 291 301
Marketing 177 119
Professional fees 126 105
Amortization of intangibles 223 217
Data processing 190 159
Telecommunications 119 131
Other general operating 545 515
General administrative and other 149 124
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Total other noninterest expense 4,654 4,623
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Income before income taxes 2,922 3,533
Income tax expense 1,052 1,293
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Net income $ 1,870 $ 2,240
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Net income available to common shareholders $ 1,869 $ 2,239
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Per share information
Earnings per common share $ 1.16 $ 1.34
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Diluted earnings per common share $ 1.15 $ 1.33
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Dividends per common share $ .56 $ .50
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Average common shares issued and outstanding (in thousands) 1,608,890 1,669,311
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(1) Trading account profits for the three months ended March 31, 2001 included
the $83 million transition adjustment loss resulting from adoption of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) on January 1, 2001.
See accompanying notes to consolidated financial statements.
2
Bank of America Corporation and Subsidiaries
Consolidated Balance Sheet
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March 31 December 31
(Dollars in millions) 2001 2000
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Assets
Cash and cash equivalents $ 23,333 $ 27,513
Time deposits placed and other short-term investments 5,549 5,448
Federal funds sold and securities purchased under agreements to resell (includes
$20,572 and $24,622 pledged as collateral) 20,581 28,055
Trading account assets (includes $21,282 and $21,216 pledged as collateral) 45,281 43,041
Derivative assets 16,508 15,534
Securities:
Available-for-sale (includes $31,085 and $40,674 pledged as collateral) 49,189 64,651
Held-to-maturity, at cost (market value - $1,118 and $1,133) 1,189 1,187
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Total securities 50,378 65,838
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Loans and leases 382,677 392,193
Allowance for credit losses (6,900) (6,838)
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Loans and leases, net of allowance for credit losses 375,777 385,355
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Premises and equipment, net 6,366 6,433
Customers' acceptance liability 2,232 1,972
Interest receivable 3,855 4,432
Mortgage banking assets 3,855 3,762
Goodwill 12,006 11,643
Core deposits and other intangibles 1,446 1,499
Other assets 42,588 41,666
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Total assets $609,755 $642,191
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Liabilities Deposits in domestic offices:
Noninterest-bearing $97,448 $98,722
Interest-bearing 214,379 211,978
Deposits in foreign offices:
Noninterest-bearing 1,716 1,923
Interest-bearing 38,917 51,621
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Total deposits 352,460 364,244
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Federal funds purchased and securities sold under agreements to repurchase 37,011 49,411
Trading account liabilities 24,138 20,947
Derivative liabilities 17,132 22,402
Commercial paper 5,707 6,955
Other short-term borrowings 30,559 35,243
Acceptances outstanding 2,232 1,972
Accrued expenses and other liabilities 19,631 20,887
Long-term debt 67,044 67,547
Trust preferred securities 4,955 4,955
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Total liabilities 560,869 594,563
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Commitments and contingencies (Note Seven)
Shareholders' Equity
Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and
outstanding - 1,662,172 and 1,692,172 shares 71 72
Common stock, $0.01 par value; authorized - 5,000,000,000 shares; issued and
outstanding - 1,601,983,783 and 1,613,632,036 shares 7,872 8,613
Retained earnings 40,785 39,815
Accumulated other comprehensive income (loss) 227 (746)
Other (69) (126)
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Total shareholders' equity 48,886 47,628
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Total liabilities and shareholders' equity $609,755 $642,191
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See accompanying notes to consolidated financial statements.
3
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
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Common Stock
Preferred -------------------------- Retained
(Dollars in millions, shares in thousands) Stock Shares Amount Earnings
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Balance, December 31, 1999 $77 1,677,273 $11,671 $35,681
Net income 2,240
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities
Comprehensive income
Cash dividends:
Common (832)
Preferred (1)
Common stock issued under
employee plans 530 (12)
Common stock repurchased (20,050) (911)
Other 1 80 1
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Balance, March 31, 2000 $77 1,657,754 $10,828 $37,089
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Balance, December 31, 2000 $72 1,613,632 $8,613 $39,815
Net income 1,870
Other comprehensive income, net of tax:
Net unrealized gains on available-
for-sale and marketable equity securities
Net unrealized gains on foreign
currency translation adjustments
Net gains on derivatives (2)
Comprehensive income
Cash dividends:
Common (900)
Preferred (1)
Common stock issued under
employee plans 2,707 34
Common stock repurchased (14,400) (739)
Conversion of preferred stock (1) 50 1
Other (5) (37) 1
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Balance, March 31, 2001 $71 1,601,984 $7,872 $40,785
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Accumulated Total
Other Share-
Comprehensive holders' Comprehensive
(Dollars in millions, shares in thousands) Income (Loss) (1) Other Equity Income
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Balance, December 31, 1999 $(2,658) $(339) $44,432
Net income 2,240 $2,240
Other comprehensive income, net of tax:
Net unrealized gains on available-for-sale
and marketable equity securities 166 166 $166
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Comprehensive income $2,406
=======
Cash dividends:
Common (832)
Preferred (1)
Common stock issued under
employee plans 37 25
Common stock repurchased (911)
Other 99 180
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Balance, March 31, 2000 $(2,492) $(203) $45,299
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Balance, December 31, 2000 $(746) $(126) $47,628
Net income 1,870 $ 1,870
Other comprehensive income, net of tax:
Net unrealized gains on available-
for-sale and marketable equity securities 383 383 383
Net unrealized gains on foreign
currency translation adjustments 3 3 3
Net gains on derivatives (2) 587 587 587
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Comprehensive income $ 2,843
=======
Cash dividends:
Common (900)
Preferred (1)
Common stock issued under
employee plans 20 54
Common stock repurchased (739)
Conversion of preferred stock
Other 37 1
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Balance, March 31, 2001 $227 $(69) $48,886
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(1) Accumulated Other Comprehensive Income (Loss) consists of the after-tax
valuation allowance for available-for-sale and marketable equity securities
of $(177) and $(560) and foreign currency translation adjustments of $(183)
and $(186) at March 31, 2001 and December 31, 2000, respectively, and net
gains on derivatives of $587 at March 31, 2001.
(2) Net gains on derivatives for the three months ended March 31, 2001 included
the $9 million after-tax transition adjustment gain resulting from the
adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133)
on January 1, 2001.
See accompanying notes to consolidated financial statements.
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Bank of America Corporation and Subsidiaries
Consolidated Statement of Cash Flows
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Three Months
Ended March 31
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(Dollars in millions) 2001 2000
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Operating activities
Net income $1,870 $2,240
Reconciliation of net income to net cash used in operating activities:
Provision for credit losses 835 420
(Gains) losses on sales of securities 8 (6)
Depreciation and premises improvements amortization 214 239
Amortization of intangibles 223 217
Deferred income tax expense 162 524
Net increase in trading and hedging instruments (5,293) (7,029)
Net (increase) decrease in interest receivable 577 (93)
Net (increase) decrease in other assets 314 (1,856)
Net decrease in interest payable (435) (176)
Net decrease in accrued expenses and other liabilities (1,235) (276)
Other operating activities, net (1,141) 1,286
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Net cash used in operating activities (3,901) (4,510)
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Investing activities
Net (increase) decrease in time deposits placed and other short-term investments (101) 1,588
Net (increase) decrease in federal funds sold and securities purchased
under agreements to resell 7,474 (1,873)
Proceeds from sales of available-for-sale securities 25,136 8,801
Proceeds from maturities of available-for-sale securities 856 1,443
Purchases of available-for-sale securities (9,758) (11,085)
Proceeds from maturities of held-to-maturity securities - 128
Proceeds from sales and securitizations of loans and leases 6,476 746
Other changes in loans and leases, net 2,097 (11,706)
Purchases and originations of mortgage banking assets - (126)
Net purchases of premises and equipment (147) (133)
Proceeds from sales of foreclosed properties 71 46
Acquisition of business activities (390) -
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Net cash provided by (used in) investing activities 31,714 (12,171)
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Financing activities
Net increase (decrease) in deposits (11,784) 4,353
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (12,400) 9,214
Net decrease in commercial paper and other short-term borrowings (5,932) (1,619)
Proceeds from issuance of long-term debt 4,762 10,137
Retirement of long-term debt (5,554) (3,718)
Proceeds from issuance of common stock 54 25
Common stock repurchased (739) (911)
Cash dividends paid (901) (833)
Other financing activities, net 546 328
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Net cash provided by (used in) financing activities (31,948) 16,976
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Effect of exchange rate changes on cash and cash equivalents (45) (25)
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Net increase (decrease) in cash and cash equivalents (4,180) 270
Cash and cash equivalents at January 1 27,513 26,989
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Cash and cash equivalents at March 31 $23,333 $27,259
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Loans transferred to foreclosed properties amounted to $101 and $68 for the
three months ended March 31, 2001 and 2000, respectively. There were no loans
securitized and retained in the trading and available-for-sale securities
portfolio for the three months ended March 31, 2001. Loans securitized and
retained in the trading and available-for-sale securities portfolio amounted to
$224 for the three months ended March 31, 2000.
See accompanying notes to consolidated financial statements.
5
Bank of America Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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Bank of America Corporation (the Corporation) is a Delaware corporation, a
bank holding company and a financial holding company. Through its banking
subsidiaries and nonbanking subsidiaries, the Corporation provides a diverse
range of financial services and products throughout the U.S. and in selected
international markets. At March 31, 2001, the Corporation operated its banking
activities primarily under two charters: Bank of America, N.A. and Bank of
America, N.A. (USA).
Note One - Accounting Policies
The consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. In the opinion of management, all normal recurring adjustments
necessary for a fair statement of the interim period results have been made.
Certain prior period amounts have been reclassified to conform to current period
classifications.
Accounting policies followed in the presentation of interim financial
results are presented on pages 66 to 72 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) as amended by
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of Financial
Accounting Standards Board Statement No. 133," and Statement of Financial
Accounting Standards No.138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an amendment of FASB Statement No. 133," was
adopted by the Corporation on January 1, 2001. In accordance with the provisions
of SFAS 133, the Corporation recorded certain transition adjustments as required
by SFAS 133. The impact of such transition adjustments to net income was a loss
of $52 million (net of related income tax benefits of $31 million), and a net
transition gain of $9 million (net of related income taxes of $5 million)
included in other comprehensive income on January 1, 2001. Because the
transition adjustment was not material to the Corporation's overall results, the
before-tax charge to earnings was included in trading account profits in
noninterest income rather than shown separately as the cumulative effect of an
accounting change. Further, the initial adoption of SFAS 133 resulted in the
Corporation recognizing $577 million of derivative assets and $514 million of
derivative liabilities on the balance sheet. Based upon the final outcome of
several pending Financial Accounting Standards Board (FASB) conclusions
surrounding the implementation of SFAS 133, the Corporation may record
additional transition adjustments. The Corporation expects that within the first
twelve months after adoption of SFAS 133, it will reclassify into earnings
substantially all of the transition adjustment originally recorded in other
comprehensive income.
In 2000, the FASB issued Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125" (SFAS
140). SFAS 140 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 December 31, 2000 consolidated
financial statements included the disclosures required by SFAS 140. The
implementation of SFAS 140 did not have a material impact on the Corporation's
results of operations or financial condition.
In 1999, the Federal Financial Institutions Examinations Council (FFIEC)
issued The Uniform Classification and Account Management Policy (the Policy)
which provides guidance and promotes consistency among banks on the treatment of
consumer delinquent and bankruptcy-related loans. The Corporation implemented
the Policy during the fourth quarter of 2000. Charge-offs of $104 million were
recorded in the consumer loan portfolio in the fourth quarter of 2000 in order
to comply with the Policy.
6
Derivatives and Hedging Activities
All derivatives are recognized on the balance sheet at fair value. Fair
value is based on dealer quotes, pricing models or quoted prices for instruments
with similar characteristics. The Corporation designates a derivative as held
for trading or hedging purposes when it enters into a derivative contract.
Derivatives designated as held for trading activities are included in the
Corporation's trading portfolio with changes in fair value reflected in trading
account profits. The Corporation uses its derivatives designated for hedging
activities as either fair value or cash flow hedges. The Corporation primarily
manages interest rate and foreign currency exchange rate sensitivity through the
use of derivatives. Fair value hedges are used to limit the Corporation's
exposure to changes in the fair value of its interest-bearing assets or
liabilities that are due to interest rate volatility. Cash flow hedges are used
to minimize the variability in cash flows of interest-bearing assets or
liabilities caused by interest rate fluctuations. Changes in the fair value of
derivatives designated for hedging activities that are highly effective as
hedges are recorded in earnings or other comprehensive income, depending on
whether the hedging relationship satisfies the criteria for a fair value or cash
flow hedge, respectively. A highly effective hedging relationship is one in
which the Corporation achieves offsetting changes in fair value or cash flows
for the risk being hedged. Hedge ineffectiveness (which represents the amount by
which the changes in the fair value of the derivative exceed changes in the fair
value of the hedged item) and gains and losses on the excluded component of a
derivative in assessing hedge effectiveness are recorded in current period
earnings. SFAS 133 retains certain concepts under Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation," (SFAS 52) for
foreign exchange hedging. Consistent with SFAS 52, the Corporation records
changes in the fair value of derivatives used as a hedge of a net investment in
foreign operations as a component of other comprehensive income.
The Corporation occasionally purchases or issues financial instruments
containing embedded derivatives. The embedded derivative is separated from the
host contract and carried at fair value if the economic characteristics of the
derivative are not clearly and closely related to the economic characteristics
of the host contract. To the extent that the Corporation cannot reliably
identify and measure the embedded derivative, the entire contract is carried at
fair value on the balance sheet.
The Corporation formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking various hedge transactions. Additionally, the
Corporation formally assesses, both at the hedge's inception and on an ongoing
basis, whether the derivatives used in its hedging transactions have been highly
effective in offsetting changes in the fair value or cash flows of the hedged
items. The Corporation discontinues hedge accounting when it is determined that
a derivative is not or has ceased to be highly effective as a hedge.
Mortgage Banking Assets
In the first quarter of 2001, the Corporation amended certain of its
Mortgage Selling and Servicing Contracts whereby its previously reported
mortgage servicing rights were bifurcated into two components, base servicing
and an Excess Spread Certificate ("Security"). The base servicing component
represents the contractually specified servicing fee and approximates the fair
value of the cost to sub-service the Corporation's portfolio. The
Security portion represents a retained financial interest in certain cash flows
of the underlying mortgage loans. The Corporation has the ability to pledge or
sell the Securities irrespective of the base servicing component.
The Securities are classified as mortgage banking assets in the
Consolidated Balance Sheet and are carried at estimated fair value with the
corresponding mark-to-market reported in trading account profits in the
Consolidated Statement of Income. The Corporation values the Securities using an
option adjusted spread model which requires several key assumptions including,
but not limited to, prepayments, discount rates based on market interest rates
and inflation rates. The Corporation seeks to offset changes in value of the
Securities due to changes in prepayment rates by entering into derivative
financial instruments such as purchased options and swaps. The derivative
instruments are accounted for as trading instruments and are marked-to-market
through trading account profits in the Consolidated Statement of Income.
Servicing fees on the base servicing, originated mortgage servicing rights
gains, ancillary servicing income and the income on the Securities are included
in mortgage banking income in the Consolidated Statement of Income.
7
Note Two - 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 was included
in merger and restructuring charges in the Consolidated Statement of Income on
page 62 of the Corporation's 2000 Annual Report on Form 10-K. 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
workforce, 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 will be used 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 March 31, 2001,
there were approximately 7,900 employees who had entered severance status as
part of these initiatives. The remaining 400 positions associated with the July
2000 growth initiative announcement have been identified, and the employees in
these positions will be notified by June 30, 2001. Cash payments applied to the
restructuring reserve through March 31, 2001 were approximately $300 million (of
which $209 million were applied in 2000) primarily related to severance costs.
Noncash reductions through March 31, 2001 were $51 million (of which $48 million
were applied in 2000), primarily related to restricted stock vesting
accelerations. The remaining restructuring reserve balance was $199 million at
March 31, 2001. Approximately $97 million of the remaining restructuring reserve
at March 31, 2001 is related to future payments for employees who have entered
severance status.
Note Three - Trading Activities
Trading-Related Revenue
Trading account profits represent the net amount earned from the
Corporation's trading positions, which include trading account assets and
liabilities as well as derivative positions. These transactions include
positions to meet customer demand as well as for the Corporation's own trading
account. Trading positions are taken in a diverse range of financial instruments
and markets. The profitability of these trading positions is largely dependent
on the volume and type of transactions, the level of risk assumed, and the
volatility of price and rate movements. Trading account profits, as reported in
the Consolidated Statement of Income, 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. Trading account profits for the three months ended March 31, 2001
include an $83 million transition adjustment net loss recorded as a result of
the implementation of SFAS 133.
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Three Months Ended
March 31
-----------------------
(Dollars in millions) 2001 2000
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Trading account profits - as reported $699 $743
Net interest income 322 227
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Total trading-related revenue $1,021 $970
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Trading-related revenue by product
Foreign exchange contracts $147 $159
Interest rate contracts 148 337
Fixed income 344 168
Equities and equity derivatives 330 295
Commodities and other 52 11
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Total trading-related revenue $1,021 $970
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8
Trading Account Assets and Liabilities
The fair values of the components of trading account assets and
liabilities at March 31, 2001 and December 31, 2000 were:
- -----------------------------------------------------------------------------
Fair Value
-----------------------------
March 31 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
Trading account assets
U.S. Government & Agency securities $12,763 $10,545
Foreign sovereign debt 10,337 10,432
Corporate & other debt securities 9,177 7,841
Equity securities 5,181 6,363
Mortgage-backed securities 1,996 1,713
Other 5,827 6,147
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Total $45,281 $43,041
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Trading account liabilities
U.S. Government & Agency securities $10,500 $ 10,906
Foreign sovereign debt 2,787 1,860
Corporate & other debt securities 1,168 2,215
Equity securities 5,226 5,712
Mortgage-backed securities 50 37
Other 4,407 217
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Total $24,138 $20,947
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See Note Four below for additional information on derivative
positions, including credit risk.
Note Four - Derivatives
The Corporation designates a derivative as held for trading or hedging
purposes when it enters into a derivative contract. Derivatives utilized by the
Corporation include swaps, financial futures and forward settlement contracts
and option contracts. A swap agreement is a contract between two parties to
exchange cash flows based on specified underlying notional amounts, assets
and/or indices. Financial futures and forward settlement contracts are
agreements to buy or sell a quantity of a financial instrument, index, currency
or commodity at a predetermined future date and rate or price. An option
contract is an agreement that conveys to the purchaser the right, but not the
obligation, to buy or sell a quantity of a financial instrument, index currency
or commodity at a predetermined rate or price at a time or during a period in
the future. Option agreements can be transacted on organized exchanges or
directly between parties.
Credit Risk Associated with Derivative Activities
Credit risk associated with derivatives is measured as the net replacement
cost should the counterparties with contracts in a gain position to the
Corporation completely fail to perform under the terms of those contracts and
any collateral underlying the contracts proves to be of no value. In managing
derivative credit risk, both the current exposure, which is the replacement cost
of contracts on the measurement date, as well as an estimate of the potential
change in value of contracts over their remaining lives are considered. In
managing credit risk associated with its derivative activities, the Corporation
deals primarily with U.S. and foreign commercial banks, broker-dealers and
corporates. To minimize credit risk, the Corporation enters into legally
enforceable master netting arrangements, which reduce risk by permitting the
closeout and netting of transactions with the same counterparty upon occurrence
of certain events.
9
A portion of the derivative activity involves exchange-traded instruments.
Because exchange-traded instruments conform to standard terms and are subject to
policies set by the exchange involved, including counterparty approval, margin
requirements and security deposit requirements, the credit risk is considered
minimal.
The following table presents the notional or contract and credit risk
amounts at March 31, 2001 and December 31, 2000 of the Corporation's derivative
asset positions held for trading and hedging purposes. These derivative
positions are primarily executed in the over-the-counter market. The credit risk
amounts presented in the following table do not consider the value of any
collateral but take into consideration the effects of legally enforceable master
netting agreements.
Derivative Assets
- -------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000(1)
---------------------------------------------------------
Contract/ Credit Contract/ Credit
(Dollars in millions) Notional Risk Notional Risk
- -------------------------------------------------------------------------------------------------
Interest rate contracts
Swaps $3,528,416 $5,055 $3,256,992 $ 3,236
Futures and forwards 1,238,319 118 1,227,537 57
Written options 608,948 - 664,108 -
Purchased options 602,395 60 601,828 145
Foreign exchange contracts
Swaps 80,128 2,994 61,035 1,424
Spot, futures and forwards 763,299 3,503 682,665 3,215
Written options 52,345 - 35,161 -
Purchased options 52,425 644 32,639 380
Equity contracts
Swaps 17,217 559 17,482 637
Futures and forwards 61,186 88 61,004 353
Written options 24,637 - 30,976 -
Purchased options 27,125 1,416 36,304 3,670
Commodity and other contracts
Swaps 7,455 1,711 9,126 1,902
Futures and forwards 2,773 25 2,098 81
Written options 9,121 - 12,603 -
Purchased options 8,511 16 10,515 228
Credit derivatives 38,136 319 40,638 206
- ----------------------------------------------------------------------------------------------
Net replacement cost $16,508 $15,534
- ----------------------------------------------------------------------------------------------
(1) The amounts at December 31, 2000 do not reflect derivative positions that
were off-balance sheet prior to the adoption of SFAS 133.
The table above includes both long and short derivative positions. The
average fair value of derivative assets for the three months ended March 31,
2001 and 2000 was $17.2 billion and $18.9 billion, respectively. The average
fair value of derivative liabilities for the three months ended March 31, 2001
and 2000 was $21.0 billion and $17.6 billion, respectively. The fair value of
derivative assets at March 31, 2001 and December 31, 2000 was $16.5 billion and
$15.5 billion, respectively. The fair value of derivative liabilities at March
31, 2001 and December 31, 2000 was $17.1 billion and $22.4 billion,
respectively.
During the three months ended March 31, 2001 and 2000, there were no
significant credit losses associated with derivative contracts. At March 31,
2001 and December 31, 2000, there were no nonperforming derivative positions
that were material to the Corporation.
In addition to credit risk management activities, the Corporation uses
credit derivatives to generate revenue by taking on exposure to underlying
credits. The Corporation also provides credit derivatives to sophisticated
customers who wish to hedge existing credit exposures or take on additional
credit exposure to generate revenue. The Corporation's credit derivative
positions at March 31, 2001 and December 31, 2000 consisted of credit default
swaps and total return swaps.
10
Asset and Liability Management (ALM) Activities
Risk management interest rate contracts and foreign exchange contracts are
utilized in the Corporation's ALM process. The Corporation maintains an overall
interest rate risk-management strategy that incorporates the use of interest
rate contracts to minimize significant unplanned fluctuations in earnings that
are caused by interest rate volatility. The Corporation's goal is to manage
interest rate sensitivity so that movements in interest rates do not adversely
affect the net interest margin. As a result of interest rate fluctuations,
hedged fixed-rate assets and liabilities appreciate or depreciate in market
value. Gains or losses on the derivative instruments that are linked to the
hedged fixed-rate assets and liabilities are expected to substantially offset
this unrealized appreciation or depreciation. Interest income and interest
expense on hedged variable-rate assets and liabilities, respectively, increases
or decreases as a result of interest rate fluctuations. Gains and losses on the
derivative instruments that are linked to these hedged assets and liabilities
are expected to substantially offset this variability in earnings.
Interest rate contracts, which are generally non-leveraged generic
interest rate and basis swaps, options and futures, allow the Corporation to
effectively manage its interest rate risk position. Generic interest rate swaps
involve the exchange of fixed-rate and variable-rate interest payments based on
the contractual underlying notional amount. Basis swaps involve the exchange of
interest payments based on the contractual underlying notional amounts, where
both the pay rate and the receive rate are floating rates based on different
indices. Option products primarily consist of caps and floors. Interest rate
caps and floors are agreements where, for a fee, the purchaser obtains the right
to receive interest payments when a variable interest rate moves above or below
a specified cap or floor rate, respectively. Futures contracts used for ALM
activities are primarily index futures providing for cash payments based upon
the movements of an underlying rate index.
The Corporation uses foreign currency contracts to manage the foreign
exchange risk associated with certain foreign-denominated assets and
liabilities, as well as the Corporation's equity investments in foreign
subsidiaries. Foreign exchange contracts, which include spot, futures and
forward contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price on an agreed-upon
settlement date. Foreign exchange option contracts are similar to interest rate
option contracts except that they are based on currencies rather than interest
rates. Exposure to loss on these contracts will increase or decrease over their
respective lives as currency exchange and interest rates fluctuate.
Fair Value Hedges
The Corporation uses various types of interest rate and foreign currency
exchange rate derivative contracts to protect against changes in the fair value
of its fixed rate assets and liabilities due to fluctuations in interest rates.
For the three months ended March 31, 2001, there were no significant gains or
losses recognized which represented the ineffective portion and excluded
component in assessing hedge effectiveness of fair value hedges.
Cash Flow Hedges
The Corporation also uses various types of interest rate and foreign
currency exchange rate derivative contracts to protect against changes in cash
flows of its variable rate assets and liabilities. For the three months ended
March 31, 2001, the Corporation recognized a net loss of $8 million (included in
other income in the Consolidated Statement of Income), which represented the
ineffective portion and excluded component in assessing hedge effectiveness of
cash flow hedges. The Corporation has determined that there are no hedging
positions where it is probable that certain forecasted transactions may not
occur by the end of the originally specified time period or within an additional
two months.
For cash flow hedges, gains and losses on derivative contracts
reclassified from accumulated other comprehensive income to current period
earnings are included in the line item in the Consolidated Statement of Income
in which the hedged item is recorded in the same period the forecasted
transaction affects earnings. Deferred net gains on derivative instruments of
approximately $22 million included in accumulated other comprehensive income at
March 31, 2001 are expected to be reclassified into earnings during the next
twelve months. These net gains reclassified into earnings are expected to
increase income or reduce expense on the hedged items.
11
Hedges of Net Investments in Foreign Operations
The Corporation uses forward exchange contracts, currency swaps, and
nonderivative hedging instruments to hedge its net investments in foreign
operations against adverse movements in exchange rates. For the three months
ended March 31, 2001, net gains of $93 million related to these derivatives and
nonderivative hedging instruments were recorded as a component of the foreign
currency translation adjustment in other comprehensive income. These net gains
were largely offset by losses in the Corporation's net investments in foreign
operations. For the same period, the Corporation had no excluded component of
net investment hedges.
Note Five - Loans and Leases
Loans and leases at March 31, 2001 and December 31, 2000 were:
- ----------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
--------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------
Commercial - domestic $140,612 36.7% $146,040 37.2%
Commercial - foreign 29,064 7.6 31,066 7.9
Commercial real estate - domestic 25,475 6.7 26,154 6.7
Commercial real estate - foreign 330 .1 282 .1
- ----------------------------------------------------------------------------------------------------------
Total commercial 195,481 51.1 203,542 51.9
- ----------------------------------------------------------------------------------------------------------
Residential mortgage 82,032 21.4 84,394 21.5
Home equity lines 21,775 5.7 21,598 5.5
Direct/Indirect consumer 40,056 10.5 40,457 10.3
Consumer finance 26,334 6.9 25,800 6.6
Bankcard 14,679 3.8 14,094 3.6
Foreign consumer 2,320 .6 2,308 .6
- ----------------------------------------------------------------------------------------------------------
Total consumer 187,196 48.9 188,651 48.1
- ----------------------------------------------------------------------------------------------------------
Total loans and leases $382,677 100.0% $392,193 100.0%
- ----------------------------------------------------------------------------------------------------------
The table below summarizes the changes in the allowance for credit losses
for the three months ended March 31, 2001 and 2000:
- -------------------------------------------------------------------------------------------------
Three Months
Ended March 31
-------------------------
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------------------------------
Balance, January 1 $ 6,838 $ 6,828
- -------------------------------------------------------------------------------------------------
Loans and leases charged off (887) (570)
Recoveries of loans and leases previously charged off 115 150
- -------------------------------------------------------------------------------------------------
Net charge-offs (772) (420)
- -------------------------------------------------------------------------------------------------
Provision for credit losses 835 420
Other, net (1) (1)
- -------------------------------------------------------------------------------------------------
Balance, March 31 $ 6,900 $ 6,827
- -------------------------------------------------------------------------------------------------
The allowance on certain homogeneous loan portfolios, which generally
consist of consumer loans, is based on aggregated portfolio segment evaluations
generally by loan type. The remaining portfolios are reviewed on an individual
loan basis.
12
The following table presents the recorded investment in specific loans
that were considered individually impaired in accordance with Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," (SFAS 114) at March 31, 2001 and December 31, 2000:
- --------------------------------------------------------------------------
March 31 December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
Commercial - domestic $3,076 $2,891
Commercial - foreign 568 521
Commercial real estate - domestic 380 412
Commercial real estate - foreign 3 2
- --------------------------------------------------------------------------
Total impaired loans $4,027 $3,826
- --------------------------------------------------------------------------
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect all
amounts due, including principal and interest, according to the contractual
terms of the agreement. Once a loan has been identified as impaired, management
measures impairment in accordance with SFAS 114. Impaired loans are measured
based on the present value of payments expected to be received, observable
market prices or for loans that are solely dependent on the collateral for
repayment, the estimated fair value of the collateral. If the recorded
investment in impaired loans exceeds the measure of estimated fair value, a
valuation allowance is established as a component of the allowance for credit
losses.
At March 31, 2001 and December 31, 2000, nonperforming loans, including
certain loans which were considered impaired, totaled $5.6 billion and $5.2
billion, respectively. Foreclosed properties amounted to $277 million and $249
million at March 31, 2001 and December 31, 2000, respectively.
Note Six - Short-Term Borrowings and Long-Term Debt
In the first quarter of 2001, Bank of America Corporation issued $4.2
billion in senior and subordinated long-term debt, domestically and
internationally, with maturities ranging from 2004 to 2031. Of the $4.2 billion
issued, $3.8 billion was converted from fixed rates ranging from 5.65 percent to
7.54 percent to floating rates through interest rate swaps at spreads ranging
from 30 to 139 basis points over three-month London InterBank Offered Rate
(LIBOR). The remaining $400 million bears interest at floating rates ranging
primarily from 32 to 83 basis points over three-month LIBOR and 28 basis points
over one-month LIBOR.
At March 31, 2001, Bank of America Corporation had the authority to issue
approximately $12.9 billion of corporate debt and other securities under its
existing shelf registration statements. In first quarter 2001, Bank of America
Corporation filed a $3 billion shelf registration statement to be used
exclusively for "retail targeted" offerings of InterNotesSM in the United
States.
In the first quarter of 2001, Bank of America, N.A. issued $110 million in
senior long-term bank notes maturing in 2002. The $110 million bears interest at
fixed rates ranging from 4.79 percent to 4.88 percent.
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 $12.4 billion at
March 31, 2001 compared to $14.5 billion at December 31, 2000. These short-term
bank notes, along with Treasury tax and loan notes and term federal funds
purchased, are reflected in other short-term borrowings in the Consolidated
Balance Sheet. Long-term debt under current and former programs totaled $14.7
billion at March 31, 2001 compared to $17.6 billion at December 31, 2000.
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
13
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 $5.4 billion at March 31, 2001 compared
to $5.2 billion at December 31, 2000. Bank of America, N.A.'s notes outstanding
under this program totaled $1.4 billion at March 31, 2001 and December 31, 2000.
Of the $20.0 billion authorized at March 31, 2001, Bank of America Corporation
and Bank of America, N.A. had remaining authority to issue approximately $4.6
billion and $8.5 billion, respectively. At March 31, 2001 and December 31, 2000,
$2.7 billion was outstanding under the former BankAmerica Euro medium-term note
program. No additional debt securities will be offered under that program.
At March 31, 2001, Bank of America Corporation had the authority to issue
300 billion in yen-denominated notes (approximately U.S. $3 billion) under a
shelf registration statement in Japan to be used exclusively for primary
offerings to non-United States residents. In addition, Bank of America
Corporation allocated $2 billion of the joint Euro medium-term note program
mentioned above to be used exclusively for secondary offerings to non-United
States residents for a shelf registration statement filed in Japan. The
Corporation had no notes outstanding under these programs at March 31, 2001 or
December 31, 2000.
From April 1, 2001 through May 9, 2001, Bank of America Corporation issued
$564 million of long-term senior and subordinated debt, with maturities ranging
from 2004 to 2026. During this same time period, Bank of America, N.A. issued
$260 million of bank notes maturing in 2002.
Note Seven - Commitments and Contingencies
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters
of credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial institutions.
The following table summarizes outstanding commitments to extend credit at March
31, 2001 and December 31, 2000:
March 31 December 31
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------------------
Credit card commitments $76,671 $71,572
Other loan commitments 240,685 243,124
Standby letters of credit and financial guarantees 34,015 33,420
Commercial letters of credit 2,994 3,327
- ------------------------------------------------------------------------------
When-Issued Securities
At March 31, 2001, the Corporation had commitments to purchase and sell
when-issued securities of $39.4 billion and $35.4 billion, respectively. At
December 31, 2000, the Corporation had commitments to purchase and sell
when-issued securities of $26.4 billion and $20.6 billion, respectively.
Litigation
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation and certain present and former officers and directors have
been named as defendants in a number of actions filed in several federal courts
that have been consolidated for pretrial purposes before a Missouri
14
federal court. The amended complaint in the consolidated actions alleges, among
other things, that the defendants failed to disclose material facts about
BankAmerica Corporation's (BankAmerica) losses relating to D.E. Shaw Securities
Group, L.P. ("D.E. Shaw") and related entities until mid-October 1998, in
violation of various provisions of federal and state laws. The amended complaint
also alleges that the proxy statement-prospectus of August 4, 1998, falsely
stated that the merger between NationsBank Corporation (NationsBank) and
BankAmerica would be one of equals and alleges a scheme to have NationsBank gain
control over the newly merged entity. The Missouri federal court has certified
classes consisting generally of persons who were stockholders of NationsBank or
BankAmerica on September 30, 1998, or were entitled to vote on the merger, or
who purchased or acquired securities of the Corporation or its predecessors
between August 4, 1998 and October 13, 1998. The amended complaint substantially
survived a motion to dismiss, and discovery is underway. Claims against certain
director-defendants were dismissed with leave to replead. The court has
preliminarily ordered the parties to be ready for trial in January 2002. A
former NationsBank stockholder who opted out of the federal class action has
commenced an action asserting claims substantially similar to the claims
relating to D.E. Shaw set forth in the consolidated action. That action is
proceeding with the federal class action in the Missouri federal court. 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 as a class. A motion to
decertify the class is pending. A lower court order dismissing that action was
reversed on appeal and discovery has commenced. 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
During 2000, the Corporation completed its 1999 stock repurchase plan. On
July 26, 2000, the Corporation's Board of Directors (the Board) authorized a new
stock repurchase program of up to 100 million shares of the Corporation's common
stock at an aggregate cost of up to $7.5 billion. At March 31, 2001 the
remaining buyback authority for common stock under the 2000 program totaled $6.1
billion, or 70 million shares. From inception in June 1999 through March 31,
2001, the Corporation had repurchased approximately 160 million shares of its
common stock in open market repurchases and under accelerated share repurchase
programs at an average per-share price of $55.33, which reduced shareholders'
equity by $8.9 billion. Comparatively, from inception in June 1999 through March
31, 2000, the Corporation had repurchased approximately 98 million shares of its
common stock in open market repurchases and under accelerated share repurchase
programs at an average per-share price of $58.81, which reduced shareholders'
equity by $5.8 billion.
In September 1999, the Corporation began selling put options on its common
stock to independent third parties. The put option program was designed to
partially offset the cost of share repurchases. The put options give the holders
the right to sell shares of the Corporation's common stock to the Corporation on
certain dates at specified prices. The put option contracts allow the
Corporation to determine the method of settlement, and the premiums received are
reflected as a component of other shareholders' equity. At March 31, 2001, there
were two million put options outstanding with exercise prices ranging from
$48.14 per share to $51.38 per share which expire from April 2001 to September
2001. At December 31, 2000, there were three million put options outstanding
with exercise prices ranging from $45.22 per share to $50.37 per share which
expire from January 2001 to April 2001.
Earnings per common share is computed by dividing net income available to
common shareholders by the weighted average common shares issued and
outstanding. For diluted earnings per common share, net income available to
common shareholders can be affected by the conversion of the registrant's
convertible preferred stock. Where the effect of this conversion would have been
dilutive, net income available to common shareholders is adjusted by the
associated preferred dividends. This adjusted net income is divided by the
weighted average number of common shares issued and outstanding for each period
plus amounts representing the dilutive effect of stock options outstanding and
the dilution resulting from the conversion of the registrant's convertible
preferred stock, if
15
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.
The calculation of earnings per common share and diluted earnings per
common share for the three months ended March 31, 2001 and 2000 is presented
below:
Three Months Ended
(Shares in thousands, dollars in millions, March 31
---------------------------
except per share information) 2001 2000
- --------------------------------------------------------------------------------------------
Earnings per common share
Net income $1,870 $2,240
Preferred stock dividends (1) (1)
- --------------------------------------------------------------------------------------------
Net income available to common shareholders $1,869 $2,239
- --------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,608,890 1,669,311
- --------------------------------------------------------------------------------------------
Earnings per common share $ 1.16 $ 1.34
- --------------------------------------------------------------------------------------------
Diluted earnings per common share
Net income available to common shareholders $1,869 $2,239
Preferred stock dividends 1 1
- --------------------------------------------------------------------------------------------
Net income available to common shareholders and assumed
conversions $1,870 $2,240
- --------------------------------------------------------------------------------------------
Average common shares issued and outstanding 1,608,890 1,669,311
- --------------------------------------------------------------------------------------------
Incremental shares from assumed conversions:
Convertible preferred stock 2,804 3,006
Stock options 19,405 16,001
- --------------------------------------------------------------------------------------------
Dilutive potential common shares 22,209 19,007
- --------------------------------------------------------------------------------------------
Total diluted average common shares issued and outstanding 1,631,099 1,688,318
- --------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.15 $ 1.33
- --------------------------------------------------------------------------------------------
Note Nine - Business Segment Information
In 2000, the Corporation realigned its business segments to report the
results of the Corporation's operations through four business segments: Consumer
and Commercial Banking, Asset Management, Global Corporate and Investment
Banking and Equity Investments. In the first quarter of 2001, the thirty-year
mortgage portfolio was moved from Consumer and Commercial Banking to the
Corporate Other segment.
Consumer and Commercial Banking provides a diversified range of products
and services to individuals and small businesses through multiple delivery
channels and commercial lending and treasury management services to middle
market companies with annual revenue between $10 million and $500 million. Asset
Management offers customized asset management and credit, financial advisory,
fiduciary, trust and banking services, as well as both full-service and discount
brokerage services. It provides management of equity, fixed income, cash and
alternative investments to individuals, corporations and a wide array of
institutional clients. Global Corporate and Investment Banking provides a
diversified range of financial products such as investment banking, trade
finance, treasury management, capital markets, leasing and financial advisory
services to domestic and international corporations, financial institutions and
government entities. Equity Investments includes Principal Investing which makes
both direct and indirect equity investments in a wide variety of transactions.
Equity Investments also includes the Corporation's strategic technology and
alliances investment portfolio in addition to other parent company investments.
The Corporate Other segment consists primarily of the functions associated with
managing the interest rate risk of the Corporation.
Effective January 2, 2001, the Corporation acquired the remaining 50
percent of Marsico Capital Management LLC (Marsico), which is part of the Asset
Management segment, for a total investment of $1.1 billion. The Corporation
acquired the first 50 percent in 1999. Marsico is a Denver-based investment
management firm specializing in large capitalization growth stocks.
16
The following table includes total revenue, net income and average total
assets for the three months ended March 31, 2001 and 2000 for each business
segment. Certain prior period amounts have been reclassified between segments to
conform to the current period presentation.
Business Segments
- --------------------------------------------------------------------------------
For the three months ended March 31
Consumer and
Total Corporation Commercial Banking (1) Asset Management (1)
---------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income (2) $ 4,721 $ 4,576 $ 3,176 $ 3,159 $ 160 $ 145
Noninterest income(3) 3,780 4,065 1,980 1,661 416 404
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 8,501 8,641 5,156 4,820 576 549
Provision for credit losses 835 420 516 398 8 9
Gains (losses) on sales of securities (8) 6 - (1) - -
Amortization of intangibles 223 217 167 168 13 6
Depreciation expense 214 239 153 171 12 14
Other noninterest expense 4,217 4,167 2,529 2,519 334 285
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,004 3,604 1,791 1,563 209 235
Income tax expense 1,134 1,364 702 609 79 90
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,870 $ 2,240 $ 1,089 $ 954 $ 130 $ 145
- -----------------------------------------------------------------------------------------------------------------------------
Average total assets $ 648,698 $ 651,019 $ 285,653 $ 281,721 $ 25,854 $ 22,393
- -----------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31
Global Corporate and
Investment Banking (1) Equity Investments (1) Corporate Other
----------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income (2) $ 1,145 $ 1,024 $ (42) $ (28) $ 282 $ 276
Noninterest income(3) 1,418 1,457 147 552 (181) (9)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,563 2,481 105 524 101 267
Provision for credit losses 245 27 - 4 66 (18)
Gains (losses) on sales of securities (8) 2 - - - 5
Amortization of intangibles 41 39 3 3 (1) 1
Depreciation expense 48 53 1 1 - -
Other noninterest expense 1,280 1,246 46 24 28 93
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 941 1,118 55 492 8 196
Income tax expense 337 394 20 191 (4) 80
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 604 $ 724 $ 35 $ 301 $ 12 $ 116
- ------------------------------------------------------------------------------------------------------------------------------
Average total assets $ 250,430 $ 234,389 $ 6,744 $ 4,743 $ 80,017 $ 107,773
- ------------------------------------------------------------------------------------------------------------------------------
(1) There were no material intersegment revenues among the segments.
(2) Net interest income is presented on a taxable-equivalent basis.
(3) Noninterest income includes the $83 million SFAS 133 transition adjustment
net loss which is included in trading account profits. The components of
the transition adjustment by business segment are a gain of $4 million for
Consumer and Commercial Banking, a gain of $19 million for Global
Commercial and Investment Banking and a loss of $106 million for Corporate
Other.
17
A reconciliation of the segments' net income (excluding Corporate Other)
to consolidated net income follows:
- ---------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------------------
Segments' net income $1,858 $2,124
Adjustments, net of taxes:
Earnings associated with unassigned capital 69 47
30-year mortgage portfolio net revenue 67 94
SFAS 133 transition adjustment (68) -
Provision for credit losses in excess of
net charge-offs (41) -
Gains on sales of securities - 3
Other (15) (28)
- ---------------------------------------------------------------------------
Consolidated net income $1,870 $2,240
- ---------------------------------------------------------------------------
18
- --------------------------------------------------------------------------------
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 2000 Annual Report on Form 10-K. These
statements are representative only on the date hereof, and the Corporation
undertakes no obligation to update any forward-looking statements made.
The possible events or factors include the following: the Corporation's
loan growth is dependent on economic conditions, as well as various
discretionary factors, such as decisions to securitize, sell, or purchase
certain loans or loan portfolios; syndications or participations of loans;
retention of residential mortgage loans; and the management of borrower,
industry, product and geographic concentrations and the mix of the loan
portfolio. The level of nonperforming assets, charge-offs and provision expense
can be affected by local, regional and international economic and market
conditions, 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.
19
Overview
The Corporation is a Delaware corporation, a bank holding company and a
financial holding company, and is headquartered in Charlotte, North Carolina.
The Corporation operates in 21 states and the District of Columbia and has
offices located in 38 countries. The Corporation provides a diversified range of
banking and certain nonbanking financial services both domestically and
internationally through four major business segments: Consumer and Commercial
Banking, Asset Management, Global Corporate and Investment Banking, and Equity
Investments. At March 31, 2001, the Corporation had $610 billion in assets and
approximately 144,000 full-time equivalent employees.
The remainder of management's discussion and analysis of the Corporation's
results of operations and financial position should be read in conjunction with
the consolidated financial statements and related notes presented on pages 2
through 18.
Refer to Table One for selected financial data for the three months ended
March 31, 2001 and 2000.
Key performance highlights for the three months ended March 31, 2001 compared to
the same period in 2000:
o Net income totaled $1.9 billion, or $1.15 per common share (diluted)
compared to $2.2 billion, or $1.33 per common share (diluted).
o Cash basis ratios on an operating basis measure performance excluding
goodwill and other intangible amortization expense. Cash basis diluted
earnings per common share was $1.28, a decrease of $0.18 per share. Cash
basis return on average common shareholders' equity was 17.75 percent, a
decrease of 374 basis points. The cash basis efficiency ratio was 52.11
percent, an increase of 113 basis points, primarily due to a seven percent
decrease in noninterest income.
o Shareholder value added (SVA) declined $407 million to $679 million
primarily related to lower market-related revenue in the Equity
Investments segment, a higher provision for credit losses in the Global
Corporate and Investment Banking segment and a transition adjustment net
loss of $83 million related to the adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). These declines in SVA were offset by
higher fee revenue in the Consumer and Commercial Banking segment.
o The return on average common shareholders' equity was 15.86 percent, a
decrease of 373 basis points.
o Total revenue includes net interest income on a taxable-equivalent basis
and noninterest income. Total revenue was $8.5 billion, a decrease of $140
million.
>> Net interest income increased $145 million to $4.7 billion. The
increase was due to an increase in managed loan growth, particularly
in the consumer Banking Regions, higher levels of customer-based
deposits and equity, and an increased trading-related contribution.
These increases were partially offset by the impact of deposit
pricing initiatives, deterioration in auto lease residual values and
the cost of share repurchases. Average managed loans and leases were
$409.3 billion, a $19.8 billion increase, primarily due to a nine
percent increase in consumer loans and leases. Average
customer-based deposits grew to $304.8 billion, a $8.7 billion
increase. The net interest yield was 3.39 percent, a 13 basis point
increase. The increase was primarily due to higher levels of core
funding sources and improved balance sheet mix.
>> Noninterest income was $3.8 billion, a $285 million decrease. The
decrease was due to declines in equity investment gains, investment
banking income, trading account profits and other income, which were
partially offset by increases in service charges, card income,
investment and brokerage services and mortgage banking income.
Trading account profits included the SFAS 133 transition adjustment
net loss of $83 million. Other income in 2001 included $35 million
in auto lease residual charges related to the closing of the
Corporation's Price Auto Outlet business. Other income in the first
quarter of 2000 reflected no significant items. Consumer and
Commercial Banking experienced an $89 million, or 18 percent,
increase in card income to $573 million primarily due to new account
growth in both credit and debit card
20
and increased purchase volume on existing accounts. Income from
investment and brokerage services increased $7 million to $378
million in the Asset Management segment largely due to new asset
management business and the completed acquisition of Marsico Capital
Management LLC (Marsico), partially offset by lower broker activity
due to decreased trade volume and significant market decline.
Trading account profits within Global Corporate and Investment
Banking increased $13 million to $729 million driven by higher
revenues from fixed income, commodities and other contracts and
equities and equity derivatives, offset by decreases in interest
rate contracts and foreign exchange contracts. Investment banking
income decreased $51 million to $346 million, reflecting weaker
demand in certain markets. Equity Investments had equity investment
gains of $141 million, reflecting a decrease of $406 million, and
included a gain in the parent company portfolio of $140 million
related to the sale of an interest in the Star Systems ATM network.
o The provision for credit losses was $835 million, a $415 million increase.
Net charge-offs were $772 million, or 0.81 percent of average loans and
leases. Provision expense exceeded net charge-offs by $63 million as the
company increased the reserve for credit losses given the deterioration in
credit quality and uncertainty surrounding the current economic
environment. The increase in net charge-offs of $352 million, or 36 basis
points, was centered in the commercial - domestic portfolio. Consumer
finance and bankcard charge-offs also increased from a year earlier
reflecting the seasoning of the consumer finance portfolio and an increase
in bankcard outstandings. Nonperforming assets were $5.9 billion, or 1.54
percent of loans, leases and foreclosed properties at March 31, 2001, a
$440 million, or 15 basis point increase from December 31, 2000. The
increase reflects an increase in nonperforming loans in the commercial -
domestic loan portfolio, resulting from credit deterioration as companies
were affected by the weakening economic environment. The allowance for
credit losses totaled $6.9 billion and $6.8 billion at March 31, 2001 and
December 31, 2000, respectively.
o Other noninterest expense was $4.7 billion, a $31 million increase, driven
by investments in growth businesses offset by the impact of productivity
initiatives.
Employee-Related Matters
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 third quarter 2000 which was included in
merger and restructuring charges in the Consolidated Statement of Income on page
62 of the Corporation's 2000 Annual Report on Form 10-K. 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
workforce, 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 will be used 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 March 31, 2001,
there were approximately 7,900 employees who had entered severance status as
part of these initiatives. The remaining 400 positions associated with the July
2000 growth initiative announcement have been identified, and the employees in
these positions will be notified by June 30, 2001. The remaining restructuring
reserve balance was $199 million at March 31, 2001. Approximately $97 million of
the remaining restructuring reserve at March 31, 2001 was related to future
payments for employees who have entered severance status. See Note Two of the
consolidated financial statements for additional restructuring charge
information.
Processes continue to be reviewed across the Corporation to ensure that it
is organized around its customers and their needs. Significant process changes
and productivity improvements, primarily in the infrastructure of the
operations, are taking place in consumer real estate, payments processing,
imaging, commercial loan processing 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, card and payment businesses and the
investment banking platform.
21
Table One
Selected Financial Data
- ----------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
----------------------------
(Dollars in millions, except per share information) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Income statement
Interest income $10,241 $10,067
Interest expense 5,602 5,562
Net interest income 4,639 4,505
Net interest income (taxable-equivalent basis) 4,721 4,576
Provision for credit losses 835 420
Gains (losses) on sales of securities (8) 6
Noninterest income 3,780 4,065
Other noninterest expense 4,654 4,623
Income before income taxes 2,922 3,533
Income tax expense 1,052 1,293
Net income 1,870 2,240
Net income available to common shareholders 1,869 2,239
Average common shares issued and outstanding (in thousands) 1,608,890 1,669,311
Average diluted common shares issued and outstanding (in thousands) 1,631,099 1,688,318
- ----------------------------------------------------------------------------------------------------------
Performance ratios
Return on average assets 1.17 % 1.38 %
Return on average common shareholders' equity 15.86 19.59
Total equity to total assets (period-end) 8.02 6.90
Total average equity to total average assets 7.38 7.07
Efficiency ratio 54.73 53.49
Dividend payout ratio 48.14 37.16
Shareholder value added $ 679 $ 1,086
- ----------------------------------------------------------------------------------------------------------
Per common share data
Earnings $ 1.16 $ 1.34
Diluted earnings 1.15 1.33
Cash dividends paid .56 .50
Book value 30.47 27.28
- ----------------------------------------------------------------------------------------------------------
Cash basis financial data (1)
Earnings $ 2,093 $ 2,457
Earnings per common share 1.30 1.47
Diluted earnings per common share 1.28 1.46
Return on average assets 1.31 % 1.52 %
Return on average common shareholders' equity 17.75 21.49
Efficiency ratio 52.11 50.98
- ----------------------------------------------------------------------------------------------------------
Balance sheet (period-end)
Total loans and leases $382,677 $382,085
Total assets 609,755 656,113
Total deposits 352,460 351,626
Long-term debt 67,044 62,059
Trust preferred securities 4,955 4,955
Common shareholders' equity 48,815 45,222
Total shareholders' equity 48,886 45,299
- ----------------------------------------------------------------------------------------------------------
Risk-based capital ratios (period-end)
Tier 1 capital 7.65 % 7.42 %
Total capital 11.84 11.00
Leverage ratio 6.41 6.17
- ----------------------------------------------------------------------------------------------------------
Market price per share of common stock
Closing $ 54.75 $ 52.44
High 55.94 55.19
Low 45.00 42.31
- ----------------------------------------------------------------------------------------------------------
(1) Cash basis calculations exclude goodwill and other intangible amortization
expense.
22
Business Segment Operations
The Corporation provides a diversified range of banking and nonbanking
financial services and products through its various subsidiaries. In 2000, the
Corporation realigned its business segments to report the results of the
Corporation's operations through four business segments: Consumer and Commercial
Banking, Asset Management, Global Corporate and Investment Banking and Equity
Investments. In the first quarter of 2001, the thirty-year mortgage portfolio
was moved from Consumer and Commercial Banking to the Corporate Other segment.
The business segments summarized in Table Two are primarily managed with a
focus on various performance measures including total revenue, net income,
shareholder value added (SVA), return on average equity and efficiency. These
performance measures are also presented on a cash basis which excludes the
impact of goodwill and other intangible amortization expense. Total revenue
includes net interest income on a taxable-equivalent basis and noninterest
income. The net interest yield of the business segments reflects the results of
a funds transfer pricing process which derives net interest income by matching
assets and liabilities with similar interest rate sensitivity and maturity
characteristics. Equity is allocated to each business segment based on an
assessment of its inherent risk. SVA is a performance measure that is aligned
with the Corporation's growth strategy orientation and strengthens the
Corporation's focus on generating shareholder value. SVA is defined as cash
basis operating earnings less a charge for the use of capital. The capital
charge is calculated by multiplying 12 percent (management's estimate of the
shareholder's minimum required rate of return on capital invested) by average
total common shareholders' equity (at the Corporation level) and by average
allocated equity (at the business segment level).
See Note Nine of the consolidated financial statements for additional
business segment information and reconciliations to consolidated amounts.
Additional information on noninterest income can be found in the "Noninterest
Income" section beginning on page 38. Certain prior period amounts have been
reclassified between segments and their components (presented after Table Two)
to conform to the current period presentation.
23
Table Two
Business Segment Summary
- --------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31
Consumer and Global Corporate and
Commercial Banking (1) Asset Management (1) Investment Banking (1) Equity Investments (1)
--------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000 2001 2000 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income(2) $ 3,176 $ 3,159 $ 160 $ 145 $ 1,145 $ 1,024 $ (42) $ (28)
Noninterest income(3) 1,980 1,661 416 404 1,418 1,457 147 552
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 5,156 4,820 576 549 2,563 2,481 105 524
Net income 1,089 954 130 145 604 724 35 301
Cash basis earnings 1,256 1,122 143 151 645 763 38 304
Shareholder value added 644 485 83 108 238 329 (29) 252
Net interest yield 4.99% 5.00% 2.63% 2.70% 2.18% 2.10% n/m n/m
Return on average equity 21.4 18.0 26.2 40.7 17.9 20.0 6.3% 70.6%
Cash basis return on equity 24.7 21.1 28.7 42.4 19.1 21.1 6.8 71.2
Efficiency ratio 55.3 59.3 62.1 55.3 53.4 53.9 47.7 5.4
Cash basis efficiency ratio 52.0 55.8 60.0 54.2 51.8 52.3 45.1 4.8
Average:
Total loans and leases $ 198,457 $187,007 $ 23,531 $20,721 $ 109,190 $ 107,707 $504 $ 416
Total deposits 258,050 253,039 11,808 10,844 67,610 66,796 37 7
Total assets 285,653 281,721 25,854 22,393 250,430 234,389 6,744 4,743
- ----------------------------------------------------------------------------------------------------------------------------------
n/m = not meaningful
(1) There were no material intersegment revenues among the segments.
(2) Net interest income is presented on a taxable-equivalent basis.
(3) Noninterest income includes the $83 million SFAS 133 transition adjustment
net loss which is included in trading account profits. The components of
the transition adjustment by business segment are a gain of $4 million for
Consumer and Commercial Banking, a gain of $19 million for Global
Commercial and Investment Banking and a loss of $106 million for Corporate
Other (not included in the table above).
Consumer and Commercial Banking
Consumer and Commercial Banking provides a wide array of products and
services to individuals, small businesses and middle market companies through
multiple delivery channels.
The Corporation's market share in the consumer and commercial businesses
is significant across some of 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 for the three months ended March 31,
2001 also reflect the Corporation's continued focus on Card Services as a growth
area as end of period managed consumer card outstandings increased 21 percent,
merchant processing volume increased 17 percent and total debit and credit card
purchase volume increased 12 percent compared to the same period in 2000.
The Corporation's mortgage banking results, which includes mortgage
banking income and the mark-to-market adjustments on mortgage banking assets and
the related instruments used to economically hedge the mortgage banking assets,
is included within the discussion of the results of operations for the Consumer
and Commercial Banking segment. The mark-to-market adjustments are included in
trading account profits in the Consumer and Commercial Banking segment. See Note
One of the consolidated financial statements for additional information on
mortgage banking activities.
24
Consumer and Commercial Banking
- ------------------------------------------------------------------
Three Months Ended
March 31
-------------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 3,176 $ 3,159
Noninterest income 1,980 1,661
- ------------------------------------------------------------------
Total revenue 5,156 4,820
Cash basis earnings 1,256 1,122
Shareholder value added 644 485
Cash basis efficiency ratio 52.0 % 55.8 %
- ------------------------------------------------------------------
o Total revenue increased seven percent for the three months ended March 31,
2001 compared to the same period in 2000. Total revenue included charges
related to the deterioration of auto lease residual values of $109 million
and $37 million for the three months ended March 31, 2001 and 2000,
respectively.
>> Net interest income increased one percent as loan and deposit growth
were partially offset by the impact of the money market savings
pricing initiative, time deposit spread compression and higher auto
lease residual charges.
>> Noninterest income increased 19 percent. Strong card income growth
of 18 percent, an 11 percent increase in service charges and
improved mortgage banking results for the three months ended March
31, 2001 were partially offset by $35 million in auto lease residual
charges related to the closing of the Corporation's Price Auto
Outlet business.
o Cash basis earnings for the three months ended March 31, 2001 rose 12
percent due to the increases in net interest income and noninterest income
discussed above, partially offset by an increase in provision for credit
losses.
>> The provision for credit losses increased 30 percent reflecting
higher consumer finance, commercial - domestic and bankcard
charge-offs, portfolio growth and deteriorating credit quality among
middle market clients.
o Shareholder value added increased $159 million over the prior year as a
result of the increase in cash basis earnings, driven by higher fee
revenue.
The major components of Consumer and Commercial Banking are Banking
Regions, Consumer Products and Commercial Banking.
Banking Regions
Banking Regions serves consumer households in 21 states and the District
of Columbia and overseas through its extensive network of approximately 4,400
banking centers, 13,000 ATMs, telephone and Internet channels on
www.bankofamerica.com. Banking Regions provides a wide array of products and
services, including deposit products such as checking, money market savings
accounts, time deposits and IRAs, and credit products such as home equity,
mortgage, 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.
25
Banking Regions
- ------------------------------------------------------------------
Three Months Ended
March 31
-------------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 2,016 $ 2,066
Noninterest income 942 827
- ------------------------------------------------------------------
Total revenue 2,958 2,893
Cash basis earnings 730 677
Shareholder value added 397 333
Cash basis efficiency ratio 59.1 % 61.0 %
- ------------------------------------------------------------------
o Total revenue for the three months ended March 31, 2001 increased two
percent due to a rise in noninterest income while net interest income
decreased two percent.
>> Loan growth, primarily in home equity lending, and deposit growth
had a positive effect on net interest income but was offset by money
market savings pricing initiatives and time deposit spread
compression.
>> Noninterest income increased 14 percent primarily due to a 23
percent increase in card income driven by a higher number of active
debit cards and a higher number of debit card transactions per
account, and an increase in consumer service charges of 11 percent
throughout all Banking Regions.
o Cash basis earnings increased eight percent for the three months ended
March 31, 2001, primarily attributable to the increase in noninterest
income discussed above and a slight decrease in noninterest expense.
o Shareholder value added rose $64 million as a result of the increase in
cash basis earnings.
Consumer Products
Consumer Products provides specialized services such as the origination
and servicing of residential mortgage loans, issuance and servicing of credit
cards, direct banking via telephone and Internet, 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
March 31
----------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 657 $ 552
Noninterest income 809 612
- ------------------------------------------------------------------
Total revenue 1,466 1,164
Cash basis earnings 375 229
Shareholder value added 202 49
Cash basis efficiency ratio 40.5 % 48.8 %
- ------------------------------------------------------------------
o Total revenue increased 26 percent due to increases in both net interest
income and noninterest income.
>> Net interest income increased 19 percent primarily due to an
increase in bankcard receivables.
26
>> Noninterest income increased 32 percent primarily due to increased
card income and improved mortgage banking results. Card income grew
due to new consumer card account growth and an increase in purchase
volume on existing accounts. Mortgage banking results have increased
due to higher servicing levels and origination activity and the net
mark-to-market adjustments related to the mortgage banking assets
and related hedging instruments. These increases were partially
offset by $35 million in auto lease residual charges related to the
closing of the Corporation's Price Auto Outlet business.
o The 64 percent increase in cash basis earnings for the three months ended
March 31, 2001 was due to the increases in net interest income and
noninterest income discussed above. These increases were partially offset
by a rise in the provision for credit losses.
>> The provision for credit losses increased 13 percent primarily due
to higher net charge-offs in the bankcard and consumer finance loan
portfolios.
o Shareholder value added increased $153 million due to the increase in cash
basis earnings.
Commercial Banking
Commercial Banking provides commercial lending and treasury management
services to middle market companies with annual revenue between $10 million and
$500 million. These services are available through relationship manager teams as
well as through alternative channels such as the telephone via the commercial
service center and the Internet by accessing Bank of America Direct.
Commercial Banking
- ------------------------------------------------------------------
Three Months Ended
March 31
---------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 503 $ 541
Noninterest income 229 222
- ------------------------------------------------------------------
Total revenue 732 763
Cash basis earnings 151 216
Shareholder value added 45 103
Cash basis efficiency ratio 46.6 % 46.9 %
- ------------------------------------------------------------------
o Noninterest income increased three percent and was offset by a seven
percent decrease in net interest income. Total revenue for the three
months ended March 31, 2001 decreased four percent.
>> The increase in noninterest income was attributable to higher
corporate service charges driven by increases in deposit account
service charges, non-deposit service charges and fees, and bankers'
acceptances and letters of credit fees.
>> Net interest income decreased primarily due to lower commercial loan
volumes and liquidation of the commercial finance businesses.
o Lower noninterest expense was more than offset by lower revenue and an
increase in the provision for credit losses resulting in a 30 percent
decline in cash basis earnings for the three months ended March 31, 2001.
>> Noninterest expense decreased four percent primarily due to lower
personnel expense resulting from the productivity and growth
initiatives begun in 2000.
>> The provision for credit losses more than doubled as a result of
credit deterioration in the commercial loan portfolio.
27
o Shareholder value added decreased $58 million as cash basis earnings
experienced a decline.
Asset Management
Asset Management includes the Private Bank, Banc of America Capital
Management and Banc of America Investment Services, Inc. The Private Bank offers
financial solutions to high-net-worth clients and foundations in the U.S. and
internationally by providing customized asset management and credit, financial
advisory, fiduciary, trust and banking services. Banc of America Capital
Management offers management of equity, fixed income, cash, and alternative
investments; manages the assets of individuals, corporations, municipalities,
foundations and universities, and public and private institutions; and provides
advisory services to the Corporation's affiliated family of mutual funds. Banc
of America Investment Services, Inc. provides both full-service and discount
brokerage services through investment professionals located throughout the
franchise and a brokerage web site that provides customers a wide array of
market analyses, investment research and self-help tools, account information
and transaction capabilities.
The Corporation's strategy is to focus on and grow the asset management
business. The three percent growth in assets under management since December 31,
2000 and the five percent growth in revenue for the three months ended March 31,
2001 reveal that customers are buying more investment products from the
Corporation's Asset Management group. Assets under management rose $24 billion
to $286 billion at March 31, 2001 compared to March 31, 2000. Assets of the
Nations Funds family of mutual funds reached $117 billion at March 31, 2001,
driven by increases in fixed income and money market funds.
Effective January 2, 2001, the Corporation acquired 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, a
Denver-based investment management firm specializing in large capitalization
growth stocks, manages $13 billion in assets.
Asset Management
- ------------------------------------------------------------------
Three Months Ended
March 31
-------------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 160 $ 145
Noninterest income 416 404
- ------------------------------------------------------------------
Total revenue 576 549
Cash basis earnings 143 151
Shareholder value added 83 108
Cash basis efficiency ratio 60.0 % 54.2 %
- ------------------------------------------------------------------
o Total revenue increased five percent for the three months ended March 31,
2001. The increase was attributable to increases in both net interest
income and noninterest income.
>> Net interest income increased 10 percent due to strong loan growth
in the commercial loan portfolio.
>> Noninterest income increased three percent reflecting new asset
management business and the completed acquisition of Marsico,
partially offset by lower broker activity due to decreased trade
volume and significant market decline.
o Cash basis earnings decreased five percent for the three months ended
March 31, 2001.
>> Noninterest expense increased 18 percent reflecting investments in
new private banking offices, the acquisition of Marsico and in sales
personnel supporting the revenue growth initiatives.
28
o Shareholder value added declined $25 million due to the increased capital
associated with building the business and the decline in cash basis
earnings.
Global Corporate and Investment Banking
Global Corporate and Investment Banking provides a broad array of
financial services such as investment banking, trade finance, treasury
management, lending, capital markets, leasing and financial advisory services to
domestic and international corporations, financial institutions and government
entities. Clients are supported through offices in 38 countries in four distinct
geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and
Latin America. Products and services provided include loan origination, merger
and acquisition advisory, debt and equity underwriting and trading, cash
management, derivatives, foreign exchange, leasing, leveraged finance, project
finance, real estate finance, senior bank debt, structured finance and trade
services.
Global Corporate and Investment Banking
- ------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 1,145 $ 1,024
Noninterest income 1,418 1,457
- ------------------------------------------------------------------
Total revenue 2,563 2,481
Cash basis earnings 645 763
Shareholder value added 238 329
Cash basis efficiency ratio 51.8 % 52.3 %
- ------------------------------------------------------------------
o For the three months ended March 31, 2001, total revenue increased three
percent due to growth in net interest income.
>> Net interest income increased 12 percent as a result of higher
trading-related activities.
>> Noninterest income declined three percent as increases in trading
account profits and corporate service charges were more than offset
by a decrease in investment banking income.
o Cash basis earnings decreased 15 percent for the three months ended March
31, 2001 primarily due to increases in the provision for credit losses.
>> The provision for credit losses increased $218 million due to credit
quality deterioration in the commercial-domestic loan portfolio of
Global Credit Products.
>> A two percent increase in noninterest expense was primarily due to
the build-out of the investment banking platform.
o Shareholder value added declined $91 million as higher provision expense
drove down cash basis earnings.
Global Corporate and Investment Banking offers clients a comprehensive
range of global capabilities through three components: Global Investment
Banking, Global Credit Products and Global Treasury Services.
29
Global Investment Banking
Global Investment Banking includes the Corporation's investment banking
activities and risk management products. Through a separate subsidiary, Banc of
America Securities LLC, Global Investment Banking underwrites and makes markets
in equity securities, high-grade and high-yield corporate debt securities,
commercial paper, and mortgage-backed and asset-backed securities. Banc of
America Securities LLC also provides correspondent clearing services for other
securities broker/dealers, traditional brokerage services to high-net-worth
individuals and prime-brokerage services. Debt and equity securities research,
loan syndications, mergers and acquisitions advisory services, private
placements and equity derivatives are also provided through Banc of America
Securities LLC.
In addition, Global Investment Banking provides risk management solutions
for our global customer base using interest rate and credit 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 Investment
Banking business also takes an active role in the trading of fixed income
securities in all of the regions in which Global Corporate and Investment
Banking transacts business and is a primary dealer in the U.S., as well as in
several international locations.
Global Investment Banking
- ------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 355 $ 244
Noninterest income 1,060 1,091
- ------------------------------------------------------------------
Total revenue 1,415 1,335
Cash basis earnings 325 332
Shareholder value added 218 227
Cash basis efficiency ratio 63.5 % 63.8 %
- ------------------------------------------------------------------
o Total revenue grew six percent for the three months ended March 31, 2001
due to a significant increase in net interest income.
>> Net interest income grew 45 percent to $355 million primarily
attributable to trading-related activities.
>> Increases in equity and equity derivative trading account profits
and higher investment and brokerage services income were more than
offset by the decrease in investment banking income resulting in a
three percent decrease in noninterest income. The decline in
investment banking income reflected improved conditions in the fixed
income debt market which was more than offset by weaker demand in
syndications and equity underwriting.
o Cash basis earnings decreased two percent for the three months ended March
31, 2001. Revenue growth was more than offset primarily by increases in
noninterest expense.
>> The increase in noninterest expense was primarily due to the
build-out of the investment banking platform.
o Shareholder value added decreased $9 million due to lower cash basis
earnings.
30
Global Credit Products
Global Credit Products provides credit and lending services and includes
the corporate industry-focused portfolio, real estate, leasing and project
finance.
Global Credit Products
- ------------------------------------------------------------------
Three Months Ended
March 31
---------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 639 $ 643
Noninterest income 160 176
- ------------------------------------------------------------------
Total revenue 799 819
Cash basis earnings 259 358
Shareholder value added (25) 44
Cash basis efficiency ratio 21.8 % 23.5 %
- ------------------------------------------------------------------
o Total revenue declined two percent for the three months ended March 31,
2001.
>> Net interest income remained essentially flat compared to the prior
year.
>> Noninterest income declined nine percent primarily due to lower
gains on the leasing portfolio.
o Cash basis earnings declined 28 percent primarily due to an increase in
the provision for credit losses of $159 million. This increase in
provision was due to credit quality deterioration.
o Shareholder value added declined $69 million as provision expense drove
down cash basis earnings.
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
March 31
-------------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ 151 $ 137
Noninterest income 198 190
- ------------------------------------------------------------------
Total revenue 349 327
Cash basis earnings 61 73
Shareholder value added 45 58
Cash basis efficiency ratio 73.2 % 78.2 %
- ------------------------------------------------------------------
o Revenue increased seven percent led by increases in both net interest
income and noninterest income for the three months ended March 31, 2001.
31
>> Net interest income increased 10 percent primarily due to growth in
deposit balances.
>> Noninterest income increased four percent due to an increase in
corporate service charges driven by an increase in non-deposit and
deposit account service charges and bankers' acceptances and letters
of credit fees.
o Cash basis earnings declined 16 percent for the three months ended March
31, 2001. Revenue growth and flat expenses were offset by higher provision
for credit losses as reductions in exposure in the first quarter of 2000
drove credit provisions lower.
o Shareholder value added declined $13 million due to the decrease in cash
basis earnings.
Equity Investments
Equity Investments includes Principal Investing, which 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.
Equity Investments
- ------------------------------------------------------------------
Three Months Ended
March 31
-----------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------
Net interest income $ (42) $ (28)
Noninterest income 147 552
- ------------------------------------------------------------------
Total revenue 105 524
Cash basis earnings 38 304
Shareholder value added (29) 252
Cash basis efficiency ratio 45.1 % 4.8 %
- ------------------------------------------------------------------
o For the three months ended March 31, 2001, both revenue and cash basis
earnings decreased substantially. Total revenue decreased 80 percent and
cash basis earnings decreased 88 percent due to lower equity investment
gains.
>> Net interest income consists primarily of the funding cost associated
with the carrying value of investments.
>> Equity investment gains decreased $406 million to $141 million and
primarily included a gain in the parent company portfolio of $140
million related to the sale of an interest in the Star Systems ATM
network.
>> Shareholder value added declined $281 million reflecting lower
market-related revenue.
32
Corporate Other
The Corporate Other segment consists primarily of certain residential
mortgages originated by the mortgage group (not from retail branch originations)
as these instruments are used for balance sheet and interest rate risk
management. This unit also includes the earnings associated with unassigned
capital, certain expenses that have not been allocated to any particular
business segment and other corporate transactions. Corporate Other results for
the three months ended March 31, 2001 include a pre-tax $106 million transition
adjustment loss related to the implementation of SFAS 133. See Note Nine of the
consolidated financial statements for additional information on the Corporate
Other segment.
33
Results of Operations
Net Interest Income
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheet for the most recent five
quarters is presented in Table Four.
As reported, net interest income on a taxable-equivalent basis increased
$145 million to $4.7 billion for the three months ended March 31, 2001 compared
to the same period in 2000. Management also reviews "core net interest income,"
which adjusts reported net interest income for the impact of trading-related
activities, securitizations, asset sales and divestitures. 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 38, as trading strategies are typically evaluated based on total revenue.
The determination of core net interest income also requires adjustment for the
impact of securitizations (primarily home equity and credit card), asset sales
(primarily residential mortgage 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.
Table Three below provides a reconciliation between net interest income on
a taxable-equivalent basis presented in Table Four and core net interest income
for the three months ended March 31, 2001 and 2000:
Table Three
Net Interest Income
- --------------------------------------------------------------------------------
Three Months Ended
March 31
------------------------ Increase/
(Dollars in millions) 2001 2000 (Decrease)
- -------------------------------------------------------------------------------------------
Net interest income
As reported (1) $ 4,721 $ 4,576 3.17 %
Less: Trading-related net interest income (322) (227)
Add: Impact of securitizations, asset sales
and divestitures 41 -
- -------------------------------------------------------------------------------------------
Core net interest income $ 4,440 $ 4,349 2.09 %
- -------------------------------------------------------------------------------------------
Average earning assets
As reported $ 561,427 $563,170 (0.31)%
Less: Trading-related earning assets (121,861) (111,884)
Add: Earning assets securitized, sold
and divested 17,515 262
- -------------------------------------------------------------------------------------------
Core average earning assets $ 457,081 $451,548 1.23 %
- -------------------------------------------------------------------------------------------
Net interest yield on earning assets (1,2)
As reported 3.39 % 3.26 % 13 bp
Add: Impact of trading-related activities .64 .61 3
Impact of securitizations, asset sales
and divestitures (0.07) - (7)
- -------------------------------------------------------------------------------------------
Core net interest yield on earning assets 3.96 % 3.87 % 9 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 $4.4 billion
for the three months ended March 31, 2001 compared to $4.3 billion for the same
period in 2000, an increase of $91 million. Managed loan growth, particularly in
the consumer Banking Regions, and higher levels of customer-based deposits and
equity were
34
partially offset by the impact of deposit pricing initiatives, deterioration in
auto lease residual values and the cost of share repurchases.
Core average earning assets were $457.1 billion for the three months ended
March 31, 2001, an increase of $5.6 billion, compared to $451.5 billion for the
same period in 2000, primarily reflecting managed loan growth of five percent.
Managed consumer loans increased nine percent, led by growth in residential
mortgages, home equity lines and bankcard receivables. 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 increased nine basis points to 3.96 percent
for the three months ended March 31, 2001 compared to 3.87 percent for the same
period in 2000, mainly due to higher levels of core funding sources and improved
balance sheet mix.
Provision for Credit Losses
The provision for credit losses totaled $835 million for the three months
ended March 31, 2001, compared to $420 million for the same period in 2000. The
increase in the provision for credit losses was due to the increase in net
charge-offs as well as additional provision expense of $63 million recorded to
increase the allowance for credit losses given the continued deterioration in
credit quality and uncertainty surrounding the current economic environment.
Total net charge-offs were $772 million for the three months ended March 31,
2001, compared to $420 million for the same period in 2000. The increase in net
charge-offs was driven primarily by increases in net charge-offs in the
commercial-domestic, consumer finance and bankcard portfolios. 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 45.
Gains (Losses) on Sales of Securities
Losses on sales of securities were $8 million for the three months ended
March 31, 2001, compared to gains on sales of securities of $6 million for the
same period in 2000.
35
Table Four
Quarterly Average Balances and Interest Rates - Taxable-Equivalent Basis
- --------------------------------------------------------------------------------
First Quarter 2001 Fourth Quarter 2000
---------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in millions) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $6,675 $ 102 6.17 % $ 5,663 $ 99 6.96 %
Federal funds sold and securities purchased under
agreements to resell 31,903 435 5.48 37,936 551 5.79
Trading account assets 62,491 852 5.49 53,251 758 5.68
Securities(1) 55,221 860 6.26 79,501 1,205 6.05
Loans and leases (2):
Commercial - domestic 144,404 2,813 7.90 147,336 3,034 8.19
Commercial - foreign 29,540 515 7.06 30,408 560 7.32
Commercial real estate - domestic 25,989 530 8.27 27,220 622 9.09
Commercial real estate - foreign 300 6 7.82 264 6 8.44
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 200,233 3,864 7.82 205,228 4,222 8.18
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 82,710 1,532 7.43 92,679 1,733 7.47
Home equity lines 21,744 467 8.71 21,117 483 9.11
Direct/Indirect consumer 40,461 784 7.86 40,390 843 8.30
Consumer finance 25,947 589 9.08 25,592 570 8.91
Bankcard 14,464 443 12.41 12,295 384 12.43
Foreign consumer 2,330 43 7.54 2,248 48 8.49
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 187,656 3,858 8.29 194,321 4,061 8.34
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 387,889 7,722 8.05 399,549 8,283 8.26
- ------------------------------------------------------------------------------------------------------------------------------------
Other earning assets 17,248 352 8.28 14,828 335 9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 561,427 10,323 7.42 590,728 11,231 7.58
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 23,020 23,458
Other assets, less allowance for credit losses 64,251 63,272
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $648,698 $677,458
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Domestic interest-bearing deposits:
Savings $20,406 61 1.21 $ 22,454 80 1.42
NOW and money market deposit accounts 107,015 808 3.06 101,376 788 3.09
Consumer CDs and IRAs 77,772 1,068 5.57 78,298 1,105 5.62
Negotiable CDs, public funds and other time deposits 7,137 108 6.16 7,570 127 6.68
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 212,330 2,045 3.91 209,698 2,100 3.98
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits (4):
Banks located in foreign countries 24,358 332 5.53 26,223 424 6.43
Governments and official institutions 3,993 52 5.27 5,884 61 4.14
Time, savings and other 22,506 284 5.11 24,064 339 5.62
- ------------------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 50,857 668 5.32 56,171 824 5.84
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 263,187 2,713 4.18 265,869 2,924 4.38
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 94,792 1,377 5.89 122,680 1,942 6.30
Trading account liabilities 28,407 290 4.14 27,548 285 4.13
Long-term debt (5) 73,752 1,222 6.63 73,041 1,322 7.24
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (6) 460,138 5,602 4.92 489,138 6,473 5.27
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing sources:
Noninterest-bearing deposits 92,431 91,685
Other liabilities 48,263 48,996
Shareholders' equity 47,866 47,639
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $648,698 $677,458
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest spread 2.50 2.31
Impact of noninterest-bearing sources .89 .90
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $4,721 3.39 % $4,758 3.21 %
- ------------------------------------------------------------------------------------------------------------------------------------
36
Third Quarter 2000 Second Quarter 2000
------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in millions) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $ 4,700 $ 83 6.97 % $ 4,578 $ 79 7.02 %
Federal funds sold and securities purchased under
agreements to resell 40,763 633 6.20 43,983 595 5.43
Trading account assets 53,793 749 5.55 48,874 702 5.77
Securities(1) 83,728 1,276 6.08 85,460 1,293 6.06
Loans and leases (2):
Commercial - domestic 151,903 3,151 8.26 148,034 3,016 8.19
Commercial - foreign 29,845 555 7.39 29,068 515 7.12
Commercial real estate - domestic 26,113 597 9.09 25,497 563 8.88
Commercial real estate - foreign 235 5 8.30 376 8 9.15
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 208,096 4,308 8.24 202,975 4,102 8.13
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 94,380 1,759 7.45 91,825 1,696 7.40
Home equity lines 20,185 466 9.18 19,067 422 8.91
Direct/Indirect consumer 41,905 848 8.06 41,757 867 8.36
Consumer finance 25,049 559 8.93 24,123 545 9.03
Bankcard 10,958 344 12.49 9,429 279 11.87
Foreign consumer 2,190 48 8.79 2,228 48 8.81
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 194,667 4,024 8.25 188,429 3,857 8.21
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and leases 402,763 8,332 8.24 391,404 7,959 8.17
- ------------------------------------------------------------------------------------------------------------------------------------
Other earning assets 11,501 241 8.39 8,191 176 8.53
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets (3) 597,248 11,314 7.55 582,490 10,804 7.45
- ------------------------------------------------------------------------------------------------------------------------------------
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 78 1.32
NOW and money market deposit accounts 99,710 740 2.96 100,186 734 2.94
Consumer CDs and IRAs 77,864 1,083 5.53 77,384 1,034 5.38
Negotiable CDs, public funds and other time deposits 8,598 140 6.46 7,361 111 6.09
- ------------------------------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 209,367 2,041 3.88 208,867 1,957 3.77
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits (4):
Banks located in foreign countries 18,845 286 6.03 15,823 232 5.92
Governments and official institutions 11,182 177 6.30 9,885 151 6.12
Time, savings and other 25,972 364 5.58 27,697 380 5.51
- ------------------------------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 55,999 827 5.87 53,405 763 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 265,366 2,868 4.30 262,272 2,720 4.17
- ------------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 136,007 2,223 6.51 135,817 1,990 5.89
Trading account liabilities 24,233 237 3.88 20,532 189 3.70
Long-term debt (5) 74,022 1,344 7.26 69,779 1,210 6.94
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (6) 499,628 6,672 5.32 488,400 6,109 5.02
- ------------------------------------------------------------------------------------------------------------------------------------
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 2.23 2.43
Impact of noninterest-bearing sources .87 .80
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $4,642 3.10 % $4,695 3.23 %
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter 2000
-----------------------------------------
Interest
Average Income/ Yield/
(Dollars in millions) Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------
Earning assets
Time deposits placed and other short-term investments $ 4,504 $ 75 6.65 %
Federal funds sold and securities purchased under
agreements to resell 45,459 575 5.07
Trading account assets 39,733 542 5.47
Securities(1) 88,211 1,337 6.08
Loans and leases (2):
Commercial - domestic 145,362 2,824 7.81
Commercial - foreign 27,927 486 6.99
Commercial real estate - domestic 24,664 517 8.43
Commercial real estate - foreign 344 8 9.29
- ------------------------------------------------------------------------------------------------------------
Total commercial 198,297 3,835 7.78
- ------------------------------------------------------------------------------------------------------------
Residential mortgage 85,427 1,566 7.34
Home equity lines 17,573 377 8.62
Direct/Indirect consumer 41,858 887 8.52
Consumer finance 22,798 486 8.53
Bankcard 8,404 234 11.22
Foreign consumer 2,227 50 9.00
- ------------------------------------------------------------------------------------------------------------
Total consumer 178,287 3,600 8.10
- ------------------------------------------------------------------------------------------------------------
Total loans and leases 376,584 7,435 7.93
- ------------------------------------------------------------------------------------------------------------
Other earning assets 8,679 174 8.11
- ------------------------------------------------------------------------------------------------------------
Total earning assets (3) 563,170 10,138 7.23
- ------------------------------------------------------------------------------------------------------------
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 $ 24,237 78 1.29
NOW and money market deposit accounts 98,424 679 2.78
Consumer CDs and IRAs 76,074 983 5.20
Negotiable CDs, public funds and other time deposits 6,966 103 5.93
- ------------------------------------------------------------------------------------------------------------
Total domestic interest-bearing deposits 205,701 1,843 3.60
- ------------------------------------------------------------------------------------------------------------
Foreign interest-bearing deposits (4):
Banks located in foreign countries 14,180 188 5.33
Governments and official institutions 8,745 124 5.72
Time, savings and other 26,382 340 5.17
- ------------------------------------------------------------------------------------------------------------
Total foreign interest-bearing deposits 49,307 652 5.31
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 255,008 2,495 3.93
- ------------------------------------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings 131,517 1,802 5.51
Trading account liabilities 23,013 181 3.16
Long-term debt (5) 64,256 1,084 6.75
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (6) 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 2.51
Impact of noninterest-bearing sources .75
- ------------------------------------------------------------------------------------------------------------
Net interest income/yield on earning assets $4,576 3.26 %
- ------------------------------------------------------------------------------------------------------------
(1) The average balance and yield on securities are based on the average of
historical amortized cost balances.
(2) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(3) Interest income includes taxable-equivalent basis adjustments of $82 in
the first quarter of 2001 and $94, $79, $78 and $71 in the fourth, third,
second and first quarters of 2000, respectively. Interest income also
includes the impact of risk management interest rate contracts, which
increased (decreased) interest income on the underlying assets $27 in the
first quarter of 2001 and $(31), $(13), $(11) and $7 in the fourth, third,
second and first quarters of 2000, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which (increased) decreased interest expense on the underlying
liabilities $23 in the first quarter of 2001 and $(7), $(16), $(5) and
$(8) in the fourth, third, second and first quarters of 2000,
respectively.
37
Noninterest Income
As presented in Table Five, noninterest income decreased $285 million to
$3.8 billion for the three months ended March 31, 2001 from the comparable 2000
period. The decrease in noninterest income for the three months ended March 31,
2001 reflects declines in equity investment gains, investment banking income,
trading account profits and other income. These decreases were partially offset
by increases in service charges, card income, investment and brokerage services
and mortgage banking income.
Table Five
Noninterest Income
- ----------------------------------------------------------------------------------------------------
Three Months
Ended March 31 Increase/(Decrease)
--------------------------------------------------
(Dollars in millions) 2001 2000 Amount Percent
- ----------------------------------------------------------------------------------------------------
Consumer service charges $ 694 $ 618 $76 12.3 %
Corporate service charges 499 475 24 5.1
- ----------------------------------------------------------------------------------------------------
Total service charges 1,193 1,093 100 9.1
- ----------------------------------------------------------------------------------------------------
Consumer investment and brokerage services 379 364 15 4.1
Corporate investment and brokerage services 136 121 15 12.4
- ----------------------------------------------------------------------------------------------------
Total investment and brokerage services 515 485 30 6.2
- ----------------------------------------------------------------------------------------------------
Mortgage banking income 151 128 23 18.0
Investment banking income 346 397 (51) (12.8)
Equity investment gains 147 563 (416) (73.9)
Card income 573 484 89 18.4
Trading account profits(1) 699 743 (44) (5.9)
Other income 156 172 (16) (9.3)
- ----------------------------------------------------------------------------------------------------
Total $3,780 $4,065 $(285) (7.0)%
- ----------------------------------------------------------------------------------------------------
(1) Trading account profits include the $83 million SFAS 133 transition
adjustment net loss. The components of the transition adjustment by
business segment are a gain of $4 million for Consumer and Commercial
Banking, a gain of $19 million for Global Commercial and Investment
Banking and a loss of $106 million for Corporate Other.
The following section discusses the noninterest income results of the
Corporation's four business segments, as well as other income for the total
Corporation. For additional business segment information, see "Business Segment
Operations" beginning on page 23.
Consumer and Commercial Banking
o Noninterest income for Consumer and Commercial Banking increased $319
million to $2.0 billion for the three months ended March 31, 2001 from the
comparable 2000 period. Strong gains in card income, higher service
charges and improved mortgage banking results were partially offset by $35
million in losses related to the closing of the Corporation's Price Auto
Outlet business.
>> Card income includes interchange income, credit and debit card fees
and merchant discount fees. Card income increased $89 million to
$573 million primarily due to new account growth in both credit and
debit card and increased purchase volume on existing accounts.
Growth in income for the core portfolio is being generated through
traditional marketing channels, expanding relationships with
existing customers and leveraging the franchise network. Card income
includes activity from the securitized portfolio of $58 million and
$39 million for the three months ended March 31, 2001 and 2000,
respectively. These amounts are primarily made up of revenues from
the securitized credit card portfolio offset by charge-offs and
38
interest expense paid to the bondholders. The $19 million increase
in the securitized portfolio revenue was primarily due to lower net
charge-offs.
>> Service charges include deposit account service charges, non-deposit
service charges and fees and bankers' acceptances and letters of
credit fees. Service charges increased $89 million to $901 million
for the three months ended March 31, 2001 due to an increase in both
consumer and corporate service charges. Consumer service charges
increased $75 million primarily due to overdraft charges. Corporate
service charges increased $14 million primarily attributable to
deposit account service charges.
>> Mortgage banking results improved for the three months ended March
31, 2001, primarily reflecting higher servicing levels and
origination activity and the net mark-to-market adjustments on
mortgage banking assets and the related instruments used to
economically hedge mortgage banking assets. These mark-to-market
adjustments are included in trading account profits. The average
managed portfolio of mortgage loans serviced increased $14.5 billion
to $337.8 billion. Total production of first mortgage loans
originated through the Corporation increased $3.6 billion to $17.0
billion, reflecting an increase in refinancings as a result of a
general decrease in levels of interest rates. First mortgage loan
origination volume was composed of approximately $7.0 billion of
retail loans and $10.0 billion of correspondent and wholesale loans.
Asset Management
o Noninterest income for Asset Management increased $12 million to $416
million for the three months ended March 31, 2001 compared to the same
period in 2000. The increase was primarily attributable to increased
investment and brokerage services.
>> Income from investment and brokerage services includes personal and
institutional asset management fees and consumer brokerage income.
Income from investment and brokerage services increased $7 million
to $378 million. This increase was largely due to new asset
management business and the completed acquisition of Marsico,
partially offset by lower broker activity due to decreased trade
volume and significant market decline. Assets under management were
$286 billion and $262 billion at March 31, 2001 and March 31, 2000,
respectively.
Global Corporate and Investment Banking
o Noninterest income for Global Corporate and Investment Banking decreased
$39 million to $1.4 billion for the three months ended March 31, 2001
compared to the same period in 2000. The decrease was primarily due to a
decline in investment banking income, partially offset by increases in
trading account profits 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 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.
o Trading-related revenue increased $108 million to $1.1 billion for the
three months ended March 31, 2001, due to increases in fixed income,
commodities and other contracts and equities and equity derivatives,
offset by decreases in interest rate contracts and foreign exchange
contracts. Fixed income increased $92 million to $260 million primarily
attributable to an increase in market liquidity from new issue activity
as a result of lower
39
interest rates. Commodities and other revenue increased $42 million to $52
million attributable to the volatility seen in the energy markets during
the first quarter of this year. Revenue from equities and equity
derivatives increased $35 million to $330 million. The increase reflects a
strong mixture of client initiated deals. The Corporation acted as manager
on 40 percent of equity transactions in the first quarter, compared to 22
percent last year. Income from interest rate contracts decreased $49
million to $262 million. The decline in interest rates early in the year
benefited interest rate derivative groups, but this was more than offset
by the prior year's Y2K activity as market participants moved back into
the market. Foreign exchange revenue decreased $12 million to $147 million
due primarily to the prior year's Y2K activity, which was partially offset
by strong sales activity in 2001. Trading account profits for the three
months ended March 31, 2001 included a $19 million transition adjustment
gain resulting from the adoption of SFAS 133.
- -------------------------------------------------------------------------
Three Months Ended
March 31
---------------------
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------
Trading account profits - as reported $729 $716
Net interest income 322 227
- -------------------------------------------------------------------------
Total trading-related revenue $1,051 $943
- -------------------------------------------------------------------------
Trading-related revenue by product
Foreign exchange contracts $147 $159
Interest rate contracts 262 311
Fixed income 260 168
Equities and equity derivatives 330 295
Commodities and other 52 10
- -------------------------------------------------------------------------
Total trading-related revenue $1,051 $943
- -------------------------------------------------------------------------
o Investment banking income decreased $51 million to $346 million for the
three months ended March 31, 2001. The decrease reflected weaker demand in
certain markets. Securities underwriting fees increased $12 million to
$191 million, attributable to growth in high grade and high yield
underwriting. Syndication fees decreased $76 million to $55 million due to
an overall slow start in 2001. Advisory services fees decreased $7 million
to $65 million. Investment banking income by major activity follows:
- --------------------------------------------------------
Three Months Ended
March 31
---------------------
(Dollars in millions) 2001 2000
- --------------------------------------------------------
Investment banking income
Securities underwriting $191 $179
Syndications 55 131
Advisory services 65 72
Other 35 15
- --------------------------------------------------------
Total $346 $397
- --------------------------------------------------------
o Corporate service charges increased $12 million to $273 million for the
three months ended March 31, 2001, driven by an increase in non-deposit
and deposit account service charges and bankers' acceptances and letters
of credit fees.
40
Equity Investments
o Noninterest income for Equity Investments decreased $405 million to $147
million for the three months ended March 31, 2001 compared to the same
period in 2000. This decrease was driven by a sharp decline in equity
investment gains driven by weaker equity markets.
>> Equity investment gains decreased $406 million to $141 million and
primarily included a gain in the parent company portfolio of $140
million related to the sale of an interest in the Star Systems ATM
network.
41
Other Noninterest Expense
As presented in Table Six, the Corporation's other noninterest expense
increased $31 million to $4.7 billion for the three months ended March 31, 2001
compared to the same period in 2000. Other noninterest expense increased by less
than one percent due to the impact of productivity initiatives being offset by
investments in growth businesses such as Asset Management, Card Services,
investment banking and bankofamerica.com.
Table Six
Other Noninterest Expense
- -----------------------------------------------------------------------------------------
Three Months
Ended March 31 Increase/(Decrease)
---------------------------------------------------
(Dollars in millions) 2001 2000 Amount Percent
- -----------------------------------------------------------------------------------------
Personnel $2,401 $2,534 $ (133) (5.2)%
Occupancy 433 418 15 3.6
Equipment 291 301 (10) (3.3)
Marketing 177 119 58 48.7
Professional fees 126 105 21 20.0
Amortization of intangibles 223 217 6 2.8
Data processing 190 159 31 19.5
Telecommunications 119 131 (12) (9.2)
Other general operating 545 515 30 5.8
General administrative and other 149 124 25 20.2
- -----------------------------------------------------------------------------------------
Total $4,654 $4,623 $31 .7 %
- -----------------------------------------------------------------------------------------
o Personnel expense decreased $133 million to $2.4 billion for the three
months ended March 31, 2001, primarily attributable to the results of the
productivity initiatives. At March 31, 2001, the Corporation had
approximately 144,000 full-time equivalent employees compared to
approximately 153,000 at March 31, 2000.
o Marketing expense increased $58 million to $177 million for the three
months ended March 31, 2001, primarily due to brand campaign expenses.
o Professional fees increased $21 million to $126 million for the three
months ended March 31, 2001, primarily reflecting higher expenses in
Equity Investments due to the build-out of bankofamerica.com, Global
Corporate and Investment Banking and Asset Management.
o Data processing expense increased $31 million to $190 million for the
three months ended March 31, 2001, primarily due to higher outsourced
processing expense as a result of the outsourcing of personnel services to
Exult, Inc. and higher expense in the Technology and Operations Group.
o General administrative and other expense increased $25 million to $149
million for the three months ended March 31, 2001, primarily due to
increased travel expense in Global Corporate and Investment Banking,
Consumer and Commercial Banking and Corporate Other.
42
Income Taxes
The Corporation's income tax expense for the three months ended March 31,
2001 was $1.1 billion for an effective tax rate of 36.0 percent compared to $1.3
billion for an effective tax rate of 36.6 percent for the same period in 2000.
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its balance
sheet that includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. The Corporation restructured its
balance sheet over the last twelve months, keeping risk-weighted assets
relatively flat while reductions in categories with lower returns were offset by
underlying core growth. Going forward, the Corporation expects that the balance
sheet will begin to rise modestly led by growth in securities and consumer
loans. The discussion of average balances below compares the three months ended
March 31, 2001 to the same period in 2000. With the exception of average managed
loans, the average balances discussed below can be derived from Table Four.
Average loans and leases, the Corporation's primary use of funds,
increased $11.3 billion to $387.9 billion for the three months ended March 31,
2001. Adjusting for securitizations, sales and divestitures, average managed
loans and leases increased $19.8 billion to $409.3 billion for the three months
ended March 31, 2001. This increase was primarily due to growth in average
managed consumer loans.
Consumer loans increased nine percent in the three months ended March 31,
2001, reflecting increases in each of the consumer loan portfolios. Average
managed residential mortgages increased $5.6 billion to $85.7 billion as strong
growth in the first half of 2000 was partially offset by the effects of the
decision to sell the bulk of the Corporation's mortgage company originations
during the latter half of 2000. Average managed home equity lines increased $4.2
billion to $21.7 billion, driven by the impact of new marketing programs
implemented in mid 2000 and lower prepayments. Average managed bankcard loans
increased $4.0 billion to $23.0 billion, resulting from deepening customer
relationships as well as new volume growth. Average managed consumer finance
loans increased $1.4 billion to $32.9 billion, and average managed
direct/indirect consumer loans increased $1.0 billion to $41.1 billion.
Average managed commercial loans increased $3.5 billion to $202.4 billion
for the three months ended March 31, 2001. The increase was centered primarily
in the commercial - foreign and commercial real estate - domestic portfolios in
the Global Corporate and Investment Banking business segment. Average managed
commercial - domestic loans remained relatively flat at $146.6 billion,
reflecting the Corporation's effort to reduce the corporate portfolio and exit
less profitable relationships.
The average securities portfolio for the three months ended March 31, 2001
decreased $33.0 billion to $55.2 billion. As a percentage of total uses of
funds, the average securities portfolio decreased by five percent to nine
percent for the three months ended March 31, 2001. See the following
"Securities" section for additional information on the securities portfolio.
Average other assets and cash and cash equivalents remained relatively
stable as it decreased $578 million to $87.3 billion for the three months ended
March 31, 2001.
At March 31, 2001, cash and cash equivalents were $23.3 billion, a
decrease of $4.2 billion from December 31, 2000. During the three months ended
March 31, 2001, net cash used in operating activities was $3.9 billion, net cash
provided by investing activities was $31.7 billion and net cash used in
financing activities was $31.9 billion. For further information on cash flows,
see the Consolidated Statement of Cash Flows of the consolidated financial
statements.
Average levels of customer-based deposits increased $8.7 billion to $304.8
billion for the three months ended March 31, 2001, primarily due to increases in
consumer money market savings accounts which reflect the success of the new
deposit pricing strategy. As a percentage of total sources of funds, average
levels of customer-based deposits increased by two percent to 47 percent for the
three months ended March 31, 2001.
43
Average levels of market-based funds decreased $29.8 billion for the three
months ended March 31, 2001 to $174.1 billion, primarily driven by the decline
in securities sold under agreements to repurchase. In addition, average levels
of long-term debt increased $9.5 billion to $73.8 billion for the three months
ended March 31, 2001, mainly as a result of borrowings to fund earning asset
growth and business development opportunities, build liquidity, repay maturing
debt and fund share repurchases.
In conjunction with its funding activities, the Corporation carefully
monitors its liquidity position - the ability to fulfill its cash requirements.
The Corporation assesses its liquidity requirements and modifies its assets and
liabilities accordingly. This process, coupled with the Corporation's ability to
raise capital and debt financing, is designed to cover the liquidity needs of
the Corporation. The Corporation also takes into consideration the ability of
its subsidiary banks to pay dividends to the Corporation. For additional
information on the dividend capabilities of subsidiary banks, see Note Fourteen
of the Corporation's 2000 Annual Report on Form 10-K. Management believes that
the Corporation's sources of liquidity are more than adequate to meet its cash
requirements.
Securities
The securities portfolio at March 31, 2001 consisted of available-for-sale
securities totaling $49.2 billion compared to $64.7 billion at December 31,
2000. Held-to-maturity securities totaled $1.2 billion at March 31, 2001 and
December 31, 2000.
The valuation allowance for available-for-sale and marketable equity
securities is included in shareholders' equity. At March 31, 2001, the valuation
allowance consisted of unrealized losses of $177 million, net of related income
taxes of $100 million, primarily reflecting $211 million of pre-tax net
unrealized losses on available-for-sale securities and $66 million pre-tax net
unrealized losses on marketable equity securities. At December 31, 2000, the
valuation allowance consisted of unrealized losses of $560 million, net of
related income taxes of $330 million, primarily reflecting $991 million of
pre-tax net unrealized losses on available-for-sale securities and $101 million
of pre-tax net unrealized gains on marketable equity securities.
At March 31, 2001 and December 31, 2000, the market value of the
Corporation's held-to-maturity securities reflected pre-tax net unrealized
losses of $71 million and $54 million, respectively.
The estimated average duration of the available-for-sale securities
portfolio was 4.03 years at March 31, 2001 compared to 4.13 years at December
31, 2000.
Capital Resources and Capital Management
Shareholders' equity at March 31, 2001 was $48.9 billion compared to
$47.6 billion at December 31, 2000, an increase of $1.3 billion. The increase
was primarily due to net earnings (net income less dividends) of $969 million,
recognition of $383 million of after-tax net unrealized gains on
available-for-sale and marketable equity securities, and net gains on
derivatives of $587 million, partially offset by the repurchase of approximately
14 million shares of common stock for approximately $739 million.
During 2000, the Corporation completed its 1999 stock repurchase plan, and
on July 26, 2000, the Corporation's Board of Directors (the Board) authorized a
new stock repurchase program of up to 100 million shares of the Corporation's
common stock at an aggregate cost of up to $7.5 billion. At March 31, 2001 the
remaining buyback authority for common stock under the 2000 program totaled $6.1
billion, or 70 million shares. From inception in June 1999 through March 31,
2001, the Corporation had repurchased approximately 160 million shares of its
common stock in open market repurchases and under accelerated share repurchase
programs at an average per-share price of $55.33, which reduced shareholders'
equity by $8.9 billion and increased earnings per share by approximately $0.06
for the three months ended March 31, 2001. Comparatively, from inception in June
1999 through March 31, 2000, the Corporation had repurchased approximately 98
million shares of its common stock in open market repurchases and under
accelerated share repurchase programs at an average per-share price of $58.81,
which reduced shareholders' equity by $5.8 billion and increased earnings per
share by approximately $0.04 for the three months ended March 31, 2000.
44
Presented below are the regulatory risk-based capital ratios and capital
amounts for the Corporation and Bank of America, N.A. at March 31, 2001 and
December 31, 2000. The Corporation and Bank of America, N.A. were considered
"well-capitalized" at March 31, 2001:
- -------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
--------------------------------------------------------
(Dollars in millions) Ratio Amount Ratio Amount
- -------------------------------------------------------------------------------------------------
Tier 1 Capital
Bank of America Corporation 7.65 % $40,769 7.50 % $40,667
Bank of America, N.A. 8.01 39,738 7.72 39,178
Total Capital
Bank of America Corporation 11.84 63,102 11.04 59,826
Bank of America, N.A. 11.15 55,348 10.81 54,871
Leverage
Bank of America Corporation 6.41 40,679 6.12 40,667
Bank of America, N.A. 7.06 39,738 6.59 39,178
- -------------------------------------------------------------------------------------------------
The regulatory capital guidelines measure capital in relation to the
credit and market risks of both on- and off-balance sheet items using various
risk weights. Under the regulatory capital guidelines, Total Capital consists of
three tiers of capital. Tier 1 Capital includes common shareholders' equity and
qualifying preferred stock, less goodwill and other adjustments. Tier 2 Capital
consists of preferred stock not qualifying as Tier 1 Capital, mandatory
convertible debt, limited amounts of subordinated debt, other qualifying term
debt and the allowance for credit losses up to 1.25 percent of risk-weighted
assets. Tier 3 Capital includes subordinated debt that is unsecured, fully paid,
has an original maturity of at least two years, is not redeemable before
maturity without prior approval by the Federal Reserve Board and includes a
lock-in clause precluding payment of either interest or principal if the payment
would cause the issuing bank's risk-based capital ratio to fall or remain below
the required minimum. At March 31, 2001, the Corporation had no subordinated
debt that qualified as Tier 3 Capital.
At March 31, 2001, the regulatory risk-based capital ratios of the
Corporation and Bank of America, N.A. exceeded the regulatory minimums of four
percent for Tier 1 risk-based capital ratio, eight percent for total risk-based
capital ratio and the leverage guidelines of 100 to 200 basis points above the
minimum ratio of three percent.
Credit Risk Management and Credit Portfolio Review
The following section discusses credit risk in the loan portfolio. The
Corporation's primary credit exposure is focused in its loans and leases
portfolio, which totaled $382.7 billion and $392.2 billion at March 31, 2001 and
December 31, 2000, respectively. In an effort to minimize the adverse impact of
any single event or set of occurrences, the Corporation strives to maintain a
diverse credit portfolio. Table Seven presents loans and leases, nonperforming
assets and net charge-offs by category. Additional information on the
Corporation's real estate, industry and foreign exposure can be found in the
Concentrations of Credit Risk section beginning on page 52.
45
Table Seven
Loans and Leases, Nonperforming Assets and Net Charge-offs
- --------------------------------------------------------------------------------
Loans and Leases Nonperforming Assets(1)
-----------------------------------------------------------------
March 31 December 31 March 31 December 31
2001 2000 2001 2000
-----------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial - domestic $140,612 36.7 % $146,040 37.2 % $3,110 $2,777
Commercial - foreign 29,064 7.6 31,066 7.9 529 486
Commercial real estate - domestic 25,475 6.7 26,154 6.7 206 236
Commercial real estate - foreign 330 .1 282 .1 3 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 195,481 51.1 203,542 51.9 3,848 3,502
- ------------------------------------------------------------------------------------------------------------------------------------
Residential mortgage 82,032 21.4 84,394 21.5 553 551
Home equity lines 21,775 5.7 21,598 5.5 36 32
Direct/Indirect consumer 40,056 10.5 40,457 10.3 19 19
Consumer finance 26,334 6.9 25,800 6.6 1,153 1,095
Bankcard 14,679 3.8 14,094 3.6 - -
Foreign consumer 2,320 .6 2,308 .6 11 9
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer 187,196 48.9 188,651 48.1 1,772 1,706
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 5,620 5,208
- ------------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties 277 249
- ------------------------------------------------------------------------------------------------------------------------------------
Total $382,677 100.0 % $392,193 100.0 % $5,897 $5,457
- ------------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets as a percentage of:
Total assets .97 % .85 %
Loans, leases and foreclosed properties 1.54 1.39
Loans past due 90 days or more and not classified as nonperforming $527 $ 495
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Net Charge-offs(2)
----------------------------------------------------
Three Months Ended March 31
2001 2000
----------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------
Commercial - domestic $415 1.17 % $172 .47 %
Commercial - foreign 34 .46 5 .08
Commercial real estate - domestic 6 .09 6 .10
Commercial real estate - foreign - - (2) n/m
- ------------------------------------------------------------------------------------------------------------
Total commercial 455 .92 181 .37
- ------------------------------------------------------------------------------------------------------------
Residential mortgage 6 .03 4 .02
Home equity lines 6 .11 3 .07
Direct/Indirect consumer 75 .76 91 .88
Consumer finance 93 1.45 57 1.01
Bankcard 125 3.51 81 3.86
Other consumer - domestic 11 n/m 2 -
Foreign consumer 1 .19 1 .12
- ------------------------------------------------------------------------------------------------------------
Total consumer 317 .68 239 .54
- ------------------------------------------------------------------------------------------------------------
Total net charge-offs $772 .81 % $420 .45 %
- ------------------------------------------------------------------------------------------------------------
Managed bankcard net charge-offs and ratios(3) $248 4.37 % $257 5.43 %
- ------------------------------------------------------------------------------------------------------------
n/m = not meaningful
(1) Balances do not include $144 million and $124 million of loans held for
sale, included in other assets at March 31, 2001 and December 31, 2000,
respectively, which would have been classified as nonperforming had they
been included in loans. The Corporation had approximately $204 million and
$390 million of troubled debt restructured loans at March 31, 2001 and
December 31, 2000, respectively, which were accruing interest and are not
included in nonperforming assets.
(2) Percentage amounts are calculated as annualized net charge-offs divided by
average oustanding loans and leases during the period for each loan
category.
(3) Includes both on-balance sheet and securitized loans.
46
Commercial Portfolio
At March 31, 2001 and December 31, 2000, total commercial loans
outstanding totaled $195.5 billion and $203.5 billion, respectively, or 51
percent and 52 percent of total loans and leases, respectively, of which 85
percent were domestic at both points in time.
Commercial - domestic loans outstanding totaled $140.6 billion and $146.0
billion at March 31, 2001 and December 31, 2000, respectively, or 37 percent of
total loans and leases at both points in time. The Corporation had commercial -
domestic loan net charge-offs of $415 million, or 1.17 percent of average
commercial - domestic loans, for the three months ended March 31, 2001, compared
to $172 million, or 0.47 percent, for the three months ended March 31, 2000. Net
charge-offs increased primarily due to a deterioration in credit quality
stemming from the weak economic environment. Nonperforming commercial - domestic
loans were $3.1 billion, or 2.21 percent of commercial - domestic loans, at
March 31, 2001, compared to $2.8 billion, or 1.90 percent, at December 31, 2000.
The increase in nonperformers involved the addition of two large credits that
recently filed for bankruptcy, one in the utilities industry and another in the
chemical and plastics industry, as well as smaller credits across various
industries and business segments. Commercial - domestic loans past due 90 days
or more and still accruing interest were $149 million at March 31, 2001,
compared to $141 million at December 31, 2000, or 0.11 percent and 0.10 percent
of commercial - domestic loans, respectively.
Commercial - foreign loans outstanding totaled $29.1 billion and $31.1
billion at March 31, 2001 and December 31, 2000, respectively, or eight percent
of total loans and leases at both points in time. The Corporation had commercial
- - foreign loan net charge-offs for the three months ended March 31, 2001 of $34
million, or 0.46 percent of average commercial - foreign loans, compared to $5
million, or 0.08 percent of average commercial - foreign loans, for the three
months ended March 31, 2000. Nonperforming commercial - foreign loans were $529
million, or 1.82 percent of commercial - foreign loans, at March 31, 2001,
compared to $486 million, or 1.56 percent, at December 31, 2000. Commercial -
foreign loans past due 90 days or more and still accruing interest were $31
million at March 31, 2001, compared to $37 million at December 31, 2000, or 0.11
percent and 0.12 percent of commercial - foreign loans, respectively. For
additional information, see the International Exposure discussion beginning on
page 54.
Commercial real estate - domestic loans totaled $25.5 billion and $26.2
billion at March 31, 2001 and December 31, 2000, respectively, or seven percent
of total loans and leases at both points in time. Net charge-offs remained
negligible at $6 million, or 0.09 percent of average commercial real estate -
domestic loans, for the three months ended March 31, 2001. Nonperforming
commercial real estate - domestic loans were $206 million, or 0.81 percent of
commercial real estate - domestic loans, at March 31, 2001, compared to $236
million, or 0.90 percent, at December 31, 2000. At March 31, 2001, commercial
real estate - domestic loans past due 90 days or more and still accruing
interest were $21 million, or 0.08 percent of total commercial real estate -
domestic loans, compared to $16 million, or 0.06 percent, at December 31, 2000.
Table Ten 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 Eleven presents aggregate commercial loan and lease exposures by
certain significant industries.
Consumer Portfolio
At March 31, 2001 and December 31, 2000, total consumer loans outstanding
totaled $187.2 billion and $188.7 billion, respectively, or 49 percent and 48
percent of total loans and leases, respectively. Approximately 67 percent and 68
percent of these loans were secured by first and second mortgages on residential
real estate at March 31, 2001 and December 31, 2000, respectively. 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 34 and the "Balance Sheet Review and Liquidity
Risk Management" section on page 43.
In 1999, the Federal Financial Institutions Examination Council (FFIEC)
issued the Uniform Classification and Account Management Policy (the Policy)
which provides guidance for and promotes consistency among banks on the
charge-off treatment of delinquent and bankruptcy-related consumer loans. The
Corporation implemented the Policy in the fourth quarter of 2000, which resulted
in accelerated charge-offs in that quarter of $104 million across several
product types in the consumer loan portfolio.
47
Residential mortgage loans decreased to $82.0 billion at March 31, 2001,
compared to $84.4 billion at December 31, 2000, representing 21 percent and 22
percent of total loans and leases, respectively, reflecting the decision to sell
the bulk of the Corporation's mortgage company originations. Net charge-offs on
residential mortgage loans remained negligible at $6 million, or 0.03 percent of
average residential mortgage loans, for the three months ended March 31, 2001.
Nonperforming residential mortgage loans increased $2 million to $553 million at
March 31, 2001 compared to $551 million at December 31, 2000.
Home equity loans increased to $21.8 billion at March 31, 2001 compared to
$21.6 billion at December 31, 2000, or six percent of total loans and leases at
both points in time. Net charge-offs on home equity loans remained negligible at
$6 million, or 0.11 percent of average home equity loans, for the three months
ended March 31, 2001. Nonperforming home equity loans increased by $4 million to
$36 million at March 31, 2001 compared to $32 million at December 31, 2000.
Consumer finance loans outstanding totaled $26.3 billion and $25.8 billion
at March 31, 2001 and December 31, 2000, respectively, or seven percent of total
loans and leases at both points in time. Approximately 80 percent of these loans
were secured by residential real estate, virtually all first lien, at March 31,
2001 and December 31, 2000. The Corporation had consumer finance net charge-offs
of $93 million, or 1.45 percent of average consumer finance loans, for the three
months ended March 31, 2001, compared to $57 million, or 1.01 percent, for the
three months ended March 31, 2000. These increases reflect the continued
seasoning of the portfolio as well as the effect of the FFIEC charge-off policy
adopted in the fourth quarter of 2000. Consumer finance nonperforming loans
increased to $1.2 billion at March 31, 2001 from $1.1 billion at December 31,
2000.
Bankcard receivables increased to $14.7 billion at March 31, 2001,
compared to $14.1 billion at December 31, 2000. Net charge-offs on bankcard
receivables for the three months ended March 31, 2001 increased $44 million from
the same period in 2000 to $125 million, or 3.51 percent of average bankcard
receivables, a decrease from 3.86 percent for the same period in 2000. The
increase in charge-offs was a result of the increase in average bankcard
outstandings in first quarter 2001 compared to the same period in 2000. Bankcard
loans past due 90 days or more and still accruing interest were $230 million, or
1.57 percent of bankcard receivables, at March 31, 2001, compared to $191
million, or 1.36 percent, at December 31, 2000.
Other consumer loans, which include direct and indirect consumer and
foreign consumer loans, decreased to $42.4 billion at March 31, 2001, compared
to $42.8 billion at December 31, 2000. Direct and indirect consumer loan net
charge-offs were $75 million, or 0.76 percent of average direct and indirect
consumer loans outstanding, for the three months ended March 31, 2001, compared
to $91 million, or 0.88 percent of the average balance outstanding, for the
comparable period in 2000. Foreign consumer loan net charge-offs were $1 million
for the three months ended March 31, 2001 and 2000, or 0.19 percent and 0.12
percent of average foreign consumer loans, respectively.
Excluding bankcard, total consumer loans past due 90 days or more and
still accruing interest were $97 million, or 0.05 percent of total consumer
loans, at March 31, 2001, compared to $110 million, or 0.06 percent, at December
31, 2000.
Nonperforming Assets
As presented in Table Seven, nonperforming assets increased to $5.9
billion, or 1.54 percent of loans, leases and foreclosed properties, at March
31, 2001 from $5.5 billion, or 1.39 percent, at December 31, 2000. Nonperforming
loans increased to $5.6 billion at March 31, 2001 from $5.2 billion at December
31, 2000, primarily due to increases in nonperforming loans in the commercial -
domestic portfolio as discussed above. Credit deterioration in loans resulted as
companies were affected by the weakening economic environment. Foreclosed
properties increased to $277 million at March 31, 2001, compared to $249 million
at December 31, 2000.
Table Eight presents the additions to and reductions in nonperforming
assets in the consumer and commercial portfolios during the most recent four
quarters.
48
Table Eight
Nonperforming Assets
- ---------------------------------------------------------------------------------------------------------------------------------
First Fourth Third Second
Quarter Quarter Quarter Quarter
(Dollars in millions) 2001 2000 2000 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $5,457 $4,403 $3,886 $3,481
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 1,315 1,954 913 760
Advances on loans 26 28 19 38
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial additions 1,341 1,982 932 798
- ---------------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (429) (288) (179) (164)
Returns to performing status (126) (73) (72) (69)
Charge-offs(1) (436) (774) (243) (294)
Transfers to assets held for sale - - (63) -
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial reductions (991) (1,135) (557) (527)
- ---------------------------------------------------------------------------------------------------------------------------------
Total commercial net additions to nonperforming assets 350 847 375 271
- ---------------------------------------------------------------------------------------------------------------------------------
Consumer
Additions to nonperforming assets:
New nonaccrual loans and foreclosed properties 819 834 722 647
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer additions 819 834 722 647
- ---------------------------------------------------------------------------------------------------------------------------------
Reductions in nonperforming assets:
Paydowns, payoffs and sales (135) (95) (110) (109)
Returns to performing status (483) (391) (402) (352)
Charge-offs(1) (101) (135) (64) (51)
Transfers to assets held for sale (10) (6) (4) (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer reductions (729) (627) (580) (513)
- ---------------------------------------------------------------------------------------------------------------------------------
Total consumer net additions to nonperforming assets 90 207 142 134
- ---------------------------------------------------------------------------------------------------------------------------------
Total net additions to nonperforming assets 440 1,054 517 405
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $5,897 $5,457 $4,403 $3,886
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Certain loan products, including commercial bankcard, consumer bankcard and
other unsecured loans, are not classified as nonperforming; therefore, the
charge-offs on these loans are not included above.
In order to respond when deterioration of a credit occurs, internal loan
workout units are devoted to providing specialized expertise and full-time
management and/or collection of certain nonperforming assets as well as certain
performing loans. Management believes focused collection strategies and a
proactive approach to managing overall problem assets expedites the disposition,
collection and renegotiation of nonperforming and other lower-quality assets. As
part of this process, management routinely evaluates all reasonable
alternatives, including the sale of assets individually or in groups, and
selects what it believes to be the optimal strategy.
Note Five of the consolidated financial statements provides the reported
investment in specific loans considered to be impaired at March 31, 2001 and
December 31, 2000. The Corporation's investment in specific loans that were
considered to be impaired at March 31, 2001 was $4.0 billion, compared to $3.8
billion at December 31, 2000. Commercial - domestic impaired loans increased
$185 million to $3.1 billion at March 31, 2001 compared to December 31, 2000.
Commercial - foreign impaired loans increased $47 million to $568 million at
March 31, 2001 compared to December 31, 2000. Commercial real estate - domestic
impaired loans decreased $32 million to $380 million at March 31, 2001 compared
to December 31, 2000.
49
Allowance for Credit Losses
The Corporation performs periodic and systematic detailed reviews of its
loan and lease portfolios to identify inherent risks in and to assess the
overall collectibility of those portfolios. The allowance on certain homogeneous
loan portfolios, which generally consist of consumer loans, is based on
aggregated portfolio segment evaluations generally by loan type. Loss forecast
models are utilized for these segments which consider a variety of factors
including, but not limited to, anticipated defaults or foreclosures based on
portfolio trends, delinquencies and credit scores, and expected loss factors by
loan type. The remaining portfolios are reviewed on an individual loan basis.
Loans subject to individual reviews are analyzed and segregated by risk
according to the Corporation's internal risk rating scale. These risk
classifications, in conjunction with an analysis of historical loss experience,
current economic conditions and performance trends within specific portfolio
segments, and any other pertinent information (including individual valuations
on nonperforming loans in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan") result in
the estimation of specific allowances for credit losses. The Corporation has
procedures in place to monitor differences between estimated and actual incurred
credit losses. These procedures include detailed periodic assessments by senior
management of both individual loans and credit portfolios and the models used to
estimate incurred credit losses in those portfolios.
Portions of the allowance for credit losses are assigned to cover the
estimated probable incurred credit losses in each loan and lease category based
on the results of the Corporation's detail review process described above. The
assigned portion continues to be weighted toward the commercial loan portfolio,
which reflects a higher level of nonperforming loans and the potential for
higher individual losses. The remaining or unassigned portion of the allowance
for credit losses, determined separately from the procedures outlined above,
addresses certain industry and geographic concentrations, including global
economic conditions. This procedure helps to minimize the risk related to the
margin of imprecision inherent in the estimation of the assigned allowances for
credit losses. Due to the subjectivity involved in the determination of the
unassigned portion of the allowance for credit losses, the relationship of the
unassigned component to the total allowance for credit losses may fluctuate from
period to period. Management evaluates the adequacy of the allowance for credit
losses based on the combined total of the assigned and unassigned components and
believes that the allowance for credit losses reflects management's best
estimate of incurred credit losses as of the balance sheet date.
The provision for credit losses increased $415 million to $835 million for
the three months ended March 31, 2001, compared to $420 million for the same
period in 2000. The increase in the provision was primarily driven by increased
credit deterioration as the overall economic environment weakened. The provision
for credit losses for the three months ended March 31, 2001 was $63 million in
excess of net charge-offs of $772 million as the Corporation increased its
allowance for credit losses in response to this continued economic slowdown.
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 at this
time given its analysis of estimated incurred credit losses at March 31, 2001.
Table Nine provides the changes in the allowance for credit losses for the three
months ended March 31, 2001 and 2000.
50
Table Nine
Allowance for Credit Losses
- --------------------------------------------------------------------------------------------------------------
Three Months
Ended March 31
---------------------------------
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 6,838 $ 6,828
- --------------------------------------------------------------------------------------------------------------
Loans and leases charged off
Commercial - domestic (416) (202)
Commercial - foreign (39) (12)
Commercial real estate - domestic (8) (8)
- --------------------------------------------------------------------------------------------------------------
Total commercial (463) (222)
- --------------------------------------------------------------------------------------------------------------
Residential mortgage (9) (7)
Home equity lines (8) (5)
Direct/Indirect consumer (116) (146)
Consumer finance (129) (93)
Bankcard (143) (94)
Other consumer - domestic (18) (2)
Foreign consumer (1) (1)
- --------------------------------------------------------------------------------------------------------------
Total consumer (424) (348)
- --------------------------------------------------------------------------------------------------------------
Total loans and leases charged off (887) (570)
- --------------------------------------------------------------------------------------------------------------
Recoveries of loans and leases previously charged off
Commercial - domestic 1 30
Commercial - foreign 5 7
Commercial real estate - domestic 2 2
Commercial real estate - foreign - 2
- --------------------------------------------------------------------------------------------------------------
Total commercial 8 41
- --------------------------------------------------------------------------------------------------------------
Residential mortgage 3 3
Home equity lines 2 2
Direct/Indirect consumer 41 55
Consumer finance 36 36
Bankcard 18 13
Other consumer - domestic 7 -
- --------------------------------------------------------------------------------------------------------------
Total consumer 107 109
- --------------------------------------------------------------------------------------------------------------
Total recoveries of loans and leases previously charged off 115 150
- --------------------------------------------------------------------------------------------------------------
Net charge-offs (772) (420)
- --------------------------------------------------------------------------------------------------------------
Provisions for credit losses 835 420
Other, net (1) (1)
- --------------------------------------------------------------------------------------------------------------
Balance, March 31 $ 6,900 $ 6,827
- --------------------------------------------------------------------------------------------------------------
Loans and leases outstanding at March 31 $382,677 $382,085
Allowance for credit losses as a percentage of loans and leases
outstanding at March 31 1.80% 1.79%
Average loans and leases outstanding during the period $387,889 $376,584
Annualized net charge-offs as a percentage of average outstanding
loans and leases during the period .81% .45%
Allowance for credit losses as a percentage of nonperforming
loans at end of period 122.78 206.79
51
Concentrations of Credit Risk
In an effort to minimize the adverse impact of any single event or set of
occurrences, the Corporation strives to maintain a diverse credit portfolio as
outlined in Tables Ten, Eleven and Twelve.
The Corporation maintains a diverse commercial loan portfolio,
representing 51 percent of total loans and leases at March 31, 2001. The largest
concentration is in commercial real estate, which represents seven percent of
total loans and leases at March 31, 2001. The exposures presented in Table Ten
represent credit extensions for real estate-related purposes to borrowers or
counterparties who are primarily in the real estate development or investment
business and for which the ultimate repayment of the credit is dependent on the
sale, lease, rental or refinancing of the real estate. The exposures included in
the table do not include credit extensions which were made on the general
creditworthiness of the borrower, for which real estate was obtained as security
and for which the ultimate repayment of the credit is not dependent on the sale,
lease, rental or refinancing of the real estate. Accordingly, the exposures
presented do not include commercial loans secured by owner-occupied real estate,
except where the borrower is a real estate developer.
52
Table Ten
Commercial Real Estate Loans, Foreclosed Properties
and Other Real Estate Credit Exposures
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 2001
Loans Other
----------------------------------------- Foreclosed Credit
(Dollars in millions) Outstanding Nonperforming Properties (1) Exposures (2)
- ----------------------------------------------------------------------------------------------------------------------------
By Geographic Region (3)
California $5,353 $ 26 $4 $ 680
Southwest 3,566 17 - 770
Northwest 2,821 15 2 179
Florida 2,637 21 - 173
Midwest 1,964 25 26 259
Mid-Atlantic 1,627 30 - 457
Carolinas 1,513 3 - 56
Midsouth 1,314 5 - 129
Northeast 1,294 63 - 744
Other states 652 1 39 110
Non-US 330 3 - 9
Geographically diversified 2,734 - - 314
- ----------------------------------------------------------------------------------------------------------------------------
Total $25,805 $209 $71 $3,880
- ----------------------------------------------------------------------------------------------------------------------------
By Property Type
Office buildings $5,285 $13 $1 $ 662
Apartments 4,267 7 - 892
Shopping centers/retail 3,334 3 17 603
Residential 3,200 29 - 38
Industrial/warehouse 2,541 6 9 106
Land and land development 1,544 2 8 124
Hotels/motels 1,104 28 9 219
Multiple use 691 1 - 91
Miscellaneous commercial 561 1 - 26
Unsecured 434 - - 669
Non-US 330 3 - 9
Other 2,514 116 27 441
- ----------------------------------------------------------------------------------------------------------------------------
Total $25,805 $209 $71 $3,880
- ----------------------------------------------------------------------------------------------------------------------------
(1) Foreclosed properties include commercial real estate loans only.
(2) Other credit exposures include letters of credit and loans held for sale.
(3) Distribution based on geographic location of collateral.
Table Eleven presents aggregate commercial loan and lease exposures
by certain significant industries at March 31, 2001 and December 31, 2000. Total
commercial loans outstanding, excluding commercial real estate loans, comprised
44 percent and 45 percent of total loans and leases at March 31, 2001 and
December 31, 2000, respectively. No commercial industry concentration is greater
than three percent of total loans and leases.
Total loans and leases outstanding at both March 31, 2001 and December 31,
2000 included approximately $5 billion, or 1.3% of total loans and leases,
related to the utilities industry on a global basis. This amount included
outstanding loans to the California utilities.
53
Table Eleven
Significant Industry Loans and Leases (1)
- --------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
------------------------------------------------------------------
Percent of Total Percent of Total
(Dollars in millions) Outstanding Loans and Leases Outstanding Loans and Leases
- --------------------------------------------------------------------------------------------------------------
Transportation $11,123 2.9 % $11,704 3.0 %
Media 8,926 2.3 9,322 2.4
Business services 8,597 2.2 8,883 2.3
Equipment and general manufacturing 8,485 2.2 8,982 2.3
Agribusiness 7,360 1.9 7,672 2.0
Telecommunications 6,850 1.8 6,801 1.7
Autos 6,615 1.7 6,741 1.7
Healthcare 6,449 1.7 7,201 1.8
Retail 6,120 1.6 7,049 1.8
Oil and gas 5,175 1.4 5,299 1.4
- --------------------------------------------------------------------------------------------------------------
(1) Includes only non-real estate commercial loans and leases.
International Exposure
Through its credit and market risk management activities, the Corporation
has been devoting particular attention to those countries that have been
negatively impacted by global economic pressure. These include certain Asian
countries as well as countries within Latin America and 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 Twelve sets forth selected
regional foreign exposure at March 31, 2001. The countries selected represent
those that are sometimes considered as having higher credit and foreign exchange
risk. At March 31, 2001, the Corporation's total exposure to these select
countries was $28.7 billion, a decrease of $1.6 billion from December 31, 2000,
primarily due to reductions in exposure to Japan and certain other countries in
Asia and Latin America. Table Twelve is based on the FFIEC's instructions for
periodic reporting of foreign exposure.
54
Table Twelve
Selected Regional Foreign Exposure
- -----------------------------------------------------------------------------------------------------------------------------------
Derivatives Total Increase/
(Net Total Gross Binding (Decrease)
Loans Positive Securities/ Cross- Local Exposure from
and Loan Other Mark-to- Other border Country March 31, December 31,
(Dollars in millions) Commitments Financing(1) Market) Investments Exposure(2) Exposure(3) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Region/Country
Asia
China $ 98 $ 24 $ 7 $ 79 $ 208 $ 117 $ 325 $ 5
Hong Kong 222 35 17 89 363 4,206 4,569 5
India 785 91 47 76 999 1,191 2,190 (19)
Indonesia 258 25 17 41 341 20 361 (34)
Japan 661 82 682 4,028 5,453 981 6,434 (660)
Korea (South) 307 831 92 58 1,288 700 1,988 (232)
Malaysia 60 10 2 - 72 396 468 (54)
Pakistan 19 - - - 19 - 19 1
Philippines 181 26 3 40 250 123 373 (18)
Singapore 317 8 61 7 393 943 1,336 (138)
Taiwan 318 53 30 - 401 659 1,060 (69)
Thailand 43 12 125 29 209 273 482 75
Other 1 18 - - 19 103 122 (10)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 3,270 $ 1,215 $ 1,083 $ 4,447 $ 10,015 $ 9,712 $ 19,727 $ (1,148)
- -----------------------------------------------------------------------------------------------------------------------------------
Central and Eastern
Europe
Russian Federation $ - $ - $ - $ 4 $ 4 $ - $ 4 $ 2
Turkey 264 52 1 19 336 - 336 4
Other 98 7 10 64 179 120 299 55
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 362 $ 59 $ 11 $ 87 $ 519 $ 120 $ 639 $ 61
- -----------------------------------------------------------------------------------------------------------------------------------
Latin America
Argentina $ 381 $ 112 $ 23 $ 61 $ 577 $ 211 $ 788 $ (286)
Brazil 865 394 148 371 1,778 531 2,309 45
Chile 510 8 25 1 544 331 875 (105)
Colombia 188 20 10 5 223 21 244 (42)
Mexico 1,396 370 91 1,232 3,089 91 3,180 (256)
Venezuela 278 14 - 211 503 28 531 52
Other 190 72 13 121 396 - 396 34
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 3,808 $ 990 $ 310 $ 2,002 $ 7,110 $ 1,213 $ 8,323 $ (558)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 7,440 $ 2,264 $ 1,404 $ 6,536 $ 17,644 $ 11,045 $ 28,689 $ (1,645)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes acceptances, standby letters of credit, commercial letters of
credit, and formal guarantees.
(2) Cross-border exposure includes amounts payable to the Corporation by
residents of countries other than the one in which the credit is booked,
regardless of the currency in which the claim is denominated, consistent
with FFIEC reporting rules.
(3) Gross local country exposure includes amounts payable to the Corporation by
residents of countries in which the credit is booked, regardless of the
currency in which the claim is denominated. Management does not net local
funding or liabilities against local exposures as allowed by the FFIEC.
55
Market Risk Management
Overview
The Corporation is exposed to market risk as a consequence of the normal
course of conducting its business activities. Examples of these business
activities include market making, underwriting, proprietary trading, and
asset/liability management in interest rate, foreign exchange, equity, commodity
and credit markets, along with any associated derivative products. Market risk
is the potential of loss arising from adverse changes in market rates, prices
and liquidity. Financial products that expose the Corporation to market risk
include securities, loans, deposits, debt and derivative financial instruments
such as futures, forwards, swaps, options and other financial instruments with
similar characteristics. Liquidity risk arises from the possibility that the
Corporation may not be able to satisfy current or future financial commitments
or that the Corporation may be more reliant on alternative funding sources such
as long-term debt.
Trading Portfolio
The Corporation's Board of Directors (the Board) delegates responsibility
of the day-to-day management of market risk to the Finance Committee. The
Finance Committee has structured a system of independent checks, balances and
reporting in order to ensure that the Board's disposition toward market risk is
not compromised.
The objective of Risk Management is to provide senior management with
independent, timely assessments of the bottom line impacts of all market risks
facing the Corporation and to monitor those impacts against trading limits. Risk
Management monitors the changing aggregate position of the Corporation and
projects the profit and loss levels that would result from both normal and
extreme market moves. In addition, Risk Management is responsible for ensuring
that reasonable policies and procedures that are in line with the Board's risk
preferences are in place and enforced. These policies and procedures encompass
the limit process, risk reporting, new product review and model review.
56
Histogram of Daily Market Risk-Related Revenue
Twelve Months Ended March 31, 2001
[Graphic omitted]
Daily Market-Risk Related Revenue Number
(Dollars in Millions) of Days
$-10 to -15 1
- -5 to -10 4
- -5 to 0 14
0 to 5 36
5 to 10 55
10 to 15 51
15 to 20 40
20 to 25 20
25 to 30 20
30 to 35 5
>35 4
Market risk-related revenue includes trading revenue and trading-related
net interest income, which encompasses both proprietary trading and
customer-related activities. During the first quarter of 2001, the Corporation
continued its efforts to build on its client franchise and reduce the proportion
of proprietary trading revenue to total revenue. The success of these efforts
can be seen in the histogram. During the twelve months ended March 31, 2001, the
Corporation recorded positive daily market risk-related revenue for 231 of 250
trading days. Furthermore, of the 19 days that showed negative revenue, only one
day was greater than $10 million.
Value at Risk
Value at Risk (VAR) is the key measure of market risk for the Corporation.
VAR represents the maximum amount that the Corporation has placed at risk of
loss, with a 99 percent degree of confidence, in the course of its risk taking
activities. Its purpose is to describe the amount of capital required to absorb
potential losses from adverse market movements.
As the following graph shows, during the twelve months ended March 31,
2001, actual market risk-related revenue exceeded VAR measures two days out of
250 total trading days. Given the 99 percent confidence interval captured by
VAR, this would be expected to occur approximately once every 100 trading days,
or two to three times each year.
57
Graphic omitted: Line graph representation of Daily Market Risk-Related Revenue
and VAR for the twelve months ended March 31, 2001. During the period, the daily
market risk-related revenue ranged from negative revenue of $13 million to
positive revenue of $38 million. Over the same period, VAR ranged from $25
million to $53 million.
58
The following table summarizes the VAR in the Corporation's trading
portfolios for the twelve months ended March 31, 2001 and 2000:
Table Thirteen
Trading Activities Market Risk
- --------------------------------------------------------------------------------------------------------------
Twelve Months Ended March 31
----------------------------------------------------------------
2001 2000
----------------------------------------------------------------
Average High Low Average High Low
(US Dollar equivalents in millions) VAR (1) VAR (2) VAR (2) VAR (1) VAR (2) VAR (2)
- --------------------------------------------------------------------------------------------------------------
Interest rate $28.1 $46.2 $16.3 $21.1 $25.5 $15.8
Foreign exchange 9.9 18.5 5.0 11.5 21.7 6.9
Commodities 2.3 5.2 .5 1.6 5.8 .5
Equities 23.9 41.5 5.5 17.6 35.1 6.7
Credit products 8.5 16.4 3.0 14.3 18.1 8.9
Real estate/mortgage 7.9 11.3 2.5 6.8 10.1 2.2
Total trading portfolio 41.5 53.0 25.1 32.2 46.7 23.5
- --------------------------------------------------------------------------------------------------------------
(1) The average VAR for the total portfolio is less than the sum of the VARs of
the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
(2) The high and low for the entire trading account may not equal the sum of
the individual components as the highs or lows of the portfolio may have
occurred on different trading days.
Total trading portfolio VAR increased during the twelve months ended March
31, 2001 relative to the twelve months ended March 31, 2000. The increase was
largely driven by increased activity in the equities and interest rate
businesses.
The following table summarizes the quarterly VAR in the Corporation's
trading portfolios for the most recent four quarters:
Table Fourteen
Quarterly Trading Activities Market Risk
- ---------------------------------------------------------------------------------------------------------------------
First Quarter 2001 Fourth Quarter 2000 Third Quarter 2000
----------------------------------------------------------------------------------------
(US Dollar equivalents in Average High Low Average High Low Average High Low
millions) VAR (1) VAR (2) VAR (2) VAR (1) VAR(2) VAR (2) VAR (1) VAR (2) VAR (2)
- ---------------------------------------------------------------------------------------------------------------------
Interest rate $32.1 $46.2 $26.9 $25.2 $42.2 $16.3 $29.1 $35.5 $24.7
Foreign exchange 8.2 12.8 5.0 10.6 15.5 5.7 9.1 13.5 5.5
Commodities 1.8 3.8 .9 2.8 4.8 1.5 2.4 5.2 .5
Equities (3) 13.1 22.5 8.9 10.4 21.6 5.5 35.2 41.5 25.5
Credit products 6.2 8.0 3.0 6.3 8.5 3.2 8.8 12.0 6.1
Real estate/mortgage 7.7 10.2 5.8 9.6 11.1 8.3 9.8 11.3 8.6
Total trading portfolio (3) 37.5 49.6 32.9 32.0 45.5 25.1 48.5 53.0 39.2
- ---------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------
Second Quarter 2000
----------------------------
(US Dollar equivalents in Average High Low
millions) VAR (1) VAR (2) VAR (2)
- --------------------------------------------------------
Interest rate $26.4 $33.6 $21.7
Foreign exchange 10.2 18.5 5.4
Commodities 1.9 3.3 .7
Equities (3) 36.7 39.8 28.7
Credit products 12.4 16.4 8.8
Real estate/mortgage 4.5 9.4 2.5
Total trading portfolio (3) 47.9 52.0 41.9
- ---------------------------------------------------------
(1) The average VAR for the total portfolio is less than the sum of the VARs of
the individual portfolios due to risk offsets arising from the
diversification of the portfolio.
(2) The high and low for the entire trading account may not equal the sum of
the individual components as the highs or lows of the portfolio may have
occurred on different trading days.
(3) The decrease in VAR in fourth quarter 2000 was due to a change in
methodology used to calculate VAR for the equities portfolio. The net
effect of the change was an approximate $20 million reduction in reported
VAR for equities. VAR was not restated for previous quarters.
VAR modeling on trading is subject to numerous limitations. In addition,
the Corporation recognizes that there are numerous assumptions and estimates
associated with modeling and actual results could differ from these assumptions
and estimates. The Corporation mitigates these uncertainties through close
monitoring and by examining and updating assumptions on an ongoing basis. The
continual trading risk management process considers the impact of unanticipated
risk exposure and updates assumptions to reduce loss exposure.
59
Stress Testing
In order to determine the sensitivity of the Corporation's capital to the
impact of historically large market moves with low probability, stress scenarios
are run against the trading portfolios. This stress testing should verify that,
even under extreme market moves, the Corporation will preserve its capital. The
scenarios for each product are large standard deviation moves in the relevant
markets that are based on significant historical events. These results are
calculated daily and reported as part of the regular reporting process.
In addition, specific stress scenarios are run regularly which represent
extreme, but plausible, events that would be of concern given the Corporation's
current portfolio. The results of these specific scenarios are presented to the
Trading Risk Committee as part of its regular meetings. Examples of these
specific stress scenarios include calculating the effects on the overall
portfolio of an extreme Federal Reserve Board tightening or easing of interest
rates, a severe credit deterioration in the U.S., and a recession in Japan and
the corresponding ripple effects throughout Asia.
Asset and Liability Management Activities
Non-Trading Portfolio
The Corporation's Asset and Liability Management (ALM) process, managed
through the Asset and Liability Committee of the Finance Committee, is used to
manage interest rate risk through the structuring of balance sheet portfolios
and identifying and linking derivative positions to specific hedged assets and
liabilities. Interest rate risk represents the only material market risk
exposure to the Corporation's non-trading financial instruments.
To effectively measure and manage interest rate risk, the Corporation uses
sophisticated computer simulations that determine the impact on net interest
income of numerous interest rate scenarios, balance sheet trends and strategies.
These simulations cover the following financial instruments: short-term
financial instruments, securities, loans, deposits, borrowings and derivative
instruments. These simulations incorporate assumptions about balance sheet
dynamics, such as loan and deposit growth and pricing, changes in funding mix
and asset and liability repricing and maturity characteristics. Simulations are
run under various interest rate scenarios to determine the impact on net income
and capital. From these scenarios, interest rate risk is quantified and
appropriate strategies are developed and implemented. The overall interest rate
risk position and strategies are reviewed on an ongoing basis by senior
management. Additionally, duration and market value sensitivity measures are
selectively utilized where they provide added value to the overall interest rate
risk management process.
At March 31, 2001, the interest rate risk position of the Corporation was
relatively neutral as the impact of a gradual parallel 100 basis point rise or
fall in interest rates over the next 12 months was estimated to be less than one
percent of net interest income.
Available-for-sale securities had an unrealized loss of $211 million at
March 31, 2001, compared to an unrealized loss of $991 million at December 31,
2000. 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 March 31, 2001 were not
significantly different from those at December 31, 2000. For a discussion of
other non-trading on-balance sheet financial instruments, see page 50 and Table
Twenty-One on page 51 of the "Market Risk Management" section of the
Corporation's 2000 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 Corporation's ALM process. The Corporation maintains an overall
interest rate risk management strategy that incorporates the use of interest
rate contracts to minimize significant unplanned fluctuations in earnings that
are caused by interest rate volatility. The Corporation's goal is to manage
interest rate sensitivity so that movements in interest rates do not adversely
affect the net interest margin. As a result of interest rate fluctuations,
hedged fixed-rate assets and liabilities appreciate or depreciate in market
value. Gains or losses on the derivative instruments that are linked to the
hedged fixed-rate assets and liabilities are expected to substantially offset
this unrealized appreciation or depreciation. Interest income and interest
expense on hedged variable-rate assets and liabilities, respectively, increases
or decreases as a result of interest rate fluctuations. Gains and losses on the
derivative instruments that are
60
linked to these hedged assets and liabilities are expected to substantially
offset this variability in earnings. See Note Four of the consolidated financial
statements for additional information on the Corporation's hedging activities.
Interest rate contracts, which are generally non-leveraged generic
interest rate and basis swaps, options, futures and forwards, allow the
Corporation to effectively manage its interest rate risk position. In addition,
the Corporation uses foreign currency contracts to manage the foreign exchange
risk associated with foreign-denominated assets and liabilities, as well as the
Corporation's equity investments in foreign subsidiaries. As reflected in Table
Fifteen, the notional amount of the Corporation's receive fixed and pay fixed
interest rate swaps at March 31, 2001 was $72.9 billion and $21.5 billion,
respectively. The receive fixed interest rate swaps are primarily converting
variable rate commercial loans to fixed rate. The net receive fixed position at
March 31, 2001 was $51.4 billion notional compared to $48.8 billion notional at
December 31, 2000. The Corporation had $15.7 billion notional and $14.7 billion
notional of basis swaps at March 31, 2001 and December 31, 2000, respectively,
linked primarily to loans and long-term debt. The Corporation had $22.5 billion
notional of option products at December 31, 2000. At March 31, 2001, there were
no option products being used in the Corporation's ALM process. The
Corporation had $2.5 billion notional and $24.8 billion notional of futures and
forward rate contracts at March 31, 2001 and December 31, 2000, respectively. In
addition, open foreign exchange contracts at March 31, 2001 had a notional
amount of $20.1 billion compared to $19.0 billion at December 31, 2000.
Table Fifteen also summarizes the expected maturity and the average
estimated duration, weighted average receive and pay rates and the net
unrealized and realized gains and losses at March 31, 2001 and December 31, 2000
of the Corporation's open ALM interest rate swaps, as well as the expected
maturity and net unrealized and realized gains and losses at March 31, 2001 and
December 31, 2000 of the Corporation's open ALM basis swaps, options, futures
and forward rate and foreign exchange contracts. Unrealized and realized 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 and realized gain of $1.4 billion and $364
million at March 31, 2001 and December 31, 2000, respectively. The ALM option
products had an unrealized loss of $157 million at December 31, 2000. At March
31, 2001, there were no option products being used in the Corporation's ALM
process. At March 31, 2001 and December 31, 2000, open foreign exchange
contracts had a net unrealized loss of $303 million and $387 million,
respectively.
The amount of unamortized net realized deferred gains associated with
closed ALM swaps was $8 million and $25 million at March 31, 2001 and December
31, 2000, respectively. The amount of unamortized net realized deferred gains
associated with closed ALM options was $89 million and $95 million at March 31,
2001 and December 31, 2000, respectively. The amount of unamortized net realized
deferred losses associated with closed ALM futures and forward contracts was $13
million and $15 million at March 31, 2001 and December 31, 2000, respectively.
There were no unamortized net realized deferred gains or losses associated with
closed foreign exchange contracts at March 31, 2001 and December 31, 2000. The
amount of unamortized net realized deferred gains in other comprehensive income
associated with cash flow hedges was $89 million at March 31, 2001.
Management believes the fair value of the ALM interest rate and foreign
exchange portfolios should be viewed in the context of the overall balance
sheet, and the value of any single component of the balance sheet positions
should not be viewed in isolation.
61
Table Fifteen
Asset and Liability Management Interest Rate and Foreign Exchange Contracts
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, 2001
Expected Maturity
------------------------------------------------------------------------- Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2001 2002 2003 2004 2005 2005 Duration
- ----------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $2,176 4.33
Notional value $72,913 $1,604 $6,229 $10,164 $16,331 $13,613 $24,972
Weighted average receive rate 6.23% 6.14% 6.60% 5.55% 6.19% 6.73% 6.18%
Total pay fixed swaps (747) 5.44
Notional value $21,483 $1,852 $ 19 $1,856 $4,618 $2,589 $10,549
Weighted average pay rate 6.13% 5.83% 6.38% 4.98% 5.10% 7.18% 6.58%
Basis swaps 1
Notional value $15,700 $ - $ - $ - $9,000 $ 500 $6,200
--------
Total swaps 1,430
- ---------------------------------------------------------------------------------------------------------------------------------
Future and forward rate contracts (1)
Notional amount $2,500 $2,500 $ - $ - $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Total open interest rate contracts 1,429
- ---------------------------------------------------------------------------------------------------------------------------------
Closed interest rate contracts(1) 173
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract position 1,602
- ---------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (303)
Notional amount $20,119 $ 190 $2,980 $3,423 $4,438 $7,084 $2,004
- ---------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $1,299
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
Expected Maturity
--------------------------------------------------------------------------- Average
(Dollars in millions, average Fair After Estimated
estimated duration in years) Value Total 2001 2002 2003 2004 2005 2005 Duration
- ---------------------------------------------------------------------------------------------------------------------------------
Open interest rate contracts
Total receive fixed swaps $ 900 3.65
Notional amount $62,485 $4,001 $7,011 $9,787 $12,835 $15,853 $12,998
Weighted average receive rate 6.39% 6.28% 6.71% 5.53% 6.45% 6.76% 6.41%
Total pay fixed swaps (529) 5.66
Notional amount $13,640 $1,878 $1,064 $ 114 $ 20 $2,584 $7,980
Weighted average pay rate 6.72% 5.86% 6.39% 7.14% 5.85% 7.05% 6.82%
Basis swaps (7)
Notional amount $14,739 $ 576 $1,669 $ 442 $7,700 $4,317 $ 35
-------
Total swaps 364
- ---------------------------------------------------------------------------------------------------------------------------------
Option products (157)
Notional amount $22,477 $2,087 $ 868 $1,575 $7,882 $4,101 $5,964
Futures and forward rate contracts (52)
Notional amount $24,818 19,068 $5,750 $ - $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Total open interest rate contracts 155
- ---------------------------------------------------------------------------------------------------------------------------------
Closed interest rate contracts(1) 105
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest rate contract position 260
- ---------------------------------------------------------------------------------------------------------------------------------
Open foreign exchange contracts (387)
Notional amount $18,958 $1,059 $2,179 $3,472 $4,472 $5,821 $1,955
- ---------------------------------------------------------------------------------------------------------------------------------
Total ALM contracts $ (127)
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Represents the unamortized net realized deferred gains associated with
closed contracts. As a result, no notional amount is reflected for expected
maturity.
62
The Corporation adopted Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133)
on January 1, 2001. SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. The Corporation has not
significantly altered its overall interest rate risk management objective and
strategy as a result of adopting SFAS 133. For further information on SFAS 133,
see Note One of the consolidated financial statements on page 6.
In conducting its mortgage production activities, the Corporation is
exposed to interest rate risk for the periods between the loan commitment date
and the loan funding date. To manage this risk, the Corporation enters into
various financial instruments including forward delivery contracts, Euro dollar
futures and option contracts. The notional amount of such contracts was $18.5
billion at March 31, 2001 with associated net unrealized losses of $5 million.
At December 31, 2000, the notional amount of such contracts was $9.7 billion
with associated net unrealized losses of $53 million. These contracts have an
average expected maturity of less than 90 days.
In 2001, the Corporation amended certain of its Mortgage Selling and
Servicing Contracts to better manage the Corporation's mortgage banking
activities. The Corporation has enhanced its ability to pledge or sell the
securities of its mortgage banking business. For additional information on
mortgage banking activities, see Note One of the consolidated financial
statements on page 6.
63
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Market Risk Management" on page 56 and the sections
referenced therein for Quantitative and Qualitative Disclosures about Market
Risk.
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Part II. Other Information
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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 Corporation's
(BankAmerica) losses relating to D.E. Shaw Securities
Group, L.P. ("D.E. Shaw") and related entities until
mid-October 1998, in violation of various provisions
of federal and state laws. The amended complaint also
alleges that the proxy statement-prospectus of August
4, 1998, falsely stated that the merger between
NationsBank Corporation (NationsBank) and BankAmerica
would be one of equals and alleges a scheme to have
NationsBank gain control over the newly merged
entity. The Missouri federal court has certified
classes consisting generally of persons who were
stockholders of NationsBank or BankAmerica on
September 30, 1998, or were entitled to vote on the
merger, or who purchased or acquired securities of
the Corporation or its predecessors between August 4,
1998 and October 13, 1998. The amended complaint
substantially survived a motion to dismiss, and
discovery is underway. Claims against certain
director-defendants were dismissed with leave to
replead. The court has preliminarily ordered the
parties to be ready for trial in January 2002. A
former NationsBank stockholder who opted out of the
federal class action has commenced an action
asserting claims substantially similar to the claims
relating to D.E. Shaw set forth in the consolidated
action. That action is proceeding with the federal
class action in the Missouri federal court. 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 as a class. A motion to decertify the
class is pending. A lower court order dismissing that
action was reversed on appeal and discovery has
commenced. 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.
64
Item 2. Changes in As part of its share repurchase program, during the
Securities and Use first quarter of 2001, the Corporation sold put
of Proceeds options to purchase an aggregate of one million
shares of Common Stock. These put options were sold
to an independent third party for an aggregate
purchase price of $6 million. The put option exercise
price is $51.38 per share and expires in September
2001. The put option contracts allow the Corporation
to determine the method of settlement (cash or
stock). Each of these transactions was exempt from
registration under Section 4(2) of the Securities Act
of 1933, as amended.
At March 31, 2001, the Corporation had two million
put options outstanding, with exercise prices ranging
from $48.14 per share to $51.38 per share and
expiration dates ranging from April 2001 to September
2001.
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
b) Reports on Form 8-K
-------------------
The following reports on Form 8-K were filed by the
Corporation during the quarter ended March 31, 2001:
Current Report on Form 8-K dated January 16, 2001 and
filed January 16, 2001 Items 5, 7 and 9.
Current Report on Form 8-K dated January 17, 2001 and
filed January 23, 2001, Items 5 and 7.
Current Report on Form 8-K dated January 24, 2001 and
filed January 24, 2001, Items 5, 7 and 9.
65
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bank of America Corporation
---------------------------
Registrant
Date: May 15, 2001 /s/ Marc D. Oken
- ------------------ ----------------
MARC D. OKEN
Executive Vice President and
Principal Financial Executive
(Duly Authorized Officer and
Chief Accounting Officer)
66
Bank of America Corporation
Form 10-Q
Index to Exhibits
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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
67