2003 Annual Report: Financial Review: Management's Discussion and Analysis: 2002 Compared to 2001

2002 Compared to 2001

The following discussion and analysis provides a comparison of our results of operations for 2002 and 2001. This discussion should be read in conjunction with the consolidated financial statements and related notes starting with the Consolidated Statement of Income. In addition, Table 1 and Table 2 (110kb) contain financial data to supplement this discussion.

Overview

Earnings excluding charges related to our strategic decision to exit certain consumer finance businesses in 2001 were $8.0 billion, or $4.95 per diluted common share. Excluding these charges, the return on average common shareholders' equity was 16.53 percent in 2001. SVA, which excludes exit and restructuring charges, remained essentially unchanged at $3.1 billion. For additional information on the use of calculated financial measures and reconciliations to corresponding GAAP measures, see the Supplemental Financial Data (110kb).

For the Corporation, an increase in net interest income of $633 million was more than offset by a decline in noninterest income of $777 million. The impact of higher levels of securities and residential mortgage loans, higher levels of core deposit funding, the margin impact of higher trading account assets, consumer loan growth and the absence of 2001 losses associated with auto lease financing had a positive effect on net interest income. The securitization of subprime real estate loans and reduced commercial loan levels negatively impacted net interest income relative to 2001. The net interest yield improved seven bps in 2002 from 2001, due to an increase in consumer loans, higher levels of core deposit funding, the absence of 2001 losses associated with auto lease financing and higher levels of securities and residential mortgage loans, offset by the securitization of subprime real estate loans and higher trading account assets.

Noninterest income declined as market conditions in 2002 negatively impacted our market-sensitive revenue. This decline was partially offset by strong performance in consumer-based fee income and gains recognized in our whole mortgage loan portfolio created by the interest rate fluctuations that occurred in 2002. Other noninterest income included gains from whole mortgage loan sales of $500 million in 2002 compared to $20 million in 2001. Gains on sales of debt securities were $630 million, an increase of $155 million from 2001.

The provision for credit losses decreased $590 million, due to $395 million in 2001 associated with exiting the subprime real estate lending business. Net charge-offs were down $547 million to $3.7 billion, or 1.10 percent of average loans and leases, a decrease of six bps. Decreases in consumer finance and commercial - domestic net charge-offs of $771 million and $478 million, respectively, and $635 million of charge-offs in 2001 related to exiting the subprime real estate lending business were partially offset by increases in held consumer credit card and commercial - foreign net charge-offs of $422 million and $313 million, respectively.

Nonperforming assets were $5.3 billion, or 1.53 percent of loans, leases and foreclosed properties at December 31, 2002, a $354 million increase from December 31, 2001. Nonperforming assets in the large corporate portfolio within Global Corporate and Investment Banking drove the increase, partially offset by credit quality improvement in the commercial portfolio within Consumer and Commercial Banking.

Noninterest expense declined $2.3 billion as reductions in personnel expense and professional fees of $147 million and $39 million, respectively, were offset by increased data processing and marketing expenses of $241 million and $71 million, respectively. Additionally, noninterest expense in 2001 included $1.3 billion of business exit costs, $662 million in goodwill amortization expense and $334 million of litigation expenses in fourth quarter 2001. Excluding these items in 2001, noninterest expense was relatively unchanged in 2002 compared to the prior year.

Salaries expense declines of $381 million, resulting from a decrease in incentive compensation, were partially offset by increased employee benefit costs of $278 million, which largely resulted from higher healthcare costs and the $69 million impact of a change in the expected long-term rate of return on plan assets to 8.5 percent for the Bank of America Pension Plan. Incentive compensation, primarily in Global Corporate and Investment Banking, declined $258 million, consistent with reductions in market-sensitive revenues. In the fourth quarter of 2002, we also recorded a $128 million severance charge related to outsourcing and strategic alliances.

Reduced consulting and other professional fees reflected the increased use of in-house personnel for consulting and productivity-related activities. Data processing expense increases reflected $45 million in costs associated with terminated contracts on discontinued software licenses in the third quarter of 2002, as well as higher volumes of online bill pay activity, check imaging and higher item processing and check clearing expenses. Marketing expense increased in 2002 as we expanded our advertising campaign. Advertising efforts primarily focused on card, mortgage, online banking and bill pay.

Income tax expense in 2002 was $3.7 billion resulting in an effective tax rate of 28.8 percent. During 2002, we reached a settlement with the IRS generally covering tax years ranging from 1984 to 1999 but including returns as far back as 1971. As a result of this settlement, we recorded a $488 million reduction in income tax expense.

Business Segment Operations

Consumer and Commercial Banking

Asset Management

Global Corporate and Investment Banking

Equity Investments