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Net interest income on a fully taxable-equivalent basis increased $596 million to $22.1 billion in 2003. This increase was driven by higher asset and liability management (ALM) portfolio levels (consisting of securities, whole loan mortgages and derivatives), higher consumer loan levels, larger trading-related contributions, higher mortgage warehouse and core deposit funding levels. Partially offsetting these increases was the impact of lower interest rates and reductions in the large corporate, foreign and exited consumer loan businesses portfolios. The net interest yield on a fully taxable-equivalent basis declined 39 basis points (bps) to 3.36 percent in 2003 due to the negative impact of increases in lower-yielding trading-related assets and declining rates offset partially by our ALM portfolio repositioning.
Noninterest income increased $2.9 billion to $16.4 billion in 2003, due to increases in (i) mortgage banking income of $1.2 billion, (ii) equity investment gains of $495 million, (iii) other noninterest income of $485 million, (iv) card income of $432 million and (v) consumer- based fee income of $244 million. The increase in mortgage banking income was driven by gains from higher volumes of mortgage loans sold into the secondary market and improved profit margins. Other noninterest income of $1.1 billion included gains of $772 million, an increase of $272 million over 2002, as we sold whole loan mortgages to manage prepayment risk due to the longer than anticipated low interest rate environment. Additionally, other noninterest income included the equity in the earnings of our investment in Grupo Financiero Santander Serfin (GFSS) of $122 million.
Gains on sales of debt securities in 2003 and 2002, were $941 million and $630 million, respectively, as we continued to reposition the ALM portfolio in response to interest rate fluctuations.
The provision for credit losses declined $858 million to $2.8 billion in 2003 due to an improvement in the commercial portfolio partially offset by a stable but growing consumer portfolio. Nonperforming assets decreased $2.2 billion to $3.0 billion, or 0.81 percent of loans, leases and foreclosed properties at December 31, 2003 compared to 1.53 percent at December 31, 2002. This decline was driven by reduced levels of inflows to nonperforming assets in Global Corporate and Investment Banking, together with loan sales and payoffs facilitated by high levels of liquidity in the capital markets.
Noninterest expense increased $1.7 billion in 2003 from 2002, driven by higher personnel costs, increased professional fees including legal expense and increased marketing expense. Higher personnel costs resulted from increased costs of employee benefits of $504 million and revenue-related incentives of $435 million. Employee benefits expense increased due to stock option expense of $120 million in 2003 and the impacts of a change in the expected long-term rates of return on plan assets to 8.5 percent for 2003 from 9.5 percent in 2002 and a change in the discount rate to 6.75 percent in 2003 from 7.25 percent in 2002 for the Bank of America Pension Plan. The increase in professional fees of $319 million was driven by an increase in litigation accruals of $220 million associated with pending litigation principally related to securities matters. Marketing expense increased by $232 million due to higher advertising costs, as well as marketing investments in direct marketing for the credit card business. In addition, recorded in other expense during the third quarter of 2003 was a $100 million charge related to issues surrounding our mutual fund practices.
Income tax expense was $5.1 billion reflecting an effective tax rate of 31.8 percent in 2003 compared to $3.7 billion and 28.8 percent in 2002, respectively. The 2002 effective tax rate was impacted by a $488 million reduction in income tax expense resulting from a settlement with the IRS generally covering tax years ranging from 1984 to 1999 but including tax returns as far back as 1971.
The result of the above was a 17 percent growth in net income in 2003 compared to 2002. Management does not currently expect that this level of growth will recur in 2004.
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