2003 Compared to 2002
The following
discussion and analysis provides a comparison of our results of operations for
2003 and 2002. This discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes. In
addition, Table 1 and
Table 2 contain financial data to supplement this discussion.
Overview
Net Income
Net Income totaled
$10.8 billion, or $3.57 per diluted common share, in 2003 compared to $9.2
billion, or $2.95 per diluted common share, in 2002. The return on average
common shareholders’ equity was 21.99 percent in 2003 compared to 19.44 percent
in 2002. These earnings provided sufficient cash flow to allow us to return
$9.8 billion and $8.5 billion in 2003 and 2002, respectively, in capital to
shareholders in the form of dividends and share repurchases, net of employee
stock options exercised.
Net Interest Income
Net Interest Income on a FTE
basis increased $596 million to $22.1 billion in 2003. This increase was driven
by higher ALM portfolio levels (consisting of securities, whole loan mortgages
and derivatives), higher consumer loan levels, larger trading-related
contributions, higher mortgage warehouse and higher 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 FTE
basis declined 37 bps to 3.40 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
Noninterest Income increased
$2.9 billion to $16.5 billion in 2003, due to increases in Mortgage Banking
Income of $1.2 billion, Equity Investment Gains of $495 million, Other
Noninterest Income of $484 million, Card Income of $432 million, and Service
Charges of $342 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 GFSS of $122 million.
Gains on Sales of Debt
Securities
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.
Provision for Credit
Losses
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. This improvement was driven by reduced levels of inflows to
nonperforming assets in Global Capital Markets and Investment Banking,
together with loan sales and payoffs facilitated by high levels of liquidity in
the capital markets.
Noninterest Expense
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 2003 was a $100
million charge related to issues surrounding our mutual fund practices.
Income Tax Expense
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, respectively, in 2002. 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.
Business Segment Operations
Global Consumer and Small Business Banking
Total Revenue
increased $2.6 billion, or 14 percent, in 2003 compared to 2002. Overall
deposit and loan growth contributed to the $703 million, or six percent,
increase in Net Interest Income. This increase was offset by the compression of
deposit interest margins and the results of ALM activities. Increases in
Mortgage Banking Income of 118 percent, Service Charges of 14 percent and Card
Income of 17 percent drove the $1.9 billion, or 28 percent, increase in
Noninterest Income. These increases were offset by a decrease in Trading
Account Profits. Net Income rose $965 million, or 20 percent, due to the
increases in Net Interest Income and Noninterest Income discussed above, offset
by an increase in the Provision for Credit Losses. Higher provision in the
credit card loan portfolio, offset by a decline in provision for other consumer
loans resulted in a $157 million, or 10 percent, increase in the Provision for
Credit Losses.
Global Business and Financial Services
Total Revenue increased $108 million, or two
percent, in 2003 compared to 2002. Net Interest Income decreased $77 million,
or two percent. Increases in Other Noninterest Income of 58 percent, Service
Charges of seven percent and Investment Banking Income of seven percent drove
the $185 million, or 15 percent, increase in Noninterest Income. These
increases were offset by a decrease in Trading Account Profits. Provision for
Credit Losses remained relatively flat. Net Income rose $102 million, or seven
percent, due to the increase in Noninterest Income discussed above, offset by
the decrease in Net Interest Income.
Global Capital Markets and Investment Banking
Total Revenue increased $133 million, or two
percent, in 2003 compared to 2002 driven by an increase in Noninterest Income.
Net Interest Income remained relatively flat at $4.3 billion as average Loans
and Leases declined $12.0 billion, or 25 percent and average Deposits increased
$1.4 billion, or two percent. Noninterest Income increased $189 million, or
five percent, resulting from increases in Investment Banking Income, Service
Charges, Investment and Brokerage Services, and Equity Investment Gains offset
by declines in Trading Account Profits. In 2003, Net Income increased $192
million, or 12 percent, due to the increase in Noninterest Income and lower
Provision for Credit Losses offset by an increase in Noninterest Expense.
Provision for Credit Losses declined $465 million to $303 million due to
continued improvements in credit quality. Noninterest Expense increased by $402
million, or eight percent, driven by costs associated with downsizing
operations in South America and Asia and restructuring locations outside the
U.S., higher market-based compensation, increases in litigation expenses and
reserves, and the allocation of the charge related to issues surrounding our
mutual fund practices.
Global Wealth and Investment Management
Total Revenue
increased $401 million, or 11 percent, in 2003. Net Interest Income remained
relatively flat as growth in Deposits and increased loan spreads were offset by
the net results of ALM activities. Noninterest Income increased $372 million,
or 22 percent, an increase in Equity Investment Gains of $198 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. Net Income increased $351 million, or 40 percent. This
increase was due to the increase in Noninterest Income and lower Provision for
Credit Losses. Provision for Credit Losses decreased $309 million, driven by
one large charge-off recorded in 2002. The allocation of the charge related to
issues surrounding our mutual fund practices and increased expenses associated
with the addition of financial advisors were the drivers of the $182 million,
or nine percent, increase in Noninterest Expense.
All Other
In 2003 compared to 2002, Total Revenue in Latin America decreased $10 million, or 24 percent.
Net Interest Income decreased $11 million, or 31 percent, due to lower Loan and Lease
balances. Noninterest Income remained relatively unchanged at $9
million. Provision for Credit Losses decreased $155 million, or 64 percent, due
to continued improvement in credit quality and Noninterest Expense increased
$12 million. As a result, Net Loss in Latin America
improved $100 million or 68 percent. Total Revenue in Equity Investments
increased $190 million, or 43 percent, in 2003 compared to 2002 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 $330 million in 2002. In
2003, Principal Investing recorded cash gains of $273 million and fair
value adjustment gains of $47 million, offset by impairment charges of $438
million. Noninterest Income primarily consists of Equity Investment Gains
(Losses). Total Revenue in Other increased $38
million, or four percent, in 2003 compared to 2002. Net Income decreased $147
million, or 14 percent. Net Interest Income remained relatively flat.
Noninterest Income increased $35 million resulting from increases in gains on
whole mortgage loan sales. Gains on Sales of Debt Securities increased $235 million to
$942 million in 2003, as we continued to reposition the ALM portfolio in
response to changes in interest rates. Noninterest Expense increased $132
million, or 39 percent.
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