Bank of America Corporation

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, 2004

 

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

100 N. Tryon Street

Charlotte, North Carolina 28255

 

Registrant’s telephone number, including area code: (704) 386-8486

 


 

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  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

 

On April 30, 2004, there were 2,038,797,417 shares of Bank of America Corporation Common Stock outstanding.

 



Bank of America Corporation

 

March 31, 2004 Form 10-Q

 

INDEX

 

               Page

Part I

Financial

Information

   Item 1.   

Financial Statements:

    
       

Consolidated Statement of Income for the Three Months Ended March 31, 2004 and 2003

   2
         

Consolidated Balance Sheet at March 31, 2004 and December 31, 2003

   3
         

Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2004 and 2003

   4
         

Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2004 and 2003

   5
         

Notes to Consolidated Financial Statements

   6
     Item 2.   

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   21
     Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

   59
     Item 4.   

Controls and Procedures

   59
Part II Other Information    Item 1.   

Legal Proceedings

   59
     Item 2.   

Changes in Securities and Use of Proceeds

   59
     Item 4.   

Submission of Matters to a Vote of Security Holders

   59
     Item 6.   

Exhibits and Reports on Form 8-K

   60
     Signature    62
     Index to Exhibits    63

 


Part I. Financial Information

Item 1. Financial Statements

 

Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Income

 

     Three Months Ended March 31

 

(Dollars in millions, except per share information)


   2004

   2003

 

Interest income

               

Interest and fees on loans and leases

   $ 5,549    $ 5,348  

Interest on debt securities

     1,212      754  

Federal funds sold and securities purchased under agreements to resell

     434      194  

Trading account assets

     1,009      1,042  

Other interest income

     368      387  
    

  


Total interest income

     8,572      7,725  
    

  


Interest expense

               

Deposits

     1,206      1,183  

Short-term borrowings

     740      453  

Trading account liabilities

     334      308  

Long-term debt

     491      572  
    

  


Total interest expense

     2,771      2,516  
    

  


Net interest income

     5,801      5,209  

Noninterest income

               

Consumer service charges

     821      777  

Corporate service charges

     595      577  
    

  


Total service charges

     1,416      1,354  
    

  


Consumer investment and brokerage services

     417      383  

Corporate investment and brokerage services

     205      165  
    

  


Total investment and brokerage services

     622      548  
    

  


Mortgage banking income

     209      405  

Investment banking income

     404      378  

Equity investment gains (losses)

     133      (68 )

Card income

     795      681  

Trading account profits

     3      114  

Other income

     135      281  
    

  


Total noninterest income

     3,717      3,693  
    

  


Total revenue

     9,518      8,902  

Provision for credit losses

     624      833  

Gains on sales of debt securities

     495      273  

Noninterest expense

               

Personnel

     2,762      2,459  

Occupancy

     488      472  

Equipment

     261      284  

Marketing

     281      230  

Professional fees

     147      125  

Amortization of intangibles

     54      54  

Data processing

     284      266  

Telecommunications

     151      124  

Other general operating

     989      711  
    

  


Total noninterest expense

     5,417      4,725  
    

  


Income before income taxes

     3,972      3,617  

Income tax expense

     1,291      1,193  
    

  


Net income

   $ 2,681    $ 2,424  
    

  


Net income available to common shareholders

   $ 2,680    $ 2,423  
    

  


Per common share information

               

Earnings

   $ 1.86    $ 1.62  
    

  


Diluted earnings

   $ 1.83    $ 1.59  
    

  


Dividends paid

   $ 0.80    $ 0.64  
    

  


Average common shares issued and outstanding (in thousands)

     1,440,153      1,499,405  
    

  


Average diluted common shares issued and outstanding (in thousands)

     1,466,701      1,526,288  
    

  


 

See accompanying notes to consolidated financial statements.

 

 

2


Bank of America Corporation and Subsidiaries

 

Consolidated Balance Sheet

 

(Dollars in millions)


  

March 31,

2004


    December 31,
2003


 

Assets

                

Cash and cash equivalents

   $ 22,296     $ 27,084  

Time deposits placed and other short-term investments

     8,561       8,051  

Federal funds sold and securities purchased under agreements to resell (includes $73,018 and $76,446 pledged as collateral)

     73,057       76,492  

Trading account assets (includes $39,522 and $18,722 pledged as collateral)

     75,004       68,547  

Derivative assets

     36,488       36,507  

Debt securities:

                

Available-for-sale (includes $34,965 and $20,858 pledged as collateral)

     139,546       66,382  

Held-to-maturity, at cost (market value- $251 and $254)

     242       247  
    


 


Total debt securities

     139,788       66,629  
    


 


Loans and leases

     375,968       371,463  

Allowance for loan and lease losses

     (6,080 )     (6,163 )
    


 


Loans and leases, net of allowance

     369,888       365,300  
    


 


Premises and equipment, net

     6,076       6,036  

Mortgage banking assets

     2,184       2,762  

Goodwill

     11,468       11,455  

Core deposit intangibles and other intangibles

     854       908  

Other assets

     70,348       66,674  
    


 


Total assets

   $ 816,012     $ 736,445  
    


 


Liabilities

                

Deposits in domestic offices:

                

Noninterest-bearing

   $ 121,629     $ 118,495  

Interest-bearing

     267,850       262,032  

Deposits in foreign offices:

                

Noninterest-bearing

     2,805       3,035  

Interest-bearing

     43,308       30,551  
    


 


Total deposits

     435,592       414,113  
    


 


Federal funds purchased and securities sold under agreements to repurchase

     115,434       78,046  

Trading account liabilities

     27,402       26,844  

Derivative liabilities

     24,321       24,526  

Commercial paper and other short-term borrowings

     64,621       42,478  

Accrued expenses and other liabilities (includes $401 and $416 of Reserve for unfunded lending commitments)

     18,635       27,115  

Long-term debt

     81,231       75,343  
    


 


Total liabilities

     767,236       688,465  
    


 


Commitments and contingencies (Note 7)

                

Shareholders’ equity

                

Preferred stock, $0.01 par value; authorized - 100,000,000 shares; issued and outstanding - 1,239,563 and 1,269,600 shares

     53       54  

Common stock, $0.01 par value; authorized - 7,500,000,000 and 5,000,000,000 shares; issued and outstanding - 1,445,487,313 and 1,441,143,786 shares

     14       14  

Retained earnings

     51,823       50,213  

Accumulated other comprehensive loss

     (2,743 )     (2,148 )

Other

     (371 )     (153 )
    


 


Total shareholders’ equity

     48,776       47,980  
    


 


Total liabilities and shareholders’ equity

   $ 816,012     $ 736,445  
    


 


 

See accompanying notes to consolidated financial statements.

 

3


Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Changes in Shareholders’ Equity

 

   

Preferred

Stock


                     

Accumulated

Other

Comprehensive

Income (Loss) (1)


    Other

   

Total

Share-

holders’

Equity


   

Comprehensive

Income


 
                             
      Common Stock

   

Retained

Earnings


         

(Dollars in millions, shares in thousands)


    Shares

    Amount

           

Balance, December 31, 2002

  $ 58     1,500,691     $ 496     $ 48,517     $ 1,232     $ 16     $ 50,319          

Net income

                          2,424                       2,424     $ 2,424  

Net unrealized losses on available-for-sale debt and marketable equity securities

                                  (9 )             (9 )     (9 )

Net unrealized gains on foreign currency translation adjustments

                                  33               33       33  

Net unrealized losses on derivatives

                                  (1,182 )             (1,182 )     (1,182 )

Cash dividends paid:

                                                             

Common

                          (961 )                     (961 )        

Preferred

                          (1 )                     (1 )        

Common stock issued under employee plans and related tax benefits

          15,206       818                       (173 )     645          

Common stock repurchased

          (18,400 )     (1,260 )                             (1,260 )        

Conversion of preferred stock

    (1 )   34       1                               —            

Other

          —         72       (1 )             (27 )     44          
   


 

 


 


 


 


 


 


Balance, March 31, 2003

  $ 57     1,497,531     $ 127     $ 49,978     $ 74     $ (184 )   $ 50,052     $ 1,266  
   


 

 


 


 


 


 


 


Balance, December 31, 2003

  $ 54     1,441,144     $ 14     $ 50,213     $ (2,148 )   $ (153 )   $ 47,980          

Net income

                          2,681                       2,681     $ 2,681  

Net unrealized gains on available-for-sale debt and marketable equity securities

                                  661               661       661  

Net unrealized gains on foreign currency translation adjustments

                                  3               3       3  

Net unrealized losses on derivatives

                                  (1,259 )             (1,259 )     (1,259 )

Cash dividends paid:

                                                             

Common

                          (1,158 )                     (1,158 )        

Preferred

                          (1 )                     (1 )        

Common stock issued under employee plans and related tax benefits

          16,446       1,060                       (218 )     842          

Common stock repurchased

          (12,153 )     (1,061 )     88                       (973 )        

Conversion of preferred stock

    (1 )   50       1                               —            
   


 

 


 


 


 


 


 


Balance, March 31, 2004

  $ 53     1,445,487     $ 14     $ 51,823     $ (2,743 )   $ (371 )   $ 48,776     $ 2,086  
   


 

 


 


 


 


 


 



(1) At March 31, 2004 and December 31, 2003, Accumulated Other Comprehensive Income (Loss) included net unrealized gains (losses) on available-for-sale debt and marketable equity securities of $591 and $(70), respectively; net unrealized losses on foreign currency translation adjustments of $163 and $166, respectively; and net unrealized losses on derivatives of $3,067 and $1,808, respectively.

 

See accompanying notes to consolidated financial statements.

 

4


Bank of America Corporation and Subsidiaries

 

Consolidated Statement of Cash Flows

 

    

Three Months

Ended March 31


 

(Dollars in millions)


   2004

    2003

 

Operating activities

                

Net income

   $ 2,681     $ 2,424  

Reconciliation of net income to net cash provided by (used in) operating activities:

                

Provision for credit losses

     624       833  

Gains on sales of debt securities

     (495 )     (273 )

Depreciation and premises improvements amortization

     209       224  

Amortization of intangibles

     54       54  

Deferred income tax benefit

     (66 )     (94 )

Net increase in trading and hedging instruments

     (10,471 )     (6,854 )

Net increase in other assets

     (3,614 )     (7,042 )

Net decrease in accrued expenses and other liabilities

     (8,252 )     (711 )

Other operating activities, net

     3,275       590  
    


 


Net cash used in operating activities

     (16,055 )     (10,849 )
    


 


Investing activities

                

Net (increase) decrease in time deposits placed and other short-term investments

     (510 )     1,290  

Net (increase) decrease in federal funds sold and securities purchased under agreements to resell

     3,435       (4,931 )

Proceeds from sales of available-for-sale debt securities

     11,460       27,258  

Proceeds from maturities of available-for-sale debt securities

     1,889       6,847  

Purchases of available-for-sale debt securities

     (84,978 )     (41,280 )

Proceeds from maturities of held-to-maturity debt securities

     5       99  

Proceeds from sales of loans and leases

     876       9,182  

Other changes in loans and leases, net

     (6,133 )     (7,110 )

Purchases and originations of mortgage banking assets

     (236 )     (359 )

Net purchases of premises and equipment

     (249 )     (150 )

Proceeds from sales of foreclosed properties

     49       12  

Investment in unconsolidated subsidiary

     —         (1,600 )

Acquisition of business activities, net

     (15 )     (71 )

Other investing activities, net

     787       586  
    


 


Net cash used in investing activities

     (73,620 )     (10,227 )
    


 


Financing activities

                

Net increase in deposits

     21,479       8,718  

Net increase in federal funds purchased and securities sold under agreements to repurchase

     37,388       7,897  

Net increase in commercial paper and other short-term borrowings

     22,143       4,495  

Proceeds from issuance of long-term debt and trust preferred securities

     7,558       4,578  

Retirement of long-term debt and trust preferred securities

     (2,507 )     (3,051 )

Proceeds from issuance of trust preferred securities

                

Proceeds from issuance of common stock

     985       752  

Common stock repurchased

     (973 )     (1,260 )

Cash dividends paid

     (1,159 )     (962 )

Other financing activities, net

     (23 )     (32 )
    


 


Net cash provided by financing activities

     84,891       21,135  
    


 


Effect of exchange rate changes on cash and cash equivalents

     (4 )     37  
    


 


Net increase (decrease) in cash and cash equivalents

     (4,788 )     96  

Cash and cash equivalents at January 1

     27,084       24,973  
    


 


Cash and cash equivalents at March 31

   $ 22,296     $ 25,069  
    


 


 

There were no net transfers of loans and leases from loans held for sale (included in Other assets) to the loan portfolio for Asset and Liability Management (ALM) purposes for the three months ended March 31, 2004. Net transfers of loans and leases from loans held for sale (included in Other assets) to the loan portfolio for ALM purposes amounted $3,621 for the three months ended March 31, 2003.

 

See accompanying notes to consolidated financial statements.

 

5


Bank of America Corporation and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Bank of America Corporation and its subsidiaries (the Corporation) through its banking and nonbanking subsidiaries, provide a diverse range of financial services and products throughout the United States and in selected international markets. At March 31, 2004, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA).

 

Note 1 – Summary of Significant Accounting Principles

 

Principles of Consolidation and Basis of Presentation

 

The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. 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 presentation.

 

Recently Issued Accounting Pronouncements

 

In December 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (Revised December 2003) “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R). FIN 46R is an update of FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46) and contains different implementation dates based on the types of entities subject to the standard and based on whether a company has adopted FIN 46. The Corporation adopted FIN 46R as of March 31, 2004. Adoption of this rule did not have a material impact on the Corporation’s results of operations or financial condition. For additional information on VIEs, see Note 6 of the consolidated financial statements.

 

6


Stock-based Compensation

 

In accordance with Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123,” (SFAS 148), the Corporation provides disclosures as if the Corporation had adopted the fair value-based method of measuring all outstanding employee stock options during the three months ended March 31, 2004 and 2003 as indicated in the following table. The prospective method of accounting for stock options that the Corporation has elected to follow, as allowed by SFAS 148, recognizes the impact of only newly issued employee stock options. The following table presents the effect on net income and earnings per common share had the fair value-based method been applied to all outstanding and unvested awards for the three months ended March 31, 2004 and 2003.

 

    

Three Months Ended

March 31


 

(Dollars in millions, except per share data)


   2004

    2003

 

Net income (as reported)

   $ 2,681     $ 2,424  

Stock-based employee compensation expense recognized during period, net of related tax effects

     35       17  

Stock-based employee compensation expense determined under fair value-based method, net of related tax effects(1)

     (54 )     (76 )
    


 


Pro forma net income

   $ 2,662     $ 2,365  
    


 


As reported

                

Earnings per common share

   $ 1.86     $ 1.62  

Diluted earnings per common share

     1.83       1.59  

Pro forma

                

Earnings per common share

     1.85       1.58  

Diluted earnings per common share

     1.82       1.55  
    


 



(1) Includes all awards granted, modified or settled for which the fair value was required to be measured under SFAS 123, except restricted stock. Restricted stock expense, included in Net income, for the three months ended March 31, 2004 and 2003 was $64 and $87, respectively.

 

For additional information on recently issued accounting pronouncements and other significant accounting principles, see Note 1 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

Note 2 - Merger-related Activity

 

Pursuant to the Agreement and Plan of Merger, dated October 27, 2003, by and between the Corporation and FleetBoston Financial Corporation (FleetBoston) (the Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of FleetBoston on April 1, 2004 (the Merger). FleetBoston’s results of operations will be included in the Corporation’s results beginning April 1, 2004.

 

As provided by the Merger Agreement, approximately 1.068 billion shares of FleetBoston common stock were exchanged for approximately 593 million shares of the Corporation’s common stock. This represents approximately 29 percent of the Corporation’s outstanding common stock. FleetBoston shareholders also received cash of $4 million instead of any fractional shares of the Corporation’s common stock that would have otherwise been issued on April 1, 2004. Holders of FleetBoston preferred stock received 1.1 million shares of the Corporation’s preferred stock. The Corporation’s preferred stock that was exchanged was valued using the book value of FleetBoston preferred stock. The depositary shares underlying the FleetBoston preferred stock, each representing a one-fifth interest in the FleetBoston preferred stock prior to the Merger, now represent a one-fifth interest in a share of the Corporation’s preferred stock. FleetBoston shares in the amount of 15.7 million that were previously held by the Corporation were cancelled.

 

7


The Merger is being accounted for in accordance with SFAS No. 141 “Business Combinations” (SFAS 141). Accordingly, the purchase price was preliminarily allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the Merger date as summarized below. The final allocation of the purchase price will be determined after completion of a final analysis to determine the fair values of FleetBoston’s tangible, and identifiable intangible assets and liabilities and final decisions regarding integration activities.

 

(Dollars in millions)


         

Purchase price

             

FleetBoston common stock exchanged (in thousands)

     1,068,335       

Exchange ratio

     0.5553       
    

      

Total shares of the Corporation’s common stock exchanged (in thousands)

     593,246       

Purchase price per share of the Corporation’s common stock(1)

   $ 76.88       
    

      

Total value of the Corporation’s common stock exchanged

          $ 45,609

FleetBoston preferred stock converted to the Corporation’s preferred stock

            271

Fair value of outstanding stock options, direct acquisition costs and the effect of FleetBoston shares already owned by the Corporation

            1,354
           

Total purchase price

          $ 47,234

Estimated fair value of net assets acquired

            14,161
           

Estimated goodwill resulting from the Merger

          $ 33,073
           


(1) The value of the shares of common stock exchanged with FleetBoston shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, October 27, 2003, the date of the Merger Agreement.

 

Note 3—Trading Account Assets and Liabilities

 

The Corporation engages in a variety of trading–related activities that are either for clients or its own account.

 

The fair values of the components of trading account assets and liabilities at March 31, 2004 and December 31, 2003 were:

 

(Dollars in millions)


  

March 31

2004


  

December 31

2003


Trading account assets

             

U.S. government and agency securities

   $ 20,272    $ 16,073

Corporate securities, trading loans, and other

     26,534      25,647

Equity securities

     11,310      11,445

Mortgage trading loans and asset-backed securities

     10,102      8,221

Foreign sovereign debt

     6,786      7,161
    

  

Total

   $ 75,004    $ 68,547
    

  

Trading account liabilities

             

U.S. government and agency securities

   $ 9,506    $ 7,304

Equity securities

     8,687      8,863

Corporate securities, trading loans, and other

     6,126      5,379

Foreign sovereign debt

     2,986      5,276

Mortgage trading loans and asset-backed securities

     97      22
    

  

Total

   $ 27,402    $ 26,844
    

  

 

8


Note 4—Derivatives

 

Credit risk associated with derivatives is measured as the fair value should the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts assuming no recoveries of underlying collateral. A detailed discussion of derivative trading activities and the ALM process is presented in Note 6 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

The following table presents the contract/notional and credit risk amounts at March 31, 2004 and December 31, 2003 of the Corporation’s derivative positions held for trading and hedging purposes. These derivative positions are primarily executed in the over-the-counter market. The credit risk amounts presented in the following table do not consider the value of any collateral held but take into consideration the effects of legally enforceable master netting agreements. The Corporation held $21.3 billion of collateral on derivative positions, of which $15.8 billion could be applied against credit risk at March 31, 2004.

 

Derivatives (1)

 

     March 31, 2004

   December 31, 2003

(Dollars in millions)


   Contract/
Notional


   Credit
Risk


   Contract/
Notional


   Credit
Risk


Interest rate contracts

                           

Swaps

   $ 9,285,606    $ 16,184    $ 8,873,600    $ 14,893

Futures and forwards

     2,415,153      182      2,437,907      633

Written options

     845,388      —        1,174,014      —  

Purchased options

     996,542      3,556      1,132,486      3,471

Foreign exchange contracts

                           

Swaps

     262,394      4,428      260,210      4,473

Spot, futures and forwards

     926,894      2,926      775,105      4,202

Written options

     154,124      —        138,474      —  

Purchased options

     146,445      455      133,512      669

Equity contracts

                           

Swaps

     25,280      438      30,850      364

Futures and forwards

     4,162      —        3,234      —  

Written options

     26,695      —        25,794      —  

Purchased options

     25,409      5,552      24,119      5,370

Commodity contracts

                           

Swaps

     12,776      1,964      15,491      1,554

Futures and forwards

     6,016      —        5,726      —  

Written options

     9,228      —        11,695      —  

Purchased options

     5,323      386      7,223      294

Credit derivatives

     167,109      417      136,788      584
    

  

  

  

Total derivative assets

          $ 36,488           $ 36,507
    

  

  

  


(1) Includes both long and short derivative positions.

 

The average fair value of derivative assets for the three months ended March 31, 2004 and 2003 was $37.0 billion and $35.2 billion, respectively. The average fair value of derivative liabilities for the three months ended March 31, 2004 and 2003 was $25.1 billion and $23.6 billion, respectively.

 

Fair Value and Cash Flow Hedges

 

The Corporation uses various types of interest rate and foreign currency exchange rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates and exchange rates. The Corporation also uses these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and anticipated transactions. During the next 12 months, net gains on derivative instruments included in accumulated OCI, of approximately $295 million (pre-tax) are expected to be reclassified into earnings. These net gains reclassified into earnings are expected to increase income or decrease expense on the respective hedged items.

 

9


The following table summarizes certain information related to the Corporation’s hedging activities for the three months ended March 31, 2004 and 2003.

 

     Three Months Ended
March 31


 

(Dollars in millions)


   2004

    2003

 

Fair value hedges(1)

                

Hedge ineffectiveness recognized in earnings

   $       2     $ —    

Net gain (loss) excluded from assessment of effectiveness

     (4 )     (79 )

Cash flow hedges

                

Hedge ineffectiveness recognized in earnings(2)

     49       15  

Net gain excluded from assessment of effectiveness

     —         —    

Net investment hedges

                

Losses included in foreign currency translation adjustments within Accumulated other comprehensive income

     (2 )     (41 )

(1) Included in interest income in the Consolidated Statement of Income.
(2) Included in Mortgage banking income in the Consolidated Statement of Income.

 

 

Note 5—Outstanding Loans and Leases, and Allowance for Credit Losses

 

Outstanding loans and leases at March 31, 2004 and December 31, 2003 were:

 

(Dollars in millions)


  

March 31

2004


  

December 31

2003


Commercial - domestic

   $ 96,148    $ 96,644

Commercial - foreign

     14,513      15,293

Commercial real estate - domestic

     19,545      19,043

Commercial real estate - foreign

     317      324
    

  

Total commercial(1)

     130,523      131,304
    

  

Residential mortgage

     142,755      140,513

Home equity lines

     24,946      23,859

Direct/Indirect consumer

     34,451      33,415

Consumer finance

     5,202      5,589

Credit card

     36,087      34,814

Foreign consumer

     2,004      1,969
    

  

Total consumer(2)

     245,445      240,159
    

  

Total

   $ 375,968    $ 371,463
    

  


(1) Includes lease financing of $9,291 and $9,692 at March 31, 2004 and December 31, 2003, respectively.
(2) Includes lease financing of $1,274 and $1,684 at March 31, 2004 and December 31, 2003, respectively.

 

10


The following table presents the recorded investment in specific loans, without consideration to the specific component of the allowance for loan and lease losses, that were considered individually impaired in accordance with SFAS No. 114 “Accounting by Creditors for Impairment of a Loan,” (SFAS 114) at March 31, 2004 and December 31, 2003. SFAS 114 impairment includes performing troubled debt restructurings, and excludes all commercial leases.

 

(Dollars in millions)


  

March 31

2004


  

December 31

2003


Commercial - domestic

   $ 1,239    $ 1,404

Commercial - foreign

     333      581

Commercial real estate - domestic

     113      151

Commercial real estate - foreign

     2      2
    

  

Total impaired loans

   $ 1,687    $ 2,138
    

  

 

At March 31, 2004 and December 31, 2003, nonperforming loans and leases, including impaired loans, totaled $2.4 billion and $2.9 billion, respectively. In addition, included in Other assets was $82 million and $202 million of nonperforming assets at March 31, 2004 and December 31, 2003, respectively. Foreclosed properties amounted to $131 million and $148 million at March 31, 2004 and December 31, 2003, respectively.

 

The following table summarizes the changes in the allowance for credit losses for the three months ended March 31, 2004 and 2003:

 

    

Three Months Ended

March 31


 

(Dollars in millions)


   2004

    2003

 

Allowance for loan and lease losses, January 1

   $ 6,163     $ 6,358  
    


 


Loans and leases charged off

     (893 )     (984 )

Recoveries of loans and leases previously charged off

     173       151  
    


 


Net charge-offs

     (720 )     (833 )
    


 


Provision for loan and lease losses

     639       894  

Other, net

     (2 )     2  
    


 


Allowance for loan and lease losses, March 31

   $ 6,080     $ 6,421  
    


 


Reserve for unfunded lending commitments, January 1

   $ 416     $ 493  

Provision for unfunded lending commitments

     (15 )     (61 )
    


 


Reserve for unfunded lending commitments, March 31

   $ 401     $ 432  
    


 


Total

   $ 6,481     $ 6,853  
    


 


 

Note 6—Special Purpose Financing Entities

 

Securitizations

 

The Corporation securitizes assets and may retain a portion or all of the securities, subordinated tranches, interest-only strips and, in some cases, a cash reserve account, all of which are considered retained interests in the securitized assets. Those assets may be serviced by the Corporation or by third parties to whom the servicing has been sold.

 

Variable Interest Entities

 

In December 2003, the FASB issued FIN 46R that addresses VIEs. FIN 46R is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the standard and based on whether a

 

11


company has adopted FIN 46. The Corporation adopted FIN 46 early in July 2003 and adopted FIN 46R as of March 31, 2004. As a result of the adoption of FIN 46R, there was no material impact on the Corporation’s results of operations or financial condition. At March 31, 2004, the consolidated assets and liabilities of one multi-seller asset-backed commercial paper conduit were reflected in Available-for-sale debt securities, Other assets, and Commercial paper and other short-term borrowings in the Global Corporate and Investment Banking business segment. At March 31, 2004, the Corporation held $5.1 billion of assets of this entity while the Corporation’s maximum loss exposure associated with this entity including unfunded lending commitments was approximately $5.6 billion.

 

Additionally, the Corporation had significant involvement with other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns, or both. These entities facilitate client transactions, and the Corporation typically functions as administrator for these entities and provides either liquidity and letters of credit or derivatives to the VIE. The Corporation typically obtains variable interests in these types of entities at the inception of the transaction. Total assets of these entities at March 31, 2004 and December 31, 2003 were approximately $33.7 billion and $36.9 billion, respectively; revenues associated with administration, liquidity, letters of credit and other services were approximately $49 million and $50 million for the three months ended March 31, 2004 and 2003. At March 31, 2004 and December 31, 2003, the Corporation’s maximum loss exposure associated with these VIEs was approximately $29.4 billion and $28.7 billion, respectively, which is net of amounts syndicated.

 

Additionally, the Corporation had contractual relationships with other VIEs that engaged in leasing or lending activities and were consolidated by the Corporation prior to FIN 46. The amount of assets of these entities at March 31, 2004 and December 31, 2003 was $2.0 billion and $1.5 billion, respectively, and the Corporation’s maximum loss exposure was $1.7 billion and $1.3 billion, respectively.

 

Management does not believe losses resulting from its involvement with the entities discussed above will be material. See Notes 1 and 9 of the Corporation’s 2003 Annual Report for additional discussion of special purpose financing entities.

 

Note 7—Commitments and Contingencies

 

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those recorded on the Corporation’s balance sheet. For additional information on commitments and contingencies, see Note 13 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

Credit Extension Commitments

 

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit (SBLCs) and commercial letters of credit to meet the financing needs of its customers. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $11.0 billion and $10.4 billion at March 31, 2004 and December 31, 2003, respectively.

 

(Dollars in millions)


  

March 31

2004


  

December 31

2003


Loan commitments(1)

   $ 218,080    $ 211,781

Standby letters of credit and financial guarantees

     29,968      31,150

Commercial letters of credit

     3,050      3,260
    

  

Legally binding commitments

     251,098      246,191

Credit card lines

     97,013      93,771
    

  

Total

   $ 348,111    $ 339,962
    

  


(1) Equity commitments of $1,575 and $1,678 related to obligations to fund existing equity investments were included in loan commitments at March 31, 2004 and December 31, 2003.

 

12


Other Commitments

 

When-issued securities are commitments to purchase or sell securities during the time period between the announcement of a securities offering and the issuance of those securities. Changes in market price between commitment date and issuance are reflected in trading account profits. At March 31, 2004, the Corporation had commitments to purchase and sell when-issued securities of $206.2 billion and $217.3 billion, respectively. At December 31, 2003, the Corporation had commitments to purchase and sell when-issued securities of $155.5 billion and $145.8 billion, respectively.

 

Interest rate lock commitments associated with mortgages are commitments to extend credit at a specified interest rate and are recorded as derivatives at fair value with changes in fair value recorded in the Consolidated Statement of Income.

 

At March 31, 2004 and December 31, 2003, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $13.4 billion and $13.7 billion, respectively, were not included in credit card line commitments in the previous table. The outstandings related to these charge cards were $251 million and $233 million, respectively.

 

At March 31, 2004, the Corporation had forward whole mortgage loan purchase commitments of $3.7 billion, of which $1.7 billion settled in April 2004, and $1.5 billion and $500 million will be settled in May and June 2004, respectively. At December 31, 2003, the Corporation had forward whole mortgage loan purchase commitments of $4.6 billion, all of which were settled in January and February 2004. At March 31, 2004 and December 31, 2003, the Corporation had no forward whole mortgage loan sale commitments. For further discussion on the ALM process, see Interest Rate Risk Management beginning on page 55.

 

Other Guarantees

 

The Corporation sells products that offer book value protection primarily to plan sponsors of ERISA-governed pension plans such as 401(k) plans, 457 plans, etc. At March 31, 2004 and December 31, 2003, the notional amount of these guarantees totaled $24.0 billion and $24.9 billion, respectively, with estimated maturity dates between 2005 and 2033. As of March 31, 2004 and December 31, 2003, the Corporation has not made a payment under these products, and management believes that the probability of payments under these guarantees is remote.

 

The Corporation also sells products that guarantee the return of principal to investors at a preset future date. At March 31, 2004 and December 31, 2003, the notional amount of these guarantees totaled $9.2 billion and $7.4 billion, respectively; however, at March 31, 2004 and December 31, 2003, the Corporation had not made a payment under these products, and management believes that the probability of payments under these guarantees is remote. These guarantees have various maturities ranging from 2005 to 2010.

 

The Corporation has entered into additional guarantee agreements, including lease end obligation agreements, partial credit guarantees on certain leases, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $1.4 billion and $1.3 billion at March 31, 2004 and December 31, 2003, respectively. The estimated maturity dates of these obligations are between 2004 and 2025. At March 31, 2004 and December 31, 2003, the Corporation had made no material payments under these products.

 

13


For additional information on recourse obligations related to mortgage loans sold and other guarantees related to securitizations, see Note 13 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

Litigation and Regulatory Matters

 

The following disclosure supplements the disclosure in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and Current Reports on Form 8-K filed since December 31, 2003.

 

Parmalat Finanziera SpA and its related entities (Parmalat)

 

On March 24, 2004, the Court of Milan, Italy rejected the Public Prosecutor’s Office of the Court of Milan, Italy’s request for an accelerated trial with respect to the Corporation for administrative liability arising out of the actions of several of the Bank’s former employees who allegedly committed illegal acts relating to Parmalat.

 

On March 25, 2004, the Public Prosecutor’s office filed notice of its intention to proceed with criminal charges against three former employees, Antonio Luzi, Luis Moncada, and Luca Sala, and with related charges for administrative liability against the Corporation in accordance with the normal rules of criminal procedure.

 

Mutual Fund Operations

 

The Corporation is continuing to respond to inquiries from federal and state banking, regulatory and law enforcement agencies concerning the mutual fund-related matters.

 

The lawsuits filed to date include putative class actions purportedly brought on behalf of shareholders in Nations Funds mutual funds, derivative actions brought on behalf of one or more Nations Funds mutual funds by Nations Funds shareholders, putative ERISA class actions brought on behalf of participants in the Corporation’s 401(k) plan, derivative actions brought against the Corporation’s directors on behalf of the Corporation by shareholders in the Corporation, derivative actions brought on behalf of third-party mutual funds by shareholders in those funds alleging the Corporation facilitated improper trading in those funds, and a private attorney general action brought under California law.

 

On February 20, 2004, the Judicial Panel on Multidistrict Litigation ordered that all actions pending in federal court with respect to alleged late trading or market timing in mutual funds be transferred to the United States District Court for the District of Maryland for coordinated pretrial proceedings.

 

On April 5, 2004, the New York Attorney General (the NYAG) unsealed an indictment against Theodore C. Siphol, III, a former employee of Banc of America Securities, LLC (BAS), a subsidiary of the Corporation. The indictment accuses Mr. Siphol of two counts of schemes to defraud, two counts of securities fraud, multiple counts of grand larceny, and multiple counts of falsifying business records in connection with alleged “late trading” by Canary Capital Partners, LLC, et al. of shares of Nations Funds and other mutual funds.

 

Paul J. Miller v. Bank of America, N.A.

 

Plaintiff filed a motion to preliminarily enjoin the Bank from continuing to engage in the practices at issue. The motion in the trial court remains pending.

 

D.E. Shaw Litigation

 

The D.E. Shaw class action settlement was consummated on April 16, 2004 and is now final in accordance with its terms.

 

FleetBoston Matters

 

The following matters have been previously reported by FleetBoston, which merged with and into the Corporation on April 1, 2004. The following disclosure supplements the disclosure in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. See Note 2 for more information on the Merger.

 

14


In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual outcome, timing or impact of pending matters will be; however, based on current knowledge, management does not believe that liabilities, if any, arising from pending litigation or regulatory matters, including the litigation and regulatory matters described below, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, but may be material to the Corporation’s operating results for any particular quarter.

 

Mutual Fund Operations

 

On February 24, 2004, the Securities and Exchange Commission (SEC) filed a civil action in the United States District Court for the District of Massachusetts against two FleetBoston subsidiaries, Columbia Management Advisors, Inc. and Columbia Funds Distributor, Inc. (the Columbia Subsidiaries), alleging that the Columbia Subsidiaries allowed certain customers to engage in short-term or excessive trading without disclosing this fact in the relevant fund prospectuses. The complaint alleged violations of federal securities laws and requested injunctive and monetary relief. A similar action was filed the same day in New York state court by the NYAG, claiming relief under New York state statutes.

 

On March 15, 2004, FleetBoston and its subsidiaries reached a settlement in principle with the NYAG and the SEC, agreeing, without admitting or denying wrongdoing, to (1) pay $70 million in disgorgement and $70 million in civil penalties; (2) the issuance of an order requiring the Columbia Subsidiaries to cease and desist from violations of the antifraud and other provisions of the federal securities laws, as well as the implementation of enhanced governance and compliance procedures; and (3) retain an independent consultant to review the Columbia Subsidiaries’ compliance, control and other policies and procedures. In addition, the agreement with the NYAG provides for reduction of mutual fund management fees of the Columbia funds by $80 million over five years.

 

FleetBoston is continuing to respond to inquiries from federal and state banking, regulatory and law enforcement agencies concerning the mutual fund-related matters.

 

Separately, putative class actions on behalf of persons who purchased or sold securities in Columbia funds during specified periods of time, derivative actions on behalf of various Columbia funds and trusts, and an individual Columbia fund shareholder action have been filed in the United States District Court for the District of Massachusetts and United States District Court for the Southern District of New York, alleging, among other things, violations of federal securities laws, the Investment Company Act of 1940, the Investment Advisors Act of 1940 and breaches of fiduciary duty in relation to alleged market timing in mutual funds. These actions have been noticed to the Judicial Panel on Multidistrict Litigation as related to those actions that have been transferred to the United States District Court for the District of Maryland for coordinated pretrial proceedings.

 

In Re Initial Public Offering Securities Litigation

 

Beginning in 2001, Robertson Stephens, Inc. (Robertson Stephens), an investment banking subsidiary of FleetBoston that ceased operations during 2002, and many other underwriters, as well as various issuers and their officers and directors, were named as defendants in purported class action lawsuits alleging violations of federal securities laws in connection with the underwriting of initial public offerings (IPOs). Robertson Stephens was named in many of the 309 purported class actions that have been consolidated in the United States District Court for the Southern District of New York. (BAS is also named as a defendant in some of the purported class actions.) The plaintiffs contend that the defendants violated the federal securities laws by failing to make certain required disclosures in prospectuses, by manipulating the prices of IPO securities in the aftermarkets through, among other things, alleged agreements with institutional investors receiving allocations to purchase additional shares in the aftermarket, and by disseminating false and misleading analyst reports. Robertson Stephens and other lead underwriters also have been named as defendants in class action lawsuits under the antitrust laws alleging that the underwriters conspired to manipulate the aftermarkets for the IPO securities and to extract anticompetitive fees in connection with the IPOs. Those antitrust lawsuits have been dismissed by the United States District Court for the Southern District of New York. Plaintiffs have appealed that decision.

 

15


Argentina Corralito Litigation and Related Matters

 

In December 2001, the Argentine government issued an order imposing limitations on the ability of FleetBoston bank customers in Argentina to withdraw funds from their deposit accounts in Argentine banks (the corralito). Since the corralito was issued, a large number of customers of FleetBoston Argentine operations (BankBoston Argentina) have filed complaints in a number of Argentine federal and provincial courts against BankBoston Argentina seeking to invalidate the corralito on constitutional grounds and withdraw their funds. The Argentine federal and provincial courts have ordered many of these deposits to be paid out at original dollar value during 2002, 2003, and the first quarter of 2004, resulting in losses for FleetBoston of approximately $363 million.

 

Fleet Specialist, Inc.

 

On March 30, 2004, Fleet Specialist and certain other specialist firms entered into agreements with the SEC and the New York Stock Exchange (the NYSE) to settle charges that the firms violated certain federal securities laws and NYSE rules in the course of their specialist trading activity. The settlement, which involves no admission or denial of wrongdoing, includes disgorgement and civil penalties for Fleet Specialist totaling approximately $59.1 million, a censure, cease and desist order, and certain undertakings, including the retention of an independent consultant to review compliance systems, policies, and procedures. The settlement does not resolve any potential regulatory charges against individuals. Separately, putative class action complaints have been filed in the United States District Court for the Southern District of New York against Fleet Specialist, FleetBoston, and other specialist firms (and their parent companies) on behalf of investors who traded stock on the NYSE between 1998 and 2003 and were allegedly disadvantaged by the improper practices of the specialist firms. Also, a putative class action complaint has been filed in California state court against certain specialist firms and individuals, including Fleet Specialist and certain of its officers, alleging violation of California state law in connection with the same alleged practices. The settlement with the SEC and NYSE, described above, does not resolve the putative class actions, although a portion of the payment is expected to be allocated to restitution for allegedly disadvantaged customers.

 

Note 8 - Shareholders’ Equity and Earnings Per Common Share

 

The change in Accumulated OCI includes pre-tax net unrealized losses related to available-for-sale debt and marketable equity securities, foreign currency translation adjustments, derivatives and other of $317 million and $1.4 billion for the three months ended March 31, 2004 and 2003, respectively. The change in Accumulated OCI also includes adjustments for gains (losses) in the Consolidated Statement of Income during the current period that had been included in Accumulated OCI in previous period ends. Pre-tax adjustments for gains included in the Consolidated Statement of Income for the three months ended March 31, 2004 and 2003 were $584 million and $130 million, respectively. The adjusted pre-tax net unrealized losses in Accumulated OCI was $901 million with a related income tax benefit of $306 million for the three months ended March 31, 2004 compared to $1.5 billion and $379 million, respectively, for the same period in 2003.

 

The Corporation has, from time to time, sold put options on its common stock to independent third parties. The put option program was designed to partially offset the cost of share repurchases. For additional information on the put option program, see Note 14 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

16


The calculation of earnings per common share and diluted earnings per common share for the three months ended March 31, 2004 and 2003 is presented below.

 

    

Three Months Ended

March 31


 

(Dollars in millions, except per share information; shares in thousands)


   2004

    2003

 

Earnings per common share

                

Net income

   $ 2,681     $ 2,424  

Preferred stock dividends

     (1 )     (1 )
    


 


Net income available to common shareholders

   $ 2,680     $ 2,423  
    


 


Average common shares issued and outstanding

     1,440,153       1,499,405  
    


 


Earnings per common share

   $ 1.86     $ 1.62  
    


 


Diluted earnings per common share

                

Net income available to common shareholders

   $ 2,680     $ 2,423  

Preferred stock dividends

     1       1  
    


 


Net income available to common shareholders and assumed conversions

   $ 2,681     $ 2,424  
    


 


Average common shares issued and outstanding

     1,440,153       1,499,405  

Dilutive potential common shares (1, 2)

     26,548       26,883  
    


 


Total diluted average common shares issued and outstanding

     1,466,701       1,526,288  
    


 


Diluted earnings per common share

   $ 1.83     $ 1.59  
    


 



(1) For the three months ended March 31, 2004 and 2003, average options to purchase 20 million and 35 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive.
(2) Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units and stock options.

 

Note 9 – Pension and Postretirement Plans

 

The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees, a number of noncontributory, nonqualified pension plans and postretirement health and life plans. A detailed discussion of these plans is provided in Note 16 of the consolidated financial statements of the Corporation’s 2003 Annual Report.

 

Net periodic benefit cost for the three months ended March 31, 2004 and 2003, included the following components:

 

     Qualified
Pension Plan


    Nonqualified
Pension Plans


   Postretirement
Health and
Life Plans


 
     Three Months
Ended
March 31


   

Three Months
Ended

March 31


  

Three Months
Ended

March 31


 

(Dollars in millions)


   2004

    2003

    2004

   2003

   2004

    2003

 

Components of net periodic benefit cost

                                              

Service cost

   $ 54     $ 49     $ 7    $ 6    $ 3     $ 3  

Interest cost

     130       129       11      9      17       17  

Expected return on plan assets

     (190 )     (184 )     —        —        (3 )     (4 )

Amortization of transition obligation

     —         —         —        —        8       8  

Amortization of prior service cost

     14       14       1      1      —         1  

Recognized net actuarial loss

     20       12       5      1      22       22  
    


 


 

  

  


 


Net periodic benefit cost

   $ 28     $ 20     $ 24    $ 17    $ 47     $ 47  
    


 


 

  

  


 


 

Contributions

 

The Corporation previously disclosed that it expected to contribute at least a combined $87 million to its Qualified Pension Plan, Nonqualified Pension Plans and Postretirement Health and Life Plans in 2004. At March 31, 2004, this estimate has not changed. At March 31, 2004, the Corporation had contributed $22 million to these plans.

 

 

17


Note 10 – Business Segment Information

 

The Corporation reports the results of its operations through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. Certain operating segments have been aggregated into a single business segment. The Corporation may periodically reclassify business segment results based on modifications to its management reporting and profitability measurement methodologies and changes in organizational alignment.

 

Consumer and Commercial Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. The segment also includes commercial lending and treasury management services primarily to middle market companies with annual revenue between $10 million and $500 million. Asset Management offers investment, fiduciary and comprehensive banking and credit expertise; asset management services to institutional clients, high-net-worth individuals and retail customers; and investment, securities and financial planning services to affluent and high-net-worth individuals. Global Corporate and Investment Banking provides capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for our corporate, commercial and institutional clients as well as traditional bank deposit and loan products, cash management and payment services to large corporations and institutional clients. Equity Investments includes Principal Investing, which is comprised of a diversified portfolio of investments in privately-held and publicly-traded companies at all stages, from start-up to buyout.

 

Corporate Other consists primarily of noninterest income (primarily from the sale of debt securities and whole loan mortgages) and noninterest expense associated with the ALM process and the results of certain consumer finance and commercial lending businesses that are being liquidated.

 

Total revenue includes net interest income on a fully taxable-equivalent basis and noninterest income. The net interest income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net interest income also reflects an allocation of net interest income generated by assets and liabilities used in the Corporation’s ALM process. The business segments’ Provision for credit losses is based on the corporate method.

 

Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing and item processing costs. Data processing costs are allocated to the segments based on equipment usage. Additionally, item processing costs are allocated to the segments based on the volume of items processed for each segment.

 

18


The following table presents results of operations, selected performance ratios and selected average balance sheet categories for the three months ended March 31, 2004 and 2003 for each business segment.

 

Business Segment Summary

 

For the three months ended March 31

 

     Total Corporation

    Consumer and
Commercial Banking (1)


    Asset Management (1)

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 5,970     $ 5,361     $ 4,534     $ 3,761     $ 214     $ 179  

Noninterest income

     3,717       3,693       2,095       2,300       455       407  
    


 


 


 


 


 


Total revenue

     9,687       9,054       6,629       6,061       669       586  

Provision for credit losses

     624       833       429       488       7       (4 )

Gains on sales of debt securities

     495       273       1       9       —         —    

Amortization of intangibles

     54       54       44       44       1       1  

Other noninterest expense

     5,363       4,671       3,225       2,981       581       375  
    


 


 


 


 


 


Income before income taxes

     4,141       3,769       2,932       2,557       80       214  

Income tax expense

     1,460       1,345       1,078       953       27       75  
    


 


 


 


 


 


Net income

   $ 2,681     $ 2,424     $ 1,854     $ 1,604     $ 53     $ 139  
    


 


 


 


 


 


Shareholder value added

   $ 1,405     $ 1,140     $ 1,269     $ 1,111     $ (27 )   $ 67  

Net interest yield (fully taxable-equivalent basis)

     3.22 %     3.52 %     4.88 %     4.74 %     3.37 %     3.09 %

Return on average equity

     22.16       19.92       32.38       32.87       7.18       20.93  

Efficiency ratio (fully taxable-equivalent basis)

     55.92       52.18       49.31       49.91       87.02       64.13  

Average:

                                                

Total loans and leases

   $ 374,077     $ 345,662     $ 197,681     $ 186,706     $ 24,430     $ 22,706  

Total assets

     849,625       713,780       396,683       344,438       27,439       25,186  

Total deposits

     425,075       385,760       326,485       295,504       14,925       13,030  

Common equity/Allocated equity

     48,632       49,343       23,028       19,785       2,966       2,688  
    


 


 


 


 


 


 

For the three months ended March 31

 

     Global Corporate and
Investment Banking (1)


    Equity Investments (1)

    Corporate Other

 

(Dollars in millions)


   2004

    2003

    2004

    2003

    2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 1,127     $ 1,254     $ (35 )   $ (37 )   $ 130     $ 204  

Noninterest income

     1,143       1,065       17       (70 )     7       (9 )
    


 


 


 


 


 


Total revenue

     2,270       2,319       (18 )     (107 )     137       195  

Provision for credit losses

     (23 )     272       —         1       211       76  

Gains (losses) on sales of debt securities

     (7 )     (14 )     —         —         501       278  

Amortization of intangibles

     7       7       1       1       1       1  

Other noninterest expense

     1,564       1,325       28       24       (35 )     (34 )
    


 


 


 


 


 


Income before income taxes

     715       701       (47 )     (133 )     461       430  

Income tax expense (benefit)

     252       241       (17 )     (48 )     120       124  
    


 


 


 


 


 


Net income (loss)

   $ 463     $ 460     $ (30 )   $ (85 )   $ 341     $ 306  
    


 


 


 


 


 


Shareholder value added

   $ 225     $ 173     $ (86 )   $ (142 )   $ 24     $ (69 )

Net interest yield (fully taxable-equivalent basis)

     1.64 %     2.23 %     n/m       n/m       n/m       n/m  

Return on average equity

     20.87       17.20       (5.68 )%     (16.48 )%     n/m       n/m  

Efficiency ratio (fully taxable-equivalent basis)

     69.22       57.43       n/m       n/m       n/m       n/m  

Average:

                                                

Total loans and leases

   $ 40,785     $ 56,543     $ 87     $ 434     $ 111,094     $ 79,273  

Total assets

     323,673       273,477       6,182       6,115       95,648       64,564  

Total deposits

     69,186       67,315       —         —         14,479       9,911  

Common equity/Allocated equity (2)

     8,917       10,855       2,093       2,103       11,628       13,912  
    


 


 


 


 


 



n/m = not meaningful

(1) There were no material intersegment revenues among the segments.
(2) Equity in Corporate Other represents equity of the Corporation not allocated to the business segments.

 

19


Reconciliations of the four business segments’ revenue and net income to consolidated totals follow:

 

    

Three Months Ended

March 31


 

(Dollars in millions)


   2004

    2003

 

Segments’ revenue

   $ 9,550     $ 8,859  

Adjustments:

                

Revenue associated with unassigned capital

     105       164  

ALM activities (1)

     (18 )     163  

Liquidating businesses

     84       110  

Fully taxable-equivalent basis adjustment

     (169 )     (152 )

Other

     (34 )     (242 )
    


 


Consolidated revenue

   $ 9,518     $ 8,902  
    


 


Segments’ net income

   $ 2,340     $ 2,118  

Adjustments, net of taxes:

                

Earnings associated with unassigned capital

     71       110  

ALM activities (1, 2)

     313       294  

Liquidating businesses

     (31 )     5  

Other

     (12 )     (103 )
    


 


Consolidated net income

   $ 2,681     $ 2,424  
    


 



(1) Includes whole mortgage loan sale gains for the three months ended March 31, 2003.
(2) Includes Gains on sales of debt securities of $338 and $186 for the three months ended March 31, 2004 and 2003, respectively.

 

The adjustments presented in the table above include consolidated income and expense amounts not specifically allocated to individual business segments.

 

20


Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as “expects,” “anticipates,” “believes,” “estimates” and other similar expressions or future or conditional verbs such as “will,” “should,” “would” and “could” are intended to identify such forward-looking statements. Readers of the Bank of America Corporation and its subsidiaries (the Corporation) Form 10-Q should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report as well as those discussed in the Corporation’s 2003 Annual Report. The statements are representative only as of the date they are made, and the Corporation undertakes no obligation to update any forward-looking statement.

 

Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: changes in general economic conditions and economic conditions in the geographic regions and industries in which the Corporation operates which may affect, among other things, the level of nonperforming assets, charge-offs and provision expense; changes in the interest rate environment which may reduce interest margins and impact funding sources; changes in foreign exchange rates; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial products including securities, loans, deposits, debt and derivative financial instruments and other similar financial instruments; political conditions and related actions by the United States military abroad which may adversely affect the Corporation’s businesses and economic conditions as a whole; liabilities resulting from litigation and regulatory investigations, including costs, expenses, settlements and judgments; changes in domestic or foreign tax laws, rules and regulations as well as Internal Revenue Service (IRS) or other governmental agencies’ interpretations thereof; various monetary and fiscal policies and regulations, including those determined by the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and state regulators; competition with other local, regional and international banks, thrifts, credit unions and other nonbank financial institutions; ability to grow core businesses; ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; mergers and acquisitions and their integration into the Corporation; decisions to downsize, sell or close units or otherwise change the business mix of the Corporation; and management’s ability to manage these and other risks.

 

21


The Corporation, headquartered in Charlotte, North Carolina, operates in 21 states and the District of Columbia and has offices located in 30 countries. The Corporation provides a diversified range of banking and certain nonbanking financial services and products both domestically and internationally through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. At March 31, 2004, the Corporation had $816.0 billion in assets and approximately 134,400 full-time equivalent employees. Notes to the consolidated financial statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Performance overview for the three months ended March 31, 2004 compared to the same period in 2003:

 

Net income totaled $2.7 billion, or $1.83 per diluted common share, 11 percent and 15 percent increases, respectively, from $2.4 billion, or $1.59 per diluted common share. The return on average common shareholders’ equity was 22 percent compared to 20 percent.

 

Within Consumer and Commercial Banking, customer satisfaction continued to increase, resulting in better retention and increased opportunities to deepen relationships with our customers. Highly satisfied customers, those who rate us a 9 or 10 on a 10- point scale, increased 11 percent. This equates to an increase of 1.4 million customers being highly satisfied with their banking experience.

 

Our active online banking customers reached 8.1 million, a 55 percent increase. Forty-seven percent of consumer households that hold checking accounts use online banking. Active bill pay customers increased 79 percent to 3.7 million. Active bill pay users paid $16.3 billion of bills compared to $9.6 billion.

 

Debit card purchase volumes grew 26 percent while consumer credit card purchases increased 24 percent. Total managed card revenue, including interest income, increased 23 percent. Average managed consumer credit card receivables grew 26 percent due to new account growth from direct marketing programs and the branch network.

 

Within Asset Management, total assets under management increased 14 percent to $337.2 billion at March 31, 2004 led by Marsico Capital Management, LLC’s (Marsico) assets under management, which increased to $33.2 billion at March 31, 2004 compared to $16.5 billion at March 31, 2003.

 

Global Corporate and Investment Banking gained market share in areas such as high-yield debt and leveraged loans during the quarter. Continued improvements in credit quality in our large corporate portfolio drove the $295 million, or 108 percent, decrease in provision for credit losses in Global Corporate and Investment Banking. Net charge-offs in the large corporate portfolio continued at their recent low levels, decreasing 65 percent from a year ago. In addition, large corporate nonperforming assets dropped $309 million, or 24 percent from year-end levels.

 

Financial highlights for the three months ended March 31, 2004 compared to the same period in 2003:

 

Net interest income on a fully taxable-equivalent basis increased $609 million to $6.0 billion. This increase was driven by higher asset and liability management (ALM) portfolio levels (consisting of securities and whole loan mortgages), higher consumer and middle market commercial loan levels, one more day of activity and higher core deposit funding levels. Partially offsetting these increases were reductions in the large corporate and foreign loan balances, and the continued runoff of previously exited consumer businesses, lower mortgage warehouse levels and a decrease in the contribution of trading-related instruments. The net interest yield on a fully taxable-equivalent basis declined 30 basis points (bps) to 3.22 percent due to the negative impact of increases in lower-yielding trading-related assets and our ALM portfolio repositioning partially offset by higher levels of higher-yielding consumer loans.

 

Noninterest income increased $24 million to $3.7 billion, due to increases in (i) Equity investment gains of $201 million due to higher cash gains on both Principal Investing and Parent Company investments, (ii) Card income of $114 million due to increased fees and interchange income, (iii) Investment and brokerage services of $74 million due to higher volumes related to increased market activity and (iv) Service charges of $62 million caused by account growth and seasonality; offset by decreases in (i) Mortgage banking income of $196 million caused by a decrease in the sales of loans to the secondary market, (ii) Other income of $146 million related to the reduction of

 

22


whole loan sale gains during the quarter and (iii) trading account profits of $111 million driven by the increase in the writedown of our mortgage banking assets as compared to a year ago.

 

Gains on sales of debt securities were $495 million and $273 million, respectively, as we continued to reposition the ALM portfolio in response to interest rate fluctuations.

 

The provision for credit losses declined $209 million to $624 million driven by a reduction in the provision for the large corporate portfolio of $295 million partially offset by an increase in the provision for credit losses in the held consumer credit card loan portfolio of $87 million, primarily a function of growth and continued seasoning in the portfolio. Nonperforming assets decreased $2.5 billion to $2.5 billion, or 0.66 percent of loans, leases and foreclosed properties at March 31, 2004 compared to 1.46 percent at March 31, 2003. This decline was driven by reduced levels of inflows to nonperforming assets, loan sales, increased returns to performing status and charge-offs. The decrease in nonperforming assets was concentrated in the commercial portfolio.

 

Noninterest expense increased $692 million, driven by higher Personnel costs of $303 million and increased Other general operating expenses of $278 million. Higher Personnel costs resulted from increased revenue-related incentives of $108 million and higher costs of employee benefits of $93 million. The increase in Other general operating expenses was related to the $375 million mutual fund settlement entered into during the quarter. This settlement amount was offset by a $90 million reserve to produce a net settlement expense of $285 million. This net settlement expense was divided equally between Asset Management and Global Corporate and Investment Banking for management reporting purposes. The financial impact was approximately $0.16 per diluted common share in the first quarter. As part of the mutual fund settlement, we agreed to reduce future fees by $16 million per year for five years for a total of $80 million. For more information on the mutual fund settlement see Note 7 of the consolidated financial statements.

 

Income tax expense was $1.3 billion reflecting an estimated effective tax rate of 32.5 percent compared to $1.2 billion and 33.0 percent, respectively.

 

On April 1, 2004, we completed our merger with FleetBoston Financial Corporation (FleetBoston) (the Merger) after obtaining final shareholder and regulatory approvals. FleetBoston is a diversified financial services company providing a comprehensive array of financial solutions to customers both domestically and internationally. We expect the Merger to create a banking institution with a truly national scope, with an increased presence in America’s growth and wealth markets and leading market shares throughout the Northeast, Southeast, Southwest, Midwest and West regions of the United States. For more information on the Merger see Note 2 of the consolidated financial statements.

 

23


Table 1

 

Selected Quarterly Financial Data (1)

 

     2004 Quarter

    2003 Quarters

 

(Dollars in millions, except per share information)


   First

    Fourth

    Third

    Second

    First

 

Income statement

                                        

Net interest income

   $ 5,801     $ 5,586     $ 5,304     $ 5,365     $ 5,209  

Noninterest income

     3,717       4,049       4,446       4,262       3,693  

Total revenue

     9,518       9,635       9,750       9,627       8,902  

Provision for credit losses

     624       583       651       772       833  

Gains on sales of debt securities

     495       139       233       296       273  

Noninterest expense

     5,417       5,288       5,077       5,065       4,725  

Income before income taxes

     3,972       3,903       4,255       4,086       3,617  

Income tax expense

     1,291       1,177       1,333       1,348       1,193  

Net income

     2,681       2,726       2,922       2,738       2,424  

Average common shares issued and outstanding (in thousands)

     1,440,153       1,463,247       1,490,103       1,494,094       1,499,405  

Average diluted common shares issued and outstanding (in thousands)

     1,466,701       1,489,481       1,519,641       1,523,306       1,526,288  
    


 


 


 


 


Performance ratios

                                        

Return on average assets

     1.27 %     1.39 %     1.48 %     1.42 %     1.38 %

Return on average common shareholders’ equity

     22.16       22.42       23.74       21.86       19.92  

Total equity to total assets (period end)

     5.98       6.52       6.84       6.63       7.36  

Total average equity to total average assets

     5.73       6.19       6.22       6.49       6.92  

Dividend payout

     43.21       42.70       40.85       35.06       39.64  
    


 


 


 


 


Per common share data

                                        

Earnings

   $ 1.86     $ 1.86     $ 1.96     $ 1.83     $ 1.62  

Diluted earnings

     1.83       1.83       1.92       1.80       1.59  

Dividends paid

     0.80       0.80       0.80       0.64       0.64  

Book value

     33.71       33.26       33.83       34.06       33.38  
    


 


 


 


 


Average balance sheet

                                        

Total loans and leases

   $ 374,077     $ 371,071     $ 357,288     $ 350,279     $ 345,662  

Total assets

     849,625       780,534       786,153       775,084       713,780  

Total deposits

     425,075       418,840       414,569       405,307       385,760  

Long-term debt (2)

     78,852       70,596       66,788       68,927       67,399  

Common shareholders’ equity

     48,632       48,238       48,816       50,212       49,343  

Total shareholders’ equity

     48,686       48,293       48,871       50,269       49,400  
    


 


 


 


 


Capital ratios (period end)

                                        

Risk-based capital:

                                        

Tier 1

     7.73 %     7.85 %     8.25 %     8.08 %     8.20 %

Total

     11.46       11.87       12.17       11.95       12.29  

Leverage

     5.43       5.73       5.95       5.92       6.24  
    


 


 


 


 


Market price per share of common stock

                                        

Closing

   $ 80.98     $ 80.43     $ 78.04     $ 79.03     $ 66.84  

High closing

     82.76       82.50       83.53       79.89       72.48  

Low closing

     78.30       72.85       74.87       68.00       65.63  
    


 


 


 


 



(1) Certain prior period amounts have been reclassified to conform to current period presentation.
(2) Includes long-term debt related to trust preferred securities (Trust Securities).

 

Supplemental Financial Data

 

        In managing our business, we use certain performance measures and ratios not defined in accounting principles generally accepted in the United States (GAAP), including shareholder value added (SVA). We also calculate certain measures, such as net interest income, core net interest income, net interest yield and the efficiency ratio, on a fully taxable-equivalent basis. Other companies may define or calculate supplemental financial data differently. See Tables 2 and 3 for supplemental financial data for the three months ended March 31, 2004 and 2003.

 

SVA is a key measure of performance not defined by GAAP that is used in managing our growth strategy orientation and strengthening our focus on generating long-term growth and shareholder value. SVA is used in measuring the performance of our different business units and is an integral component for allocating resources. Each business segment has a goal for growth in SVA reflecting the individual segment’s business and customer strategy. Investment resources and initiatives are aligned with these SVA growth goals during the planning and forecasting process. Investment, relationship and profitability models all have SVA as a key measure to support the implementation of SVA growth goals. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. Cash basis earnings is defined as net income adjusted to exclude amortization of intangibles. The

 

24


charge for the use of capital is calculated by multiplying 11 percent (management’s estimate of the shareholders’ minimum required rate of return on capital invested) by average total common shareholders’ equity at the corporate level and by average allocated equity at the business segment level. Equity is allocated to the business segments using a risk-adjusted methodology for each segment’s credit, market and operational risks. The nature of these risks is discussed further beginning on page 41. SVA increased 23 percent to $1.4 billion for the three months ended March 31, 2004 compared to the comparable 2003 period, due to both the $257 million increase in cash basis earnings and the $8 million effect of lower levels of allocated equity. For additional discussion of SVA, see Business Segment Operations beginning on page 30.

 

We review net interest income on a fully taxable-equivalent basis, which is a performance measure used by management in operating the business that we believe provides investors with a more accurate picture of the interest margin for comparative purposes. In this presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a fully taxable-equivalent basis is also used in the calculation of the efficiency ratio and the net interest yield. The efficiency ratio, which is calculated by dividing noninterest expense by total revenue, measures how much it costs to produce one dollar of revenue. Net interest income on a fully taxable-equivalent basis is also used in our business segment reporting.

 

Table 2

 

Supplemental Financial Data

 

    

Three Months Ended

March 31


 

(Dollars in millions)


   2004

    2003

 

Shareholder value added

                

Net income

   $ 2,681     $ 2,424  

Amortization of intangibles

     54       54  
    


 


Cash basis earnings

     2,735       2,478  

Capital charge

     (1,330 )     (1,338 )
    


 


Shareholder value added

   $ 1,405     $ 1,140  
    


 


Fully taxable-equivalent basis data

                

Net interest income

   $ 5,970     $ 5,361  

Total revenue

     9,687       9,054  

Net interest yield

     3.22 %     3.52 %

Efficiency ratio

     55.92       52.18  
    


 


 

Additionally, we review core net interest income, which adjusts reported net interest income on a fully taxable-equivalent basis for the impact of Global Corporate and Investment Banking trading-related activities and loans that we originated and sold into revolving credit card and commercial securitizations. Noninterest income, rather than net interest income and provision for credit losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. We evaluate our trading results by combining trading-related net interest income with trading account profits, as discussed in Trading-related Revenue on page 29 and in the Global Corporate and Investment Banking business segment section beginning on page 33, as trading strategies are evaluated based on total revenue.

 

25


Table 3 below provides a reconciliation of net interest income on a fully taxable-equivalent basis presented in Table 4 to core net interest income for the three months ended March 31, 2004 and 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Table 3

 

Core Net Interest Income

 

    

Three Months Ended

March 31


 

(Dollars in millions)


   2004

    2003

 

Net interest income

                

As reported (fully taxable-equivalent basis)

   $ 5,970     $ 5,361  

Trading-related net interest income

     (577 )     (612 )

Impact of revolving securitizations

     38       98  
    


 


Core net interest income

   $ 5,431     $ 4,847  
    


 


Average earning assets

                

As reported

   $ 743,711     $ 613,092  

Trading-related earning assets

     (218,789 )     (158,392 )

Impact of revolving securitizations

     1,553       4,477  
    


 


Core average earning assets

   $ 526,475     $ 459,177  
    


 


Net interest yield on earning assets

                

As reported (fully taxable-equivalent basis)

     3.22 %     3.52 %

Impact of trading-related activities

     0.90       0.68  

Impact of revolving securitizations

     0.01       0.04  
    


 


Core net interest yield on earning assets

     4.13 %     4.24 %
    


 


 

Core net interest income increased $584 million for the three months ended March 31, 2004 from the comparable 2003 period as higher ALM portfolio levels, higher consumer and middle market commercial loan levels, one more day of activity and higher core deposit funding levels were partially offset by reductions in the large corporate and foreign loan balances and the continued runoff of previously exited consumer businesses, and lower mortgage warehouse levels.

 

Core average earning assets increased $67.3 billion for the three months ended March 31, 2004 from the comparable 2003 period primarily due to higher levels of residential mortgages, credit card loans, and debt securities, partially offset by reductions in the levels of commercial loans.

 

The core net interest yield decreased 11 bps for the three months ended March 31, 2004 from the comparable 2003 period mainly due to the negative impact of declining rates net of ALM repositioning.

 

 

26


Table 4

 

Quarterly Average Balances and Interest Rates - Fully Taxable-equivalent Basis

 

     First Quarter 2004

    Fourth Quarter 2003

 

(Dollars in millions)


  

Average

Balance


  

Interest

Income/
Expense


   Yield/
Rate


   

Average

Balance


  

Interest

Income/
Expense


   Yield/
Rate


 

Earning assets

                                        

Time deposits placed and other short-term investments

   $ 12,268    $ 48    1.57 %   $ 11,231    $ 49    1.71 %

Federal funds sold and securities purchased under agreements to resell

     113,761      434    1.53       96,713      506    2.08  

Trading account assets

     105,033      1,023    3.90       94,630      927    3.91  

Debt securities

     99,755      1,223    4.91       59,197      742    5.01  

Loans and leases (1):

                                        

Commercial - domestic

     95,931      1,562    6.55       95,648      1,670    6.93  

Commercial - foreign

     15,227      139    3.67       16,226      136    3.31  

Commercial real estate - domestic

     19,491      207    4.27       19,293      207    4.28  

Commercial real estate - foreign

     324      3    3.63       323      3    3.97  
    

  

  

 

  

  

Total commercial

     130,973      1,911    5.87       131,490      2,016    6.09  
    

  

  

 

  

  

Residential mortgage

     141,898      1,960    5.53       142,482      1,931    5.41  

Home equity lines

     24,379      262    4.31       23,206      255    4.36  

Direct/Indirect consumer

     34,045      464    5.49       33,422      478    5.67  

Consumer finance

     5,490      104    7.56       5,798      108    7.38  

Credit card

     35,303      870    9.92       32,734      810    9.83  

Foreign consumer

     1,989      16    3.27       1,939      17    3.37  
    

  

  

 

  

  

Total consumer

     243,104      3,676    6.07       239,581      3,599    5.98  
    

  

  

 

  

  

Total loans and leases

     374,077      5,587    6.00       371,071      5,615    6.02  
    

  

  

 

  

  

Other earning assets

     38,817      426    4.41       42,370      388    3.66  
    

  

  

 

  

  

Total earning assets (2)

     743,711      8,741    4.72       675,212      8,227    4.85  
    

  

  

 

  

  

Cash and cash equivalents

     23,185                   22,974              

Other assets, less allowance for loan and lease losses

     82,729                   82,348              
    

  

  

 

  

  

Total assets

   $ 849,625                 $ 780,534              
    

  

  

 

  

  

Interest-bearing liabilities

                                        

Domestic interest-bearing deposits:

                                        

Savings

   $ 26,159    $ 17    0.27 %   $ 25,494    $ 19    0.30 %

NOW and money market deposit accounts

     155,835      321    0.83       155,369      401    1.02  

Consumer CDs and IRAs

     75,341      567    3.03       73,246      475    2.58  

Negotiable CDs, public funds and other time deposits

     5,939      74    5.01       6,195      44    2.81  
    

  

  

 

  

  

Total domestic interest-bearing deposits

     263,274      979    1.50       260,304      939    1.43  
    

  

  

 

  

  

Foreign interest-bearing deposits (3):

                                        

Banks located in foreign countries

     18,954      171    3.62       13,225      177    5.34  

Governments and official institutions

     4,701      19    1.63       2,654      11    1.58  

Time, savings and other

     21,054      37    0.71       20,019      51    1.02  
    

  

  

 

  

  

Total foreign interest-bearing deposits

     44,709      227    2.04       35,898      239    2.65  
    

  

  

 

  

  

Total interest-bearing deposits

     307,983      1,206    1.57       296,202      1,178    1.58  
    

  

  

 

  

  

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

     203,398      739    1.46       151,999      537    1.40  

Trading account liabilities

     34,543      335    3.90       38,298      317    3.28  

Long-term debt (4)

     78,852      491    2.49       70,596      450    2.55  
    

  

  

 

  

  

Total interest-bearing liabilities (2)

     624,776      2,771    1.78       557,095      2,482    1.77  
    

  

  

 

  

  

Noninterest-bearing sources:

                                        

Noninterest-bearing deposits

     117,092                   122,638              

Other liabilities

     59,071                   52,508              

Shareholders’ equity

     48,686                   48,293              
    

  

  

 

  

  

Total liabilities and shareholders’ equity

   $ 849,625                 $ 780,534              
    

  

  

 

  

  

Net interest spread

                 2.94                   3.08  

Impact of noninterest-bearing sources

                 0.28                   0.31  
    

  

  

 

  

  

Net interest income/yield on earning assets

          $ 5,970    3.22 %          $ 5,745    3.39 %
    

  

  

 

  

  


(1) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis.
(2) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $715 in the first quarter of 2004 and $884, $925, $587 and $576 in the fourth, third, second and first quarters of 2003, respectively. These amounts were substantially offset by corresponding decreases in the income earned on the underlying assets. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $183 in the first quarter of 2004 and $90, $141, $28 and $46 in the fourth, third, second and first quarters of 2003, respectively. These amounts were substantially offset by corresponding decreases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 55.
(3) Primarily consists of time deposits in denominations of $100,000 or more.
(4) Includes long-term debt related to Trust Securities.

 

27


 

 

    Third Quarter 2003

    Second Quarter 2003

    First Quarter 2003

 

(Dollars in millions)


 

Average

Balance


  

Interest

Income/
Expense


   Yield/
Rate


   

Average

Balance


  

Interest

Income/
Expense


   Yield/
Rate


   

Average

Balance


  

Interest

Income/
Expense


   Yield/
Rate


 

Earning assets

                                                           

Time deposits placed and other short-term investments

  $ 10,062    $ 41    1.63 %   $ 7,888    $ 39    1.99 %   $ 6,987    $ 43    2.49 %

Federal funds sold and securities purchased under agreements to resell

    90,236      479    2.11       70,054      194    1.11       57,873      194    1.35  

Trading account assets

    96,105      991    4.11       99,129      1,022    4.13       99,085      1,053    4.27  

Debt securities

    63,423      616    3.89       94,017      1,005    4.28       66,186      769    4.65  

Loans and leases (1):

                                                           

Commercial - domestic

    96,086      1,719    7.10       100,721      1,746    6.95       103,663      1,836    7.18  

Commercial - foreign

    16,885      151    3.55       18,004      170    3.79       18,876      156    3.35  

Commercial real estate - domestic

    19,681      210    4.23       20,039      218    4.36       19,955      215    4.37  

Commercial real estate - foreign

    280      3    4.16       305      3    3.95       301      3    3.88  
   

  

  

 

  

  

 

  

  

Total commercial

    132,932      2,083    6.22       139,069      2,137    6.16       142,795      2,210    6.27  
   

  

  

 

  

  

 

  

  

Residential mortgage

    130,948      1,656    5.05       120,754      1,703    5.64       113,695      1,582    5.59  

Home equity lines

    22,539      255    4.48       22,763      263    4.64       23,054      267    4.70  

Direct/Indirect consumer

    33,278      488    5.82       32,248      495    6.17       31,393      503    6.49  

Consumer finance

    6,528      121    7.39       7,244      137    7.58       8,012      154    7.76  

Credit card

    29,113      742    10.11       26,211      690    10.56       24,684      644    10.57  

Foreign consumer

    1,950      17    3.43       1,990      17    3.47       2,029      17    3.45  
   

  

  

 

  

  

 

  

  

Total consumer

    224,356      3,279    5.82       211,210      3,305    6.27       202,867      3,167    6.30  
   

  

  

 

  

  

 

  

  

Total loans and leases

    357,288      5,362    5.97       350,279      5,442    6.23       345,662      5,377    6.29  
   

  

  

 

  

  

 

  

  

Other earning assets

    60,194      539    3.56       42,133      452    4.30       37,299      441    4.77  
   

  

  

 

  

  

 

  

  

Total earning assets (2)

    677,308      8,028    4.72       663,500      8,154    4.92       613,092      7,877    5.18  
   

  

  

 

  

  

 

  

  

Cash and cash equivalents

    22,660                   23,203                   21,699              

Other assets, less allowance for loan and lease losses

    86,185                   88,381                   78,989              
   

  

  

 

  

  

 

  

  

Total assets

  $ 786,153                 $ 775,084                 $ 713,780              
   

  

  

 

  

  

 

  

  

Interest-bearing liabilities

                                                           

Domestic interest-bearing deposits:

                                                           

Savings

  $ 25,285    $ 20    0.31 %   $ 24,420    $ 35    0.58 %   $ 22,916    $ 34    0.59 %

NOW and money market deposit accounts

    151,424      249    0.65       146,284      295    0.81       142,338      291    0.83  

Consumer CDs and IRAs

    71,216      872    4.85       69,506      742    4.28       66,937      695    4.21  

Negotiable CDs, public funds and other time deposits

    7,771      25    1.27       12,912      45    1.41       3,598      16    1.78  
   

  

  

 

  

  

 

  

  

Total domestic interest-bearing deposits

    255,696      1,166    1.81       253,122      1,117    1.77       235,789      1,036    1.78  
   

  

  

 

  

  

 

  

  

Foreign interest-bearing deposits (3):

                                                           

Banks located in foreign countries

    12,273      59    1.90       16,150      87    2.16       14,218      80    2.27  

Governments and official institutions

    2,032      6    1.21       2,392      8    1.42       1,785      6    1.31  

Time, savings and other

    18,792      47    1.00       19,209      57    1.18       18,071      61    1.38  
   

  

  

 

  

  

 

  

  

Total foreign interest-bearing deposits

    33,097      112    1.35       37,751      152    1.61       34,074      147    1.75  
   

  

  

 

  

  

 

  

  

Total interest-bearing deposits

    288,793      1,278    1.76       290,873      1,269    1.75       269,863      1,183    1.78  
   

  

  

 

  

  

 

  

  

Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings

    162,080      447    1.09       152,722      514    1.35       123,041      453    1.49  

Trading account liabilities

    36,903      345    3.71       38,610      316    3.28       34,858      308    3.58  

Long-term debt (4)

    66,788      481    2.88       68,927      531    3.08       67,399      572    3.40  
   

  

  

 

  

  

 

  

  

Total interest-bearing liabilities (2)

    554,564      2,551    1.83       551,132      2,630    1.91       495,161      2,516    2.05  
   

  

  

 

  

  

 

  

  

Noninterest-bearing sources:

                                                           

Noninterest-bearing deposits

    125,776                   114,434                   115,897              

Other liabilities

    56,942                   59,249                   53,322              

Shareholders’ equity

    48,871                   50,269                   49,400              
   

  

  

 

  

  

 

  

  

Total liabilities and shareholders’ equity

  $ 786,153                 $ 775,084                 $ 713,780              
   

  

  

 

  

  

 

  

  

Net interest spread

                2.89                   3.01                   3.13  

Impact of noninterest-bearing sources

                0.33                   0.32                   0.39  
   

  

  

 

  

  

 

  

  

Net interest income/yield on earning assets

         $ 5,477    3.22 %          $ 5,524    3.33 %          $ 5,361    3.52 %
   

  

  

 

  

  

 

  

  

 

28


Trading-related Revenue

 

Trading account profits represent the net amount earned from our trading positions, which include trading account assets and liabilities as well as derivative positions and mortgage banking certificates. Trading account profits, as reported in the Consolidated Statement of Income, do not include the net interest income recognized on trading positions or the related funding charge or benefit.

 

Trading-related revenue, which includes net interest income from trading-related positions and trading account profits in Noninterest income is presented in the following table. Not included are commissions from equity transactions which are recorded in Noninterest income as Investment and brokerage service income, however, we consider these to be an integral component to the overall business trading revenues. 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, commodities and mortgage banking certificates.

 

Table 5

Trading-related Revenue(1)

 

    

Three Months Ended

March 31


 

(Dollars in millions)


   2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 577     $ 612  

Trading account profits

     3       114  
    


 


Total trading-related revenue

   $ 580     $ 726  
    


 


Trading-related revenue by product

                

Fixed income

   $ 212     $ 308  

Interest rate (fully taxable-equivalent basis)

     193       158  

Foreign exchange

     189       136  

Equities(2)

     3       121  

Commodities

     (2 )     51  
    


 


Market-based trading-related revenue

     595       774  

Credit portfolio hedges(3)

     (15 )     (48 )
    


 


Total trading-related revenue

   $ 580     $ 726  
    


 



(1) Certain prior period amounts have been reclassified to conform to the current period presentation.
(2) Equity revenues do not include commissions from equity transactions which were $172 and $140 for the three months ending March 31, 2004 and 2003, respectively.
(3) Includes credit default swaps used for credit risk management.

 

Trading-related revenue decreased 20 percent to $580 million for the three months ended March 31, 2004 as compared to a year ago, driven by decreases in both net interest income and trading account profits. The overall decrease was led by a decline in Equities revenue of $118 million, or 98 percent, but after including commissions on equity transactions, the decline was $86 million or 33 percent. The reduction in Equities revenue was driven by net losses on a single retained stock position. Also contributing to the drop was a decrease in revenue from fixed income products of $96 million. This decrease was due to the increase in losses related to the writedown of our Mortgage banking assets from $95 million in the first quarter of 2003 to $275 million in the first quarter of 2004 due to faster prepayment speeds and changes in other assumptions relative to our portfolio and a decrease of $44 million in mortgage-backed securities sales and trading activities partially offset by increased structured finance trading activities of $101 million. Also decreasing during the current quarter were commodities revenues by $53 million from a year ago due to a reduced risk profile and lower customer activity. The decreases were partially offset by a $53 million or 39 percent increase in foreign exchange revenue, which was the result of the market volatility of the dollar and increased customer activity and a $35 million increase in interest rate revenue.

 

29


Complex Accounting Estimates and Principles

 

Our significant accounting principles are described in Note 1 of the Corporation’s 2003 Annual Report and are essential in understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Some of our accounting principles require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment in applying the complex accounting principles to complicated transactions to determine the most appropriate treatment. We have established procedures and processes to facilitate making the judgments necessary to estimate the values of our assets and liabilities and to analyze complex transactions to prepare financial statements. For a complete discussion of our more judgmental and complex accounting estimates and principles, see Complex Accounting Estimates and Principles on pages 30 through 32 of the Corporation’s 2003 Annual Report.

 

See Note 1 of the consolidated financial statements for Recently Issued Accounting Pronouncements.

 

Business Segment Operations

 

We provide our customers and clients both traditional banking and nonbanking financial products and services through four business segments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. Descriptions of each business segment and subsegments are disclosed in the Corporation’s 2003 Annual Report on pages 32 through 38.

 

See Note 10 of the consolidated financial statements for additional business segment information including the allocation of certain expenses, selected financial information for the business segments and reconciliations to consolidated Total revenue and Net income amounts.

 

Consumer and Commercial Banking

 

Our Consumer and Commercial Banking strategy is to attract, retain and deepen customer relationships. A critical component of that strategy includes continuously improving customer satisfaction. We believe this focus will help us achieve our goal of being recognized as the best retail bank in America. Customers expressing the highest levels of satisfaction increased 11 percent at March 31, 2004 compared to March 31, 2003. Since first quarter 2003 we have added 1,435,000 net new checking accounts and 1,046,000 net new savings accounts. This growth resulted from the introduction of new products, advancement of our multicultural strategy and strong customer retention. Access to our services through online banking, which saw a 55 percent increase in active online subscribers, our network of domestic banking centers, card products, ATMs, telephone and Internet channels, and our product innovations, such as an expedited mortgage application process and new deposit products, all contributed to success with our customers.

 

Consumer and Commercial Banking drove our financial results for the three months ended March 31, 2004 as total revenue increased $568 million, or nine percent. Net income rose $250 million, or 16 percent. The increase in net income partially offset by an increase in capital drove a $158 million, or 14 percent, increase in SVA.

 

Net interest income increased $773 million due to the net results of ALM activities, and overall consumer loan portfolio and deposit growth. Net interest income was positively impacted by the $11.0 billion, or six percent, increase in average loans and leases for the three months ended March 31, 2004, compared to the same period in 2003, driven by a $10.6 billion, or 43 percent, increase in average held credit card outstandings. Average commercial loans increased 4 percent for the three months ended March 31, 2004 compared to a year ago.

 

Deposit growth also positively impacted net interest income. Higher consumer deposit balances as a result of government tax cuts, higher customer retention and our efforts to add new customers, as evidenced by the increase in net new checking and savings accounts, drove the $31.0 billion, or 10 percent, increase in average deposits for the three months ended March 31, 2004.

 

30


Significant Noninterest Income Components

 

     Three Months
Ended
March 31


 

(Dollars in millions)


   2004

    2003

 

Service charges

   $ 1,114     $ 1,053  

Mortgage banking income

     209       405  

Card income

     795       681  

Trading account profits (losses)

     (290 )     (121 )

 

Increases in both consumer and corporate service charges led to the $61 million, or six percent, increase in service charge income. Consumer service charges increased $45 million, or six percent, to $813 million due primarily to a $43 million increase in deposit fees and ATM fees associated with growth in new accounts. Corporate service charges increased $16 million, or six percent, to $301 million mainly due to higher levels of letter of credit and bankers’ acceptance fees, and deposit account growth.

 

First mortgage loan originations decreased $9.0 billion to $23.8 billion for the three months ended March 31, 2004, resulting from lower refinancing levels driven by relatively higher interest rates. First mortgage loan origination volume was composed of approximately $14.1 billion of retail loans and $9.7 billion of wholesale loans for the three months ended March 31, 2004, compared to $22.0 billion and $10.8 billion, respectively, for the three months ended March 31, 2003. Increased mortgage prepayments, resulting from the refinancing boom, led to a $12.0 billion net decrease in the average portfolio of first mortgage loans serviced to $247.0 billion for the three months ended March 31, 2004, compared to a year ago. Increased loan additions drove the increase in loans serviced for investors to $184.1 billion for the three months ended March 31, 2004 compared to $178.2 billion a year ago. A 30 percent decrease in the sales of loans to the secondary market and spread compression drove the $196 million decrease in Mortgage banking income. For the three months ended March 31, 2004 and 2003, loan sales to the secondary market were $16.3 billion and $23.3 billion, respectively.

 

Trading account profits (losses) primarily represent the net mark-to-market adjustments on mortgage banking assets and related derivative instruments used as an economic hedge on the assets. Impacting trading account profits (losses) for the three months ended March 31, 2004 was a $275 million negative impact on the value of Mortgage banking assets due to changes in servicing prepayment speeds and other servicing model assumptions. The value of Mortgage banking assets decreased to $2.2 billion at March 31, 2004 compared to $2.8 billion at December 31, 2003 due to negative mark-to-market adjustments, and normal paydowns and amortization offset by additions due to loan sales.

 

Strong debit and credit card performance resulted in a 17 percent increase in card income overall. The increase in debit card income of $24 million, or 11 percent, was due to a 26 percent increase in purchase volumes, as well as growth in active accounts, partially offset by a lower signature interchange rate. Credit card income increased $90 million, or 19 percent, resulting from higher interchange fees of $39 million (driven mainly by a 24 percent increase in credit card purchase volumes), overlimit fees of $18 million, merchant discount fees of $17 million, late fees of $17 million and cash advance fees of $10 million offset by lower excess servicing income of $27 million. Card income included activity from the securitized credit card portfolio of $14 million and $41 million for the three months ended March 31, 2004 and 2003, respectively. Noninterest income, rather than net interest income and provision for credit losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. New advances on previously securitized accounts will be recorded on our balance sheet after the revolving period of the securitization, which has the effect of increasing loans on our balance sheet and increasing net interest income and charge-offs, with a corresponding reduction in noninterest income. Average on-balance sheet credit card outstandings increased 43 percent, due to over 4 million new accounts and an increase of $2.9 billion in new advances on previously securitized balances that are recorded on our balance sheet after the revolving period of the securitization. Average managed credit card outstandings, which include securitized credit card loans, increased 26 percent for the three months ended March 31, 2004 due to new account growth from direct marketing programs and the branch network.

 

31


On January 23, 2004, the Federal District Court in the Eastern District of New York approved Visa U.S.A.’s previously entered into agreement in principle to settle the class action anti-trust lawsuit filed against it by Wal-Mart and other retailers (the settlement). The after-tax impact of the resulting reduction in interchange fees on net income for the three months ended March 31, 2004 was $22 million. While it is difficult to predict volume and interchange fees, we believe that, on an after-tax basis, the impact of the reduction in interchange fees will likely reduce net income in 2004 by approximately $21 million in both the second and third quarters and $22 million in the fourth quarter.

 

The decrease in the provision for credit losses of $59 million, or 12 percent relates to a decline in the provision related to commercial loans of $69 million and banking region products of $63 million partially offset by an increase in provision related to the held consumer credit card loan portfolio of $87 million.

 

Noninterest expense increased $244 million, or eight percent, due to increases in personnel expense of $95 million, data processing costs of $86 million and occupancy expense of $22 million. Personnel expense increased as a result of higher salaries and benefit cost related to fulfillment and sales groups, as well as new store openings.

 

Asset Management

 

Asset Management provides wealth and investment management services through three businesses: The Private Bank, which focuses on high-net-worth individuals and families; Banc of America Investments (BAI), providing investment and financial planning services to individuals; and Banc of America Capital Management (BACAP), the asset management group serving the needs of institutional clients, high-net-worth individuals and retail customers. Together, these businesses are focusing on attracting and deepening client relationships, with the ultimate goal of becoming America’s advisor of choice. Our Asset Management strategy is threefold: (i) to continue to expand distribution capabilities to reach key constituencies and markets; (ii) to complete the expansion and rollout of integrated wealth management models to better serve our clients’ financial needs; and (iii) to continue to strengthen and develop our full array of investment management products and services for individuals and institutions. BAI continued to increase the number of financial advisors and ended the current quarter with 1,215 financial advisors, an increase of 25 percent from a year ago. In addition, the Premier Banking and Investments partnership has developed an integrated financial services model and to date has opened 13 wealth centers. The Private Bank successfully completed the rollout of its high-net-worth model to all markets. BACAP has experienced growth in assets under management led by higher market valuations, sales in assets advised by Marsico and sales in the fee-based assets of BACAP’s consulting services group, which provides investment products to the Private Bank and BAI.

 

Total revenue increased $83 million, or 14 percent, for the three months ended March 31, 2004 although net income decreased 62 percent, due to the impact of the mutual fund settlement, which had a pre-tax effect of approximately $143 million, partially offset by an increase of $45 million in investment and brokerage services. For more information on the mutual fund settlement see Note 7 of the consolidated financial statements. SVA decreased by $94 million, or 140 percent, as the decrease in net income was combined with a marginal increase in capital levels.

 

Client Assets

 

     March 31

(Dollars in billions)


   2004

   2003

Assets under management

   $ 337.2    $ 297.0

Client brokerage assets

     91.0      90.8

Assets in custody

     50.6      45.1
    

  

Total client assets

   $ 478.8    $ 432.9
    

  

 

Assets under management, which consist largely of mutual funds, equities and bonds, generate fees based on a percentage of their market value. Compared to a year ago, assets under management increased $40.2 billion, or 14 percent, primarily due to a $40.7 billion, or 51 percent, increase in equities, led by improved market valuations and sales in assets advised by Marsico, and a $7.6 billion, 14 percent increase in fixed income assets partially offset by a

 

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decline of $5.9 billion, or four percent, in money market assets. Client brokerage assets, a source of commission revenue, were flat versus the prior year. Client brokerage assets consist largely of investments in bonds, annuities, money market mutual funds and equities. Assets in custody increased $5.5 billion, or 12 percent, and represent trust assets administered for customers. Trust assets encompass a broad range of asset types including real estate, private company ownership interest, personal property and investments.

 

Net interest income increased 20 percent to $214 million as growth in deposits and loan balances combined with the net results of ALM activities drove the increase. Average deposits increased $1.9 billion, or 15 percent, for the three months ended March 31, 2004. Average loans and leases increased $1.7 billion, or eight percent, for the three months ended March 31, 2004.

 

Significant Noninterest Income Components

 

    

Three Months
Ended

March 31


(Dollars in millions)


   2004

   2003

Asset management fees (1)

   $ 318    $ 282

Brokerage income

     105      96
    

  

Total investment and brokerage services

   $ 423    $ 378
    

  


(1) Includes personal and institutional asset management fees, mutual fund fees and fees earned on assets in custody.

 

Noninterest income increased $48 million, or 12 percent, for the three months ended March 31, 2004 due to an increase in Investment and brokerage services of $45 million driven by the $20 million impact of higher Marsico balances reflecting sales and market appreciation and an increase in brokerage sales revenue of $9 million.

 

Provision for credit losses remained low at $7 million for the three months ended March 31, 2004.

 

Noninterest expense increased $206 million, or 55 percent, due to Asset Management’s share of the mutual fund settlement, which amounted to approximately $143 million, and increased expenses associated with the addition of financial advisors.

 

Global Corporate and Investment Banking

 

Our Global Corporate and Investment Banking strategy is to align our resources with sectors where we can deliver value added financial advisory solutions to our issuer and investor clients. As we broaden and deepen our relationships with our clients, we expect to build leading market shares that should provide our shareholders sustainable revenue and SVA growth.

 

Our financial performance continues to be strong as total revenue was $2.3 billion, reflecting a $49 million, or two percent decrease from first quarter 2003, as market-based trading revenues, including commissions on equity transactions, declined $71 million with investment banking income and credit related revenues from loans and leases partially offsetting the decline as they increased $16 million and $13 million, respectively. Net income increased $3 million, or one percent and includes the impact of the charge taken for the mutual fund matter. Reduced credit costs, resulting from continued improvement in credit quality, more than offset the mutual fund charge. SVA increased by $52 million, or 30 percent, principally as a result of lower capital attributable to an improvement in credit quality.

 

Net interest income decreased $127 million, or 10 percent, to $1.1 billion. Driving this decline was the $15.8 billion, 28 percent decrease in average loans and leases for the three months ended March 31, 2004. Also, trading-related earning assets grew by $60.4 billion but the narrower margins from these assets only partially offset the overall decline. Average deposits increased $1.9 billion, or three percent, for the three months ended March 31, 2004, despite decreases in compensating balances by the U.S. Treasury. Noninterest income increased $78 million, or seven percent, for the three months ended March 31, 2004, as increases in investment and brokerage services, investment banking income, and equity investment gains were partially offset by a decline in trading account profits.

 

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Investment banking income increased $16 million, or four percent, for the three months ended March 31, 2004 as we continued to gain market share in leveraged loans and high-yield debt. The continued strong market share in high-yield debt more than offset the overall market decline for securities underwriting of equity offerings to drive a nine percent increase in securities underwriting fees.

 

Investment Banking Income

 

     Three Months
Ended
March 31


(Dollars in millions)


   2004

   2003

Securities underwriting

   $ 218    $ 200

Syndications

     85      102

Advisory services

     77      59

Other

     9      12
    

  

Total

   $ 389    $ 373
    

  

 

Trading-related revenue, which includes net interest income from trading-related positions and trading account profits in noninterest income is presented in the following table. Not included are commissions from equity transactions which are recorded in Noninterest income as Investment and brokerage service income, however, we consider these to be an integral component to the overall business trading revenues.

 

Trading-related Revenue(1)

 

     Three Months
Ended
March 31


 

(Dollars in millions)


   2004

    2003

 

Net interest income (fully taxable-equivalent basis)

   $ 577     $ 612  

Trading account profits

     268       303  
    


 


Total trading-related revenue

   $ 845     $ 915  
    


 


Trading-related revenue by product

                

Fixed income

   $ 508     $ 425  

Interest rate (fully taxable-equivalent basis)

     168       235  

Foreign exchange

     189       136  

Equities (2)

     (3 )     116  

Commodities

     (2 )     51  
    


 


Market-based trading-related revenue

     860       963  

Credit portfolio hedges (3)

     (15 )     (48 )
    


 


Total trading-related revenue

   $ 845     $ 915  
    


 



(1) Certain prior period amounts have been reclassified among products to conform to the current period presentation.
(2) Equity revenues do not include commissions from equity transactions which were $172 and $140 for the three months ending March 31, 2004 and 2003, respectively.
(3) Includes credit default swaps used for credit risk management.

 

        Market-based trading-related revenue decreased by $103 million, or 11 percent. Fixed income continued to show strong results increasing $83 million, or 20 percent, driven by high yield debt and structured finance trading activity. Foreign exchange increased $53 million, or 39 percent, which was a result of the market volatility of the dollar and increased customer activity. More than offsetting these increases were declines in equities, interest rate and commodities revenues. Equities revenues declined by $119 million or 103 percent and after including commissions on equity transactions declined $87 million or 34 percent. The overall decline in equity trading-related revenues was driven by net losses on a single retained stock position. Interest rate revenues declined by $67 million or 29 percent largely due to reduced corporate customer activity and lower trading-related profits in the face of market uncertainty over the interest rate environment. Commodities revenue declined $53 million due to a reduced risk profile and lower customer activity.

 

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Continued improvements in credit quality in our large corporate portfolio drove the $295 million, or 108 percent, decrease in provision for credit losses. Driving this decrease was the low level of net charge-offs during the first quarter 2004 of $96 million in the large corporate portfolio, a decline of 65 percent from a year ago. Additionally, the large corporate nonperforming assets and criticized exposure decreases were greater in the first quarter of 2004 as compared to the first quarter of 2003.

 

Noninterest expense increased $239 million, or 18 percent, due to Global Corporate and Investment Banking’s share of the mutual fund settlement, which amounted to approximately $143 million, higher incentive compensation for market-based activities of $59 million and increased expenses for legal fees of $25 million related to regulatory and compliance matters.

 

Equity Investments

 

For the three months ended March 31, 2004, revenue increased $89 million, or 83 percent. Equity Investments had a net loss of $30 million for the three months ended March 31, 2004 compared to a net loss of $85 million for the same period in 2003. The improvements were primarily due to higher cash gains driven by increasing liquidity in the private equity markets. SVA increased by $56 million, or 39 percent, due to the improvement in the net loss.

 

The following table presents the equity investment portfolio in Principal Investing by major industry at March 31, 2004 and December 31, 2003.

 

Equity Investments in the Principal Investing Portfolio

 

(Dollars in millions)


   March 31,
2004


   December 31,
2003


Consumer discretionary

   $ 1,406    $ 1,435

Industrials

     792      876

Information technology

     746      741

Telecommunications services

     587      639

Health care

     349      385

Financials

     306      332

Materials

     262      266

Real estate

     228      229

Consumer staples

     198      245

Individual trusts, nonprofits, government

     48      48

Energy

     30      29

Utilities

     29      35
    

  

Total

   $ 4,981    $ 5,260
    

  

 

The following table presents the equity investment gains (losses) in Principal Investing.

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