2003 Annual Report: Financial Review: Management's Discussion and Analysis: 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.

In managing our four business segments, we evaluate results using both financial and nonfinancial measures. Financial measures consist primarily of revenue, net income and SVA. Nonfinancial measures include, but are not limited to, market share and customer satisfaction. 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 certain assets and liabilities used in our ALM process.

From time to time, we refine the business segment strategy and reporting. As we continued to refine our business segment strategy in 2002, we moved a portion of our thirty-year mortgage portfolio from the Consumer and Commercial Banking segment to Corporate Other. The mortgages designated solely for our ALM process were moved to Corporate Other to reflect the fact that management decisions regarding this portion of the mortgage portfolio are driven by corporate ALM considerations and not by the business segments' management. In the third quarter of 2002, certain consumer finance businesses in the process of liquidation (subprime real estate, auto leasing and manufactured housing) were transferred from Consumer and Commercial Banking to Corporate Other and in the first quarter of 2003, certain commercial lending businesses in the process of liquidation were transferred from Consumer and Commercial Banking to Corporate Other.

See Note 20 (105kb) of the consolidated financial statements for additional business segment information including the allocation of certain expenses, selected financial information for the business segments, reconciliations to consolidated amounts and information on Corporate Other. Certain prior period amounts have been reclassified among segments and their components to conform to the current period presentation.

Consumer and Commercial Banking

The major subsegments of Consumer and Commercial Banking are Banking Regions, Consumer Products and Commercial Banking.

Banking Regions serves consumer households and small businesses in 21 states and the District of Columbia through its network of 4,277 banking centers, 13,241 ATMs, telephone and Internet channels on www.bankofamerica.com. Banking Regions provides a wide range of products and services, including deposit products such as checking accounts, money market savings accounts, time deposits and IRAs, debit card products and credit products such as home equity, mortgage and personal auto loans. It also provides treasury management, credit services, community investment, e-commerce and brokerage services to nearly two million small business relationships across the franchise. Banking Regions also includes Premier Banking, which provides high-touch banking, which represents more direct contact with the client, and investment solutions to affluent clients with balances up to $3 million.

Consumer Products provides services including the origination, fulfillment and servicing of residential mortgage loans, issuance and servicing of credit cards, direct banking via telephone and Internet, student lending and certain insurance services. Consumer Products also provides retail finance and floorplan programs to marine, RV and auto dealerships.

Commercial Banking provides commercial lending and treasury management services primarily to middle-market companies with annual revenue between $10 million and $500 million. These services are available through relationship manager teams as well as through alternative channels such as the telephone via the commercial service center and the Internet by accessing Bank of America Direct. Commercial Banking also includes the Real Estate Banking Group, which provides project financing and treasury management to private developers, homebuilders and commercial real estate firms across the U.S. Commercial Banking also provides lending and investing services to develop low- and moderate-income communities.

Consumer and Commercial Banking drove our financial results in 2003 as total revenue increased $2.7 billion, or 11 percent. Net income rose $1.0 billion, or 15 percent. The increase in net income and a decrease in the capital charge resulting from the reduction in the rate used to calculate the charge for the use of capital drove a $1.1 billion, or 24 percent, increase in SVA.

Net interest income increased $765 million due to overall deposit and loan portfolio growth. This increase was offset by the compression of deposit interest margins and the net results of ALM activities. Net interest income was positively impacted by the $6.2 billion, or three percent, increase in average loans and leases in 2003, compared to 2002, resulting from a $6.3 billion, or six percent, increase in consumer loans. An eight percent increase in average direct/indirect loans contributed to the growth in the consumer loan portfolio. Average commercial loans remained relatively unchanged in 2003.

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 accounts, drove the $29.3 billion, or 10 percent, increase in average deposits in 2003.

Significant Noninterest Income Components
(Dollars in millions)			2003				2002
Service charges		$	4,353			$	4,069
Mortgage banking income			1,922				761
Card income			3,052				2,620
Trading account profits (losses)			(169	)			(7	)

Increases in both consumer and corporate service charges led to the $284 million, or seven percent, increase in service charge income. Consumer service charges increased $247 million, or eight percent, to $3.2 billion due to favorable repricing and increased levels of deposit fees from new account growth of $254 million. Corporate service charges increased $37 million, or three percent, to $1.2 billion due to a $31 million increase in income from pricing initiatives and account growth.

Decreasing mortgage interest rates in the first half of 2003 drove a sharp increase in refinance volumes within the mortgage industry leading to increases in our loan production and sales activity. First mortgage loan originations increased $43.1 billion to $131.1 billion in 2003, resulting from elevated refinancing levels and broader market coverage from our ongoing deployment of LoanSolutions®, which was first rolled out in the second quarter of 2002. Total mortgages funded through LoanSolutions® totaled $36.3 billion and $7.3 billion in 2003 and 2002, respectively. First mortgage loan origination volume was composed of approximately $91.8 billion of retail loans and $39.3 billion of wholesale loans in 2003, compared to $59.9 billion and $28.1 billion, respectively, in 2002. Increased mortgage prepayments, resulting from the extended low interest rate environment of 2003, led to a $32.6 billion net decline in the average portfolio of first mortgage loans serviced to $250.4 billion in 2003. Increased sales of loans to the secondary market in 2003, along with improved profit margins drove the $1.2 billion increase in mortgage banking income. In 2003 and 2002, loan sales to the secondary market were $107.4 billion and $51.6 billion, respectively.

As we have seen interest rates rise from mid-year levels, the warehouse and pipeline of mortgage loan applications at December 31, 2003 were approximately 70 percent lower compared to June 30, 2003 levels. At current or increased mortgage interest rate levels, the mortgage industry would be expected to experience a significant decline in first mortgage origination volume. We are not in a position to determine the ultimate impact to the mortgage banking industry or our related business at this time. As industry origination volumes decline, we believe we can garner market share from increased distribution, increased advertising and sales productivity; however, we do expect the decline in industry volumes to negatively impact mortgage banking income in 2004 compared to 2003. We also believe our increased focus on home equity lending will replace a portion of the drop in mortgage revenue with higher net interest income.

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) in 2003 was a net reduction, including the negative impact of changes in prepayment speeds, in the value of our mortgage banking assets and related derivative instruments of $159 million, due to a difference between the change in the value of our mortgage banking assets and the related derivatives. The value of mortgage banking assets increased to $2.7 billion at December 31, 2003 compared to $2.1 billion at December 31, 2002 due to new additions from loan sales, offset by normal paydowns, amortization and negative mark-to-market adjustments.

Increases in both debit and credit card income resulted in the 16 percent increase in card income. The increase in debit card income of $111 million, or 14 percent, to $896 million was due to increases in purchase volumes related to account growth and higher activation and penetration levels. Credit card income increased $321 million, or 18 percent, resulting from higher interchange fees of $154 million, driven by increased credit card purchase volumes, late fees of $113 million, overlimit fees of $86 million, cash advance fees of $43 million and other miscellaneous fees of $95 million offset by lower excess servicing income of $170 million. Debit card purchase volumes grew 22 percent while credit card purchases increased 13 percent in 2003 from 2002. Currently, management anticipates that credit and debit card purchase volumes will continue to increase in 2004. Card income included activity from the securitized portfolio of $116 million and $157 million in 2003 and 2002, 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 32 percent, due to over 4 million new accounts and an increase of $2.6 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 15 percent in 2003 due to new account growth from direct marketing programs and the branch network.

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). Effective January 1, 2004, the settlement permitted retailers who accept Visa U.S.A. cards to reject payment from consumers signing for purchases using their debit card, changing Visa U.S.A.'s longstanding "honor all cards" policy. In addition, beginning August 1, 2003, interchange fees charged to retailers were reduced by approximately 30 percent. This reduction was effective until January 1, 2004, at which time Visa U.S.A. was free to set competitive rates. The after-tax impact of the reduction in interchange fees on net income in 2003 was $52 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 by approximately $90 million in 2004.

An increase in provision in the held consumer credit card loan portfolio of $613 million and declines in provision for other consumer loans of $239 million and commercial loans of $140 million resulted in a $256 million, or 14 percent, increase in the provision for credit losses. The increase in held consumer credit card provision to $1.8 billion was due to increases of $192 million related to higher outstandings, $173 million from charge-offs of new advances on previously securitized balances, and $255 million from charge-offs related to continued seasoning of outstandings from new account growth and economic conditions, including higher bankruptcies. Seasoning refers to the length of time passed since an account was opened.

Noninterest expense increased $1.0 billion, or nine percent, due to increases in data processing costs of $305 million, personnel expense of $291 million, other general operating expenses of $142 million, marketing and promotional fees of $112 million and occupancy expense of $92 million. Personnel expense increased as a result of higher incentive compensation of $178 million driven by increased mortgage sales production. Marketing and promotional fees were up due to increased advertising and marketing investments of $105 million in direct marketing for the credit card business.

Asset Management

Total revenue increased $256 million, or 11 percent, in 2003 and net income increased 79 percent, due to lower provision for credit losses of $317 million and an increase in equity investment gains of $199 million. SVA increased by $287 million, or 354 percent, as the increase in net income was partially offset by the impact of an increase in capital levels. The increase in capital levels was driven by additional goodwill recorded in mid-2002 representing final contingent consideration in connection with the acquisition of the remaining 50 percent of Marsico. All conditions related to this contingent consideration have been met.

Client Assets
		December 31
(Dollars in billions)			2003				2002
Assets under management		$	335.7			$	310.3
Client brokerage assets			88.8				90.9
Assets in custody			49.9				46.6
Total client assets		$	474.4			$	447.8

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 $25.4 billion, or eight percent, due to a $33.7 billion, or 41 percent, increase in equities, led by improved market valuations and sales in assets advised by Marsico, offset by a decline of $13.2 billion, or eight percent, in money market assets. Client brokerage assets, a source of commission revenue, decreased $2.1 billion, or two percent. Client brokerage assets consist largely of investments in bonds, annuities, money market mutual funds and equities. Assets in custody increased $3.3 billion, or seven 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 remained relatively flat as growth in deposits and increased loan spreads were offset by lower loan balances and the net results of ALM activities. Average loans and leases decreased $773 million, or three percent, in 2003. Average deposits increased $1.1 billion, or nine percent, in 2003.

Significant Noninterest Income Components
(Dollars in millions)			2003				2002
Asset management fees(1)		$	1,160			$	1,087
Brokerage income			420				435
Total investment and brokerage services		$	1,580			$	1,522
(1)  Includes personal and institutional asset management fees, mutual fund fees and fees earned on assets in custody.

Noninterest income increased $254 million, or 16 percent, in 2003 due to an increase in equity investment gains of $199 million related to gains from securities sold that were received in satisfaction of debt that had been restructured and charged off in prior periods and higher asset management fees.

Provision for credit losses decreased $317 million, primarily due to one large charge-off recorded in 2002.

Noninterest expense increased $120 million, or eight percent, due to a $50 million allocation of the charge related to issues surrounding our mutual fund practices, previously announced in the third quarter of 2003 and increased expenses associated with the addition of financial advisors.

Global Corporate and Investment Banking

Global Corporate and Investment Banking offers clients a comprehensive range of global capabilities through three subsegments: Global Investment Banking, Global Credit Products and Global Treasury Services.

Global Investment Banking includes our investment banking activities and risk management products. Global Investment Banking underwrites and makes markets for its clients in equity and equity linked securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities as well as provides correspondent clearing services for other securities broker/dealers and prime-brokerage services. It also provides debt and equity securities research, loan syndications, mergers and acquisitions advisory services and private placements.

In addition, Global Investment Banking provides risk management solutions for our global customer base using interest rate, equity, credit and commodity derivatives, foreign exchange, fixed income and mortgage-related products. In support of these activities, the businesses may take positions in these products and capitalize on market-making activities. The Global Investment Banking business is a primary dealer in the U.S. as well as in several international locations.

Global Credit Products provides credit and lending services for our clients with our corporate industry-focused portfolios, which also includes leasing. Global Credit Products is also responsible for actively managing loan and counterparty risk in our large corporate portfolio using available risk mitigation techniques, including credit default swaps.

Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and our corporate clients manage their operational cash flows on a local, regional, national and global level.

Our financial performance continues to improve as total revenue increased $256 million, or three percent, in 2003, due to increases in investment banking income of $188 million, miscellaneous other income of $160 million, service charges of $63 million and investment and brokerage service fees of $58 million. Net income increased $451 million, or 29 percent. SVA increased by $732 million, or 292 percent, as a result of lower capital, the increase in net income and a decrease in the capital charge related to improving credit quality including a reduction in nonperforming assets.

Net interest income remained relatively flat at $4.8 billion. Average loans and leases declined $13.8 billion, or 22 percent, in 2003, primarily as a result of either the client selection process or refinancing by clients in the public markets as companies restructured their capital positions coupled with the lack of demand for additional bank debt as capital expenditures or inventory financing continued to be moderate. Average deposits increased $1.4 billion, or two percent, in 2003, despite decreases in compensating balances by the U.S. Treasury and foreign deposits.

Noninterest income increased $228 million, or six percent, in 2003, as increases in investment banking income, service charges, and investment and brokerage services were partially offset by a decline in trading account profits. Active market-based trading account profits increased by $170 million; however, this was more than offset by credit portfolio hedges that decreased by $414 million.

Investment banking income increased $188 million, or 13 percent, in 2003. We continued to maintain syndicated lending and fixed income market share and gained in areas such as mergers and acquisitions, and mortgage-backed securities. Although the overall market for securities underwriting declined for equity offerings, our continued strong market share in equity offerings resulted in a 34 percent increase in securities underwriting fees.

Investment Banking Income
(Dollars in millions)			2003				2002
Securities underwriting		$	963			$	721
Syndications			428				427
Advisory services			228				288
Other			50				45
Total		$	1,669			$	1,481

Investment and brokerage services income was $693 million and $636 million in 2003 and 2002, respectively. Service charges on accounts were $1.2 billion for both periods.

Trading-related net interest income as well as trading account profits in noninterest income (trading-related revenue) are presented in the following table as they are both considered in evaluating the overall profitability of our trading activities. Certain prior period amounts have been reclassified among products to conform to the current period presentation.

Trading-related Revenue
(Dollars in millions)			2003				2002
Net interest income (fully taxable-equivalent basis)		$	2,214			$	1,976
Trading account profits			588				832
Total trading-related revenue		$	2,802			$	2,808
Trading-related revenue by product
Fixed income		$	1,371			$	833
Interest rate (fully taxable-equivalent basis)			922				879
Foreign exchange			549				532
Equities(1)			337				386
Commodities			(47	)			94
Market-based trading-related revenue			3,132				2,724
Credit portfolio hedges(2)			(330	)			84
Total trading-related revenue		$	2,802			$	2,808
(1)  Does not include commission revenue from equity transactions. (2)  Includes credit default swaps used for credit risk management.

Total trading-related revenue remained flat at $2.8 billion as the $238 million increase in net interest income was offset by a $244 million decrease in trading account profits in 2003. This decrease in trading account profits was principally attributable to the $414 million decrease in revenue from credit portfolio hedges used as part of the overall credit risk management process. For additional information on credit portfolio hedges, see Concentrations of Credit Risk in the Credit Risk Management section. Market-based trading-related revenue increased by $408 million, or 15 percent, resulting from an increase of $538 million in fixed income trading. Driving the increase in fixed income trading were increased high-yield sales and trading activities of $283 million and an increase of $23 million of sales and trading activities in mortgage-backed securities. Interest rate sales and trading increased $43 million due to general trading-related activities in the improving economy. Offsetting this increase was a decline in commodities revenue of $141 million primarily due to the adverse impact on jet fuel prices from the SARS outbreak in the second quarter of 2003. Equities also declined by $49 million, which was offset by an increase of $63 million in trading commissions that was included in investment and brokerage services income. The growth in our overall trading reflects the strength of our debt sales and trading platform, which capitalized on the tightening of credit spreads and stronger distribution capabilities in the investor market.

Continued improvements in credit quality in our large corporate portfolio drove the $731 million, or 61 percent, decrease in provision for credit losses. In 2003, net charge-offs of $690 million in the large corporate portfolio were at their lowest levels in three years. Large corporate nonperforming assets dropped $1.7 billion, or 57 percent, in 2003, due to reduced levels of inflows of $2.3 billion, nonperforming loan sales of $1.4 billion, charge-offs of $841 million, and paydowns and payoffs of $667 million.

Noninterest expense increased $372 million, or seven percent, due to costs associated with downsizing operations in South America and Asia and restructuring of locations within the United States of $113 million, higher incentive compensation for market-based activities of $104 million, increased expenses from ongoing litigation and litigation reserves of $74 million, and a $50 million allocation of the charge related to issues surrounding our mutual fund practices.

Equity Investments

In 2003, revenue increased $192 million, or 43 percent, due to an improvement in equity investment gains. Equity Investments had a net loss of $249 million in 2003 compared to a net loss of $331 million in 2002. The improvement was primarily due to lower impairments. SVA increased by $108 million, or 19 percent, due to the improvement in the net loss, lower capital levels and the reduction in the rate used to calculate the charge for the use of capital.

The following table presents the equity investment portfolio in Principal Investing by major industry.

Equity Investments in the Principal Investing Portfolio
		December 31
(Dollars in millions)			2003				2002
Consumer discretionary		$	1,435			$	1,311
Industrials			876				999
Information technology			741				830
Telecommunication services			639				673
Health care			385				397
Financials			332				266
Materials			266				337
Consumer staples			245				276
Real estate			229				236
Individual trusts, nonprofits, government			48				79
Utilities			35				22
Energy			29				29
Total		$	5,260			$	5,455

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

Equity Investment Gains (Losses) in Principal Investing
(Dollars in millions)		2003				2002
Cash gains		$	273			$	432
Impairments			(438	)			(708	)
Fair value adjustments			47				(10	)
Total		$	(118	)		$	(286	)

Net interest income consists primarily of the internal funding cost associated with the carrying value of investments.

Noninterest income primarily consists of equity investment gains (losses). While overall economic conditions in 2003 improved, leading to lower impairment charges of $438 million in 2003 compared to $708 million in 2002, weakness in the private equity markets remained. This weakness resulted in a reduced level of cash gains in 2003 as compared to 2002. We anticipate that, with a continued improvement in the economy, cash gains should increase and impairments should continue to decline.

Corporate Other

Total revenue increased $56 million, or seven percent, in 2003. Net income decreased $245 million, or 22 percent.

Net interest income decreased $204 million, or 22 percent, primarily due to the continued run-off of certain consumer finance and commercial lending businesses that are being liquidated. Average loans and leases increased $27.8 billion, or 42 percent, in 2003, due to the ALM process. Average deposits increased $2.9 billion, or 25 percent, in 2003.

Noninterest income increased $260 million to $195 million in 2003, resulting from increases in gains on whole loan sales. Gains on whole loan sales increased $272 million to $772 million resulting from sales of whole loan mortgages used to manage prepayment risk due to the longer than anticipated low interest rate environment.

Gains on sales of debt securities in 2003 and 2002, were $943 million and $682 million, respectively, as we continued to reposition the ALM portfolio in response to changes in interest rates.

Noninterest expense increased $174 million, or 56 percent, due to a $187 million increase in professional fees resulting from litigation expenses.