Annual Report 2002 CONTENTS 1 Chairman’s Letter to Shareholders 6 Executive Officers 8 Innovation 10 Simpler Mortgage 12 Our 14,000 Neighborhoods 14 Wealth Management 16 Across Industries, Borders, Currencies 18 Why Small Businesses Choose Us 20 Higher Standard of Living 22 Our Balanced Mix of Businesses 24 Financial Review 112 Board of Directors and Corporate Information 2002 Revenue** ($ in millions) Asset Management $2,399 Equity Investments $(433) $8,833 $22,989 Year Ended December 31 2002 2001 $ 35,082 9,249 3,760 6.08 5.91 2.44 1.40% 19.44% 52.55% $ 34,981 6,792 3,087 4.26 4.18 2.28 1.05% 13.96% 59.20% 1,520 1,595 Global Corporate and Investment Banking Consumer and Commercial Banking Financial Highlights (Dollars in millions, except per share information) For the Year Revenue* Net income Shareholder value added Earnings per common share Diluted earnings per common share Dividends paid per common share Return on average assets Return on average common shareholders’ equity Efficiency ratio Average common shares issued and outstanding (in millions) At Year End Total assets Total loans and leases Total deposits Total shareholders’ equity Common shareholders’ equity Book value per common share Market price per share of common stock Common shares issued and outstanding (in millions) $ 660,458 342,755 386,458 50,319 50,261 33.49 69.57 1,501 $ 621,764 329,153 373,495 48,520 48,455 31.07 62.95 1,559 * Fully taxable equivalent 2002 Net Income** ($ in millions) Asset Management $404 Equity Investments $(329) $1,723 $6,088 Global Corporate and Investment Banking Consumer and Commercial Banking ** Excludes Corporate Other BANK OF AMERICA 2002 The theme of this report — Higher Standards — reflects your company’s commitment to the idea that in every endeavor, there is always an opportunity to raise the bar, to do something better than anyone has done it before. Our commitment to this idea is evident in the year’s achievements. In 2002, your company: • Posted strong financial results in a challenging business environment; • Launched exciting new products and significantly improved customer satisfaction; • Outperformed its peers and gained market share in most of its major businesses; and, • Won recognition from two major financial publications (U.S. Banker and American Banker) as the best American banking story of the year. We are fulfilling our vision for a fully integrated, multi-product financial services company, and that vision has not changed. We are more convinced than ever that clients of all our businesses want a financial services partner that offers unmatched convenience and expertise, high service quality, innovation and a variety of products and services delivered as a single relationship. We also remain convinced that such a company, when managed with focus, discipline and intensity, will produce strong growth and consistent, quality returns for its owners. Building and preserving trust. Producing quality returns was, as always, our top priority in 2002. But there was no denying the top story of the year in corporate America: BANK OF AMERICA 2002 1 Kenneth D. Lewis Chairman, Chief Executive Officer and President $35.0 $35.1 $33.3 $20.7 $18.6 $9.2 $7.5 $6.8 2000 2001 2002 2000 2001 2002 2000 2001 2002 Revenue ($ in billions) (fully taxable equivalent) Non Interest Expense ($ in billions) Net Income ($ in billions) a crisis of public confidence in the ability of American Our management processes, structures and policies help corporations to govern themselves effectively and ethically. us ensure compliance with laws and regulations and provide When your Board of Directors launched an initiative clear lines of sight for decision-making and accountability. two years ago to review, redesign and formally adopt new But these disciplines represent only one side of governance. governing principles, we thought we were simply setting The other side, corporate culture, is even more important. new standards required to become a world-class company. It is corporate culture — championed by leadership and We had no idea how rapidly these initiatives would become sustained by every associate within the organization — that a competitive advantage. Two years later, we have confidence determines corporate ethics. in our governance systems and continue to refine our policies One way we build and protect our culture is by aggres- to ensure adequate independence, control and oversight of sively promoting our company’s core values to associates at our company’s activities. all times, as well as our Code of Ethics, which we updated Our governance structure enables us to manage all the last fall. But we also know that actions speak louder than major aspects of the company’s business effectively through words. And so, we foster a culture of openness, in which an integrated process that includes financial, strategic, risk and healthy debate is encouraged and associates are expected associate planning. In particular, we made important changes to blow the whistle on improper activity. We also do not in our processes for managing risk. As a financial services hesitate to separate ourselves from individuals who violate company, we are in the business of taking risk — whether we our cultural standards and expectations, regardless of succeed depends largely on whether we take the right risks, and whether we get paid appropriately for the risks we take. performance or potential. We believe results are important — but we believe how We define risk broadly, including not only credit, market we achieve results is equally important. Our commitment and liquidity risk — the traditional concerns for banks — but to this principle is the key to sustaining the public trust and also operational risk, including risks related to systems, confidence in our company. processes or external events, as well as legal, regulatory and reputation risks. In evaluating and responding to risk, we Strong, consistent financial results. In 2002, your company’s associates produced net income of $9.25 employ three lines of accountability to protect shareholder billion on revenue of $35.1 billion, compared to $6.79 value: first, the line of business; second, Risk Management, billion and $35.0 billion in 2001. While these are solid joined by other units such as Finance and Legal; and third, our corporate audit function. results taking into account continuing economic headwinds, we are highly focused on increasing revenue in 2003 as 2 BANK OF AMERICA 2002 we pursue our long-term goal of 7% to 9% annual revenue In December, we agreed to purchase a 24.9% stake in growth. Earnings per share (EPS) were $5.91, shareholder Grupo Financiero Santander Serfin (GFSS), the subsidiary value added (SVA) was $3.76 billion, and return on equity of Santander Central Hispano in Mexico, for $1.6 billion. (ROE) was 19.4%; these results compared, respectively, GFSS is the third-largest and most profitable banking to $4.18, $3.09 billion and 14.0% in 2001. organization in Mexico. The transaction is expected to close The result is a stock price for your company that continues in the first quarter of 2003. to climb. In 2002, it increased 10.5% to $69.57 at year-end, This investment was driven by our desire to better a strong gain on top of a 2001 increase of 37%. Over a serve Hispanic customers within our U.S. franchise and to three-year period, Bank of America ranks number one in its increase our presence in all our Hispanic communities. Our peer group with a 15.9% average total shareholder return, relationship with GFSS will enable us to better understand including both stock price gains and dividends. our Hispanic customers, enhance our products and services Returning capital to shareholders continues to be a and position Bank of America as the bank of choice for the priority. In October, the board approved a 7% increase in Mexican-American population in our key markets. Finally, the quarterly dividend to $0.64, or $2.56 annually, repre- the investment met our stated financial hurdles and will be senting a 3.7% dividend yield based on our stock price at accretive to earnings in 2003. the end of the year. In addition, we repurchased 109 million Our Global Corporate and Investment Banking business shares of stock in 2002, and the board authorized further (GCIB), by focusing on clients in industry sectors with repurchases of up to 130 million shares within 24 months high growth potential and where we have specific expertise, at its January 22, 2003 meeting. gained market share in almost all of its major product and As in 2001, our Consumer and Commercial Banking service categories. In particular, we gained ground in business (CCB) led the way for our company, with par- advisory services, equity offerings, convertibles, high-grade ticularly strong growth in card income, mortgage banking debt and asset-backed securities. income and deposits. Our results in these businesses Global Treasury Services continued to provide a strong, demonstrate the tremendous strength of CCB as a growth steady income stream for GCIB with a 26% increase in net engine for our company. income. Investment banking fees of $1.5 billion fell only CCB posted earnings of $6.09 billion, up from $4.95 3% from last year, even as fees across the industry fell by billion a year earlier. Revenue growth in CCB was 9%, double digits. Despite strong performance in GCIB relative including growth of 8% in card income and 27% in mortgage to our competitors, lower demand in market-sensitive banking income. Average deposits grew 6% and consumer businesses (including a significant decline in trading profits), loans increased 16%. We also achieved significant growth in coupled with continued high credit losses, resulted in net our customer base as net new checking accounts increased by income of $1.72 billion, a 12% decline from last year. more than half a million and active users of Online Banking surged to more than 4.7 million. Commercial loan levels Results in the Asset Management Group (AMG) also were deeply affected by the challenging economy generally and the declined 12% as companies paid down loan balances. double-digit decline in the stock market specifically. Net income We also took steps this year to open new markets and from AMG fell 23% from a year ago to $404 million, primarily to expand our customer base in the consumer and small due to weak market activity and one large credit charge-off. business segments. These results masked important accomplishments for the Last fall, we announced plans to open up to 550 new business. Our mutual funds investment results put us among banking centers over the next three years, including 15 the leading performers in 2002, and assets under management new banking centers in Chicago in the coming year. remained stable at $310 billion while, again, major market Banking centers continue to be the dominant channel for the creation of new banking relationships, and we indices fell sharply. AMG also made strong gains on its great- est priority: expanding distribution by increasing the number are opening these centers in markets that offer the best of advisors serving clients. Our goal was to increase our force potential for new growth. of financial advisors by 20% — a goal we surpassed in 2002. BANK OF AMERICA 2002 3 Our ability to add resources and capabilities in businesses cross sales. We have hundreds more projects in the pipeline like GCIB and AMG demonstrates a great advantage of and plan to more than double the number of Six Sigma our diverse revenue streams. During a year in which most “Green Belt” and “Black Belt” projects in 2003. market-sensitive businesses struggled greatly, our corporate The result of all this work is more satisfied customers earning power enabled us to continue to invest in our and clients, all of whom are more likely to purchase more investment banking and asset management businesses. products and services from our company and to recommend By adding program trading capabilities for our institutional us to friends and relatives. But the benefits go further. clients and advisors in Asset Management, we continued While we will continue to invest in advertising to develop to position these businesses well to lead their industries and support our company’s brand — we executed several when markets recover. very successful campaigns this year — we believe the Your company’s financial results clearly illustrate the Bank of America brand is created in the millions of experi- strength of our business mix. Steady earnings growth from ences that customers have with our company every day. our retail business combined with volatile but higher potential Every customer interaction — we have more than 150 growth from our market-sensitive businesses enables us per second — is an opportunity to attract, retain or deepen to produce consistent results through strong and weak a customer relationship. And every interaction that results economic cycles. in a delighted customer builds the strength of our brand In fact, we now have posted stable or increased earnings and our company for the future. per share in eight consecutive quarters. This is the kind of The promise of Higher Standards. Bank of America . consistent, predictable financial performance that makes our is founded on an important idea: that people are at their company increasingly attractive to investors and also enhances best when they are striving to exceed accomplishments our ability to plan and invest strategically for the future. of the past. In our company, we have long talked about our More satisfied customers and clients. As pleased as I am about our financial results, I am even more encour- commitment to redefining world-class business performance and standards of operational consistency, accuracy and aged by the progress in our customer and client satisfaction efficiency. We have long insisted on continuous improve- measures, which provide the foundation for future growth. ment and the sustained intensity that drives it, promising Last year in these pages, I wrote about our organic growth never to settle for an industry benchmark or our own strategy, our intense focus on customer satisfaction and our historical performance. We have said our goal is nothing Six Sigma initiatives for enterprise-wide process improve- short of becoming the world’s most admired company. ment. This year, I am pleased to report that our focus on This drive to excel can be summed up in two words: quality and productivity is changing not only our culture Higher Standards. This is our goal in everything we do. inside the company, but also the way our customers view us Higher standards for our customers, who use our products from outside the company. For the year, the number of cus- tomers rating their satisfaction level a 9 or 10 on a 10-point and services to help manage their financial lives and achieve their dreams. Higher standards for our shareholders, who scale — those we refer to as “delighted” — rose 10.4%, or have entrusted us with their wealth and financial future. 1.2 million customers across the franchise. Over the same Higher standards for our associates, who have chosen to use period, more than one million fewer customers experienced their skills and talents here and who deserve every opportu- problems with bank services, a decrease of 24%. nity to reach their full potential. Higher standards for our In CCB, we’ve streamlined processes for deposits, communities, which are deeply invested in this enterprise payments and problem resolution. In AMG, associates are and upon which the future prosperity of our company rests. using Six Sigma to boost sales and revenue opportunities. Throughout our company, our associates are raising the And in GCIB, associates designed and implemented an automated, standardized client calling and pitch reporting bar for performance. Consumer bankers are pursuing product innovation for customers that makes home buying easier, system to enhance client relationship management and and that offers unmatched financial security. Small business 4 BANK OF AMERICA 2002 $5.91 19.44% $4.52 $4.18 15.96% 13.96% $2.44 $2.28 $2.06 2000 2001 2002 2000 2001 2002 2000 2001 2002 Earnings Per Common Share (diluted) Return on Average Common Shareholders’ Equity Dividends ($ per share) bankers are nurturing the grassroots of the American In particular, I greatly appreciate the service of Ray Holman, economy, and helping foster the entrepreneurial spirit in chairman of Mallinckrodt, Inc. and Peter Ueberroth, managing our multicultural communities. Middle-market, corporate director of The Contrarian Group, Inc., both of whom are and investment bankers are helping their clients raise the retiring from the board this year. On behalf of all our associ- capital they need to grow their businesses and navigate ates, I also thank our customers, who provide the inspiration today’s treacherous markets safely and successfully. for all we do, and our shareholders, whose commitment to and These associates are led by an executive management team investment in this company make higher standards an ideal that includes seasoned veterans and rising stars from both worth expecting, worth demanding and worth fighting for. inside and outside the financial services industry, several of As always, I welcome your thoughts and suggestions. whom won industry recognition for their tremendous results in 2002. Working with managers and associates throughout the company, we all are building customer and client rela- tionships and delivering the financial products and services our customers need to help them achieve their dreams. In regard to our focus on building relationships — the foundation of our corporate strategy — I will repeat what KENNETH D. LEWIS Chairman, Chief Executive Officer and President I wrote last year. We know that we are not the only large February 10, 2003 banking company pursuing a relationship-based strategy, and that the real game is execution. What’s different today is the evidence from our customers and on our income statement that we are, indeed, executing this strategy more successfully — and on a much larger scale — than our competitors. While the economic outlook remains uncertain, we believe we will continue to build on our momentum, and will be well-positioned to further separate our company from the pack when stronger economic growth returns. In closing, I would like to thank our Board of Directors for their guidance and counsel during a turbulent year. BANK OF AMERICA 2002 5 Executive Officers Richard M. DeMartini President, Asset Management James H. Hance, Jr. Vice Chairman and Chief Financial Officer Barbara J. Desoer President, Consumer Products Edward J. Brown, III President, Global Corporate and Investment Banking 6 BANK OF AMERICA 2002 Amy Woods Brinkley Chief Risk Officer R. Eugene Taylor President, Consumer and Commercial Banking Kenneth D. Lewis Chairman, Chief Executive Officer and President BANK OF AMERICA 2002 7 To make banking more convenient, to make banking more secure, to bring higher standards into the core of financial services innovation, that is our charter. It’s the new palm scanner pictured at right that “reads” the uniqueness of your palm print to gain greater security in the safety deposit vault. It’s a patented new mini Check Card that’s as easy to get to as pulling out your keys (and should be on the key chains of 11 million of our customers by the end of 2003). It’s new digital check imaging that can provide copies of checks to customers and small business owners via the Internet or at a neighborhood banking center. It’s talking ATMs to make life easier for our vision-impaired customers. It’s a faster mortgage application thanks to LoanSolutions®. This proprietary process leverages one of our greatest competitive advantages for mortgage growth — our extensive banking center network. In minutes, our 7,300 personal bankers can match customers with the right products to meet their needs. Further setting new standards for convenience and ease, other process improvements led to an 80% reduction in mortgage paperwork. It’s extending innovation to corporate and institutional clients. In 2002, Banc of America Securities pioneered Core Bond, an innovative “basket” security that lowers the cost of capital for corporate issuers and reduces transaction costs for investors looking to purchase a portfolio of corporate bonds. The inaugural issue bundled $2 billion in new issues from 22 investment grade corporations. It’s a focus on continuously improving quality, productivity and innovation to delight customers and drive organic growth. In 2002, more than 58,000 associates attended quality and productivity training, creating a new culture built on delivering process excellence and the best customer experience. It’s embracing Six Sigma tools and skills to lead to higher process and service standards as we handle nearly 57 million customer transactions faster and more accurately. Last year, for example, these efforts resulted in improvements in processing of 22% for same-day payments and 35% for same-day deposits. It’s what market leadership is all about. 8 BANK OF AMERICA 2002 9 Consumers represent a huge source of earnings, growth and stability for our company. This business was the backbone of 2002 performance, and momentum for the future is immense. Consumer-related products and services contributed more than one-third of corporate earnings. And, we’re delighting, adding and retaining customers in record numbers — the best leading indicators of growth. In 2002, Bank of America became the provider of home financing solutions to nearly a million households. We surpassed $100 billion in total mortgage loans made. Consumer mortgage revenue grew to a record $1.2 billion, a 20% increase over 2001. Most important, we helped our customers realize the dream of home ownership, save hundreds or even thousands of dollars each year through refinancing, or finance home improvements or other important purchases. Nearly half our mortgage customers now make electronic payments — saving them time and reducing cost for the company. Banking centers continue to be a primary point in serving all of our customers, including businesses of all sizes. They remain consumers’ top choice in selecting where to open personal accounts to help manage their household finances. We possess the nation’s most extensive network, giving us an unmatched competitive advantage. In the next three years, we’ll strengthen our base and provide even greater customer convenience to our nearly 28 million relationships by opening 550 new banking centers. Individual customer relationships continue to begin with checking and savings. We provide a variety of both. Last year, we grew checking accounts by 528,000. That helped drive a 5.3% increase in consumer deposits, exceeding goals for both. Revenue grew 12%, while customers responding they were “delighted” with their service increased 10%. We’re investing in technology that gives customers a choice in when, how and where to access their money. We lead the industry with more than 4.7 million active Online Banking customers and nearly 1.8 million active online bill payers. Monthly, our customers pay 9.9 million bills online totaling $2.7 billion. Another form of convenience customers seek is choice in payment options. We’re a leading provider of credit and debit cards, with more than 20 million active card accounts. In 2002, consumer credit card activity contributed $3.1 billion in total revenue and SVA of $450 million. Our customers continually set higher standards in what they want from their bank. We love that challenge. 10 BANK OF AMERICA 2002 11 12 The story of America is a story of ethnic and cultural diversity. Our tradition of serving America’s The story of America is a story of ethnic and cultural diversity. Our tradition of serving America’s immigrant and minority communities provides us a competitive edge in continuing to serve an increas- immigrant and minority communities provides us a competitive edge in continuing to serve an increas- ingly diverse customer base. For us, doing so is a business imperative. Ethnic markets are projected ingly diverse customer base. For us, doing so is a business imperative. Ethnic markets are projected to drive population growth in our markets this decade. We believe we’re well positioned to lead them. to drive population growth in our markets this decade. We believe we’re well positioned to lead them. We’re working to ensure that all of our customers have access to the products and services they We’re working to ensure that all of our customers have access to the products and services they need to participate fully in the economic life of their communities. We communicate with our customers need to participate fully in the economic life of their communities. We communicate with our customers in dozens of languages and extend our reach to them through strategic alliances with community-based in dozens of languages and extend our reach to them through strategic alliances with community-based organizations and advertisements in ethnically targeted publications. organizations and advertisements in ethnically targeted publications. SafeSend™, our cross-border money transfer service, helps customers avoid wiring costs by using SafeSend™, our cross-border money transfer service, helps customers avoid wiring costs by using stored value cards when sending money to family or friends in Mexico. This enables us to tap into the stored value cards when sending money to family or friends in Mexico. This enables us to tap into the estimated $12 billion U.S.-Mexico money transfer industry. We recognize the Matricula Consular or estimated $12 billion U.S.-Mexico money transfer industry. We recognize the Matricula Consular or Mexican Consulate ID as identification verification, making it easier for new immigrants to obtain financial Mexican Consulate ID as identification verification, making it easier for new immigrants to obtain financial services. And our pending investment in a 24.9% stake in Grupo Financiero Santander Serfin, Mexico’s services. And our pending investment in a 24.9% stake in Grupo Financiero Santander Serfin, Mexico’s third-largest bank, will provide greater opportunities to better serve our customers with ties to that country. third-largest bank, will provide greater opportunities to better serve our customers with ties to that country. Increasing minority home ownership continues to be a major focus for Bank of America. We’re Increasing minority home ownership continues to be a major focus for Bank of America. We’re a leader in helping minority borrowers become homeowners, ranking third nationally in most recent a leader in helping minority borrowers become homeowners, ranking third nationally in most recent competitive reports. Minority borrowers represent a greater share of our total mortgage originations competitive reports. Minority borrowers represent a greater share of our total mortgage originations than our peers. Through alliances with organizations such as than our peers. Through alliances with organizations such as the National Urban League, NAACP, National Council of La Raza, the National Urban League, NAACP, National Council of La Raza, ACORN Housing Corporation and numerous financial partners ACORN Housing Corporation and numerous financial partners and housing organizations, we’re expanding access to mortgage and housing organizations, we’re expanding access to mortgage financing, home ownership counseling and other money financing, home ownership counseling and other money management information. management information. Our Asian-American customers benefit daily from our Our Asian-American customers benefit daily from our bilingual retail service through more than 175 Asian-language bilingual retail service through more than 175 Asian-language banking centers. banking centers. America’s diversity adds great richness to the fabric of our America’s diversity adds great richness to the fabric of our communities. It’s in our dreams for good homes, quality education communities. It’s in our dreams for good homes, quality education for our children and economic security where we find our for our children and economic security where we find our common ground. common ground. BANK OF AMERICA 2002 BANK OF AMERICA 2002 13 13 More Americans entrust Bank of America to manage their wealth than any other U.S. bank. More Americans entrust Bank of America to manage their wealth than any other U.S. bank. Why? We have a simple standard: always put the client’s interest first — whether it’s objective advice, Why? We have a simple standard: always put the client’s interest first — whether it’s objective advice, a sophisticated spectrum of investment opportunities and solutions, or decades of experience in a sophisticated spectrum of investment opportunities and solutions, or decades of experience in trust and estate planning. trust and estate planning. Testimony to this is ending an extremely difficult year with assets under management virtually Testimony to this is ending an extremely difficult year with assets under management virtually unchanged at $310 billion. unchanged at $310 billion. The Private Bank excels at focusing on the needs of clients with more than $3 million in assets, The Private Bank excels at focusing on the needs of clients with more than $3 million in assets, providing integrated advice in four key areas of wealth management: banking, credit, investments, providing integrated advice in four key areas of wealth management: banking, credit, investments, and trust and estate planning. Our personal trust organization ranks as the largest provider of trust and trust and estate planning. Our personal trust organization ranks as the largest provider of trust and estate services to individuals and families. and estate services to individuals and families. Financial advisors from our Asset Management Group have joined with Premier Banking, which Financial advisors from our Asset Management Group have joined with Premier Banking, which serves nearly 400,000 clients with assets up to $3 million, to enhance access to investment services serves nearly 400,000 clients with assets up to $3 million, to enhance access to investment services for more of our customers through our major market banking centers. for more of our customers through our major market banking centers. Banc of America Investments’ financial advisors partner with affluent clients in developing effective Banc of America Investments’ financial advisors partner with affluent clients in developing effective financial plans to achieve both near- and long-term goals. Using sophisticated technology, our financial financial plans to achieve both near- and long-term goals. Using sophisticated technology, our financial advisors help clients assess needs, opportunities and risk tolerance. Based on this assessment, financial advisors help clients assess needs, opportunities and risk tolerance. Based on this assessment, financial advisors tailor a strategy and asset allocation to the client’s needs. advisors tailor a strategy and asset allocation to the client’s needs. Investment solutions are provided through Banc of America Capital Management. Investment Investment solutions are provided through Banc of America Capital Management. Investment results for the three years ending December 31, 2002 place it among the industry’s best-performing results for the three years ending December 31, 2002 place it among the industry’s best-performing managers, with nearly 80% of its funds’ assets ranked in the top two quartiles of their respective managers, with nearly 80% of its funds’ assets ranked in the top two quartiles of their respective Lipper categories. A leading U.S. investment manager, our Nations Funds™ ranks as the 11th largest Lipper categories. A leading U.S. investment manager, our Nations Funds™ ranks as the 11th largest fund group. In 2002, we received the prestigious DALBAR Award for customer service for the fourth fund group. In 2002, we received the prestigious DALBAR Award for customer service for the fourth year in a row. Our Future Scholar ™ college savings and investment plan was one of only six programs year in a row. Our Future Scholar ™ college savings and investment plan was one of only six programs to win an A+ rating in a recent Barron’s survey of 68 of these tax-advantaged plans. to win an A+ rating in a recent Barron’s survey of 68 of these tax-advantaged plans. Objective advice, strong investment performance and great service. These are the higher standards Objective advice, strong investment performance and great service. These are the higher standards that make us America’s trusted wealth advisor. that make us America’s trusted wealth advisor. 14 BANK OF AMERICA 2002 14 BANK OF AMERICA 2002 15 16 Adding to the diverse, yet stable mix of our business model is the continuum of services we provide Adding to the diverse, yet stable mix of our business model is the continuum of services we provide to corporate and commercial clients. We serve nine out of 10 Fortune 500 companies and nearly to corporate and commercial clients. We serve nine out of 10 Fortune 500 companies and nearly one-third of all mid-size companies in our franchise. one-third of all mid-size companies in our franchise. Global Corporate and Investment Banking. Our GCIB team has been resilient in one of the most challenging corporate banking environments in recent years, outperforming many investment-banking competitors. A growing percentage of our most important clients now view us as their lead investment bank. Both Global Finance and Euromoney named Bank of America “Best U.S. Bank.” Corporate Finance and International Financing Review recognized us with several prestigious “deal of the year” awards. Our depth of executive leadership and talent, combined with our capital strength, global positioning and array of products, are differentiators that contributed to substantial gains in market share in 2002. According to Thomson Financial, our market share: • Increased from 2.9% to 5.2% in U.S. M&A transactions • Grew from 2.4% to 4.1% in U.S. equity and equity-related securities • Nearly tripled among U.S. issuers of convertible securities • Increased in U.S. high-grade and high-yield bond underwriting and U.S. asset-backed securities, categories where we rank in the top five Commercial Banking. Our team, with approximately 25,000 relationships, has become the predominant commercial bank in the country. We provide financial solutions to clients with annual revenues of $10 million to $500 million. We serve as lead bank or primary financial provider for 67% of our clients, offering traditional credit, capital markets, treasury services and personal wealth management services. In a tough year for mid-size companies, we realized a 19% increase in Commercial net income. Among the largest U.S. bank providers of real estate financing for our commercial and corporate clients, we originate, structure, underwrite and distribute commercial and residential property transactions. In 2002, capital raised for clients totaled $133 billion. We’re also recognized as a national leader in affordable housing financing. Every business needs to keep its focus on its business. Our corporate and commercial bankers supply the financial expertise and resources so our clients can do exactly that. BANK OF AMERICA 2002 17 Small business is big business at Bank of America. We have the deepest small business penetration of any single banking institution in the nation. Two million small businesses — one in every five — bank with us. By doubling our Small Business Administration loan originations to nearly 4,000, we became the country’s No. 1 SBA lender for 2002 and the top SBA lender to minority business owners. By providing the best products, unbeatable convenience, superior service and world-class value and financial advice, we’re becoming the small business bank of America. Half our clients are in the key growth states of California and Florida, where we also enjoy the leading overall banking market share. More than 20% of our small business relationships are with minority or women owners. Small Business net income grew by an impressive 18% in 2002, and deposits increased by nearly 7%. Our company’s diverse business mix enables us to bring a wider array of products and services to small business owners than many of our competitors. For example, small businesses increasingly need treasury management and merchant services, as well as retirement planning. We bring the same expertise to small businesses as we do to many of the nation’s commercial and corporate companies, for whom we are a leading provider of financial services. In 2002, we introduced Business Advantage, one of the most comprehensive and competitive value packages in the market. It’s a preferred pricing and service account that rewards small business owners for deepening their relationships with us. Unlike other providers’ products, Business Advantage gives owners the ability to tailor products and services to their specific needs so they don’t have to pay for a one-size-fits-all account. Convenience also separates Bank of America from others serving small businesses. Our customers have access to more than 4,200 banking centers, a corps of nearly 900 Small Business Banking client managers and sales associates, business lending centers, call centers, and Merchant Card and Treasury Management sales officers. Add more than 13,000 ATMs and award-winning Online Banking with Bill Pay, and we provide the 24/7 access that small business owners require. More than 375,000 of our small business clients are active users of our online service, recently named the No. 1 small business Web site by Gomez, an Internet publication. A small business client said it best when he summed up his experience with Bank of America as a “unique, small-town atmosphere with big-time benefits.” 18 BANK OF AMERICA 2002 19 Higher standards in corporate leadership mean higher standards in community leadership. That’s nothing new to us. Through the years, we’ve strengthened the markets we serve by combining products, services and our financial success with associates’ talent and creativity. We’re proud of an outstanding record of impact that is making communities across America better places to live and work. In 1998, Bank of America made an unprecedented 10-year, $350 Billion Commitment to community development lending and investment. In just four years, we’ve exceeded $160 billion, with more than $49 billion in loans and investments in 2002. Over the past two decades, we’ve helped create more than 100,000 affordable housing units. Demonstrating sustainability of the business, Community Development Banking in 2002 generated $170 million in revenue and $24 million in SVA. A leader in corporate philanthropy, we provided almost $128 million in direct grants, matching gifts, volunteer grants, sponsorships and in-kind contributions to qualifying nonprofits and other community-based organizations across our franchise in 2002. Embracing that spirit of giving and commitment to community, our associates donated $10 million of their own money. Our corporate and associate spirit also extends to hands-on civic engagement. We provided more than 650,000 hours of volunteer time through the efforts of more than 135,000 associates participating in more than 3,000 bank-sponsored activities with an estimated financial value of nearly $10 million. We focus our charitable and volunteer activities on programs that contribute to creating economic opportunities for individuals and communities. For example, understanding that good money man- agement skills are key to financial security, we introduced Financial Fitness for Life with the National Council on Economic Education. To help K–12 students become smart consumers, savers and investors, we’ve provided teachers with free curriculum and materials available in both English and Spanish. Our America/Works program is meeting two important goals — supporting the community’s efforts to help people become economically self-sufficient and supplementing our company’s efforts to attract new associates. Partnering with community-based organizations such as Goodwill and the Urban League, we’ve hired more than 7,000 people from public assistance through this initiative. Why do we care about strong, vibrant communities? Because we’re a part of them, too. 20 BANK OF AMERICA 2002 21 Our Balanced Mix of Businesses at a Glance Consumer and Commercial Banking Growth Strategies We serve nearly 28 million customers, including 2 million small businesses, in 21 states plus the District of Columbia. Customers access us through more than 4,200 banking centers, more than 13,000 ATMs, 24-hour telephone banking and the largest online bank in the world with 4.7 million active users at year-end 2002. $1.2 $1.6 Consumer Products Commercial Banking We are the financial services leader in providing high-touch banking and investment solutions to affluent clients with balances up to $3 million who are interested in building and preserving their wealth through investing and credit strategies. Each of our 400,000 Premier clients is assigned an experienced client manager who delivers the full resources of Bank of America for proactive financial planning and personalized solutions. Net Income ($ in billions) We are the nation’s top bank for small businesses that have annual sales of $10 million or less. We serve one in five small businesses within our franchise and are the No. 1 SBA lender. We are a leading provider of credit and debit cards with nearly 20 million active accounts. We are the fourth-largest direct-to-customer mortgage provider and the third-largest provider of mortgages to minority borrowers through our Consumer Real Estate activities. As the preeminent commercial bank in the United States, we’re recognized for the financial expertise of our bankers and the comprehensive range of services we provide to clients with annual revenues of $10 million to $500 million. We provide banking services through more than 25,000 relationships. Consumer Consumer, Premier, Small Business $3.3 • Acquire, deepen and retain relationships to increase market share • Build relationship net income • Expand the number of banking centers by nearly 13% over three years • Capture multicultural growth • Increase customer service delight Premier • Grow market share, leading with our top markets • Deepen client relationships, leveraging investment solutions • Increase client satisfaction through error-free service and expanded wealth management services • Deliver Bank of America’s full resources to meet the needs of our affluent clients Small Business • Make it easy to do business with us • Provide world-class value and advice • Increase sales productivity through Six Sigma efforts Card Services • Grow revenue by deepening customer relationships • Improve customer satisfaction • Drive product innovation • Improve core processes Consumer Real Estate • Listen to our customers to define and determine world-class service • Deliver the industry’s best combination of product, price and experience • Leverage all channels, processes and products to expand our relationships with our customers Commercial • Build market share • Increase lead relationships • Reduce earnings volatility by growing noncredit revenue Asset Management Group AMG is a leading provider of wealth and investment management services, financial planning, trust and estate planning, and securities services to individuals and families, small businesses, corporations and institutions. Asset Management $0.4 • Earn the role of trusted wealth advisor to our clients • Field a world-class team of financial advisors through training and devel- opment of our associates and employing the most talented professionals • Offer a wide array of high-quality investment solutions • Provide the highest levels of customer service • Capture more opportunities to work with other Bank of America customers nationwide Net Income ($ in billions) Global Corporate and Investment Banking GCIB is an integrated corporate and investment bank that provides issuer clients with innovative comprehensive capital-raising solutions and advisory services in addition to traditional bank deposit and loan products. We also provide cash management and payments services. Investor clients are served by strong equity and debt sales and trading capabilities. Clients benefit from extensive derivatives and other risk management products. 22 BANK OF AMERICA 2002 GCIB $1.7 Net Income ($ in billions) • Increase fee-based business by focusing on strategic issuer clients in key sectors • Build leading capital-raising and advisory capabilities that will enable us to meet the needs of our clients • Build market share with investor clients by serving their needs in an integrated way to deepen relationships • Reduce credit risk to improve capital efficiency and lower volatility Financial Results for 2002 Consumer — Banking Regions (including Premier and Small Business) • Revenue of $13.4 billion, increased 8% over 2001 • Net income of $3.3 billion, increased 25% over 2001 • Shareholder value added of $2.1 billion, increased 17% over 2001 Consumer Products (including credit card, mortgage and indirect consumer lending) • Revenue of $6.1 billion, increased 19% over 2001 • Net income of $1.6 billion, increased 25% over 2001 • Shareholder value added of $1.3 billion, increased 29% over 2001 Commercial Banking • Revenue of $3.5 billion, flat with 2001 • Net income increased to $1.2 billion, or 14% over 2001 • Shareholder value added increased to $678 million, up 32% from 2001 Recent Achievements Consumer • Grew checking accounts by 528,000, exceeding our goal for the year • Reached 4.7 million online customers, 1.8 million online bill payers • Improved customer delight scores by 10% Premier • Increased customer satisfaction by 15% • Achieved nearly 9% growth in investment balances • Added 50,000 new clients • Achieved 28% total balance growth for new clients referred from banking centers • Increased revenue per client by 40% Small Business • Achieved status of nation’s No. 1 SBA lender • Introduced Business Advantage, a preferred pricing and service account that rewards owners for deepening their relationships with us • Online Banking ranked No. 1 for small businesses by Gomez, an Internet publication Card Services • Introduced Total Security Protection™ — offering greater defense against theft, loss and unauthorized use • Introduced mini card, a fast, convenient way to make purchases Consumer Real Estate • Helped nearly a million Americans purchase, refinance or leverage their home’s equity • Launched an exclusive process requiring 80% less paperwork • Introduced LoanSolutions® in banking centers, creating more than 4,000 additional outlets to serve the home financing needs of customers Commercial • Grew commercial noncredit revenue to more than 50% of total • Decreased commercial problem loans by 38% and nonperformers by 32% • Increased number of advisors by more than 20%, improving our • Revenue held steady, declining only 3% in one of the most difficult years ability to serve customers throughout the bank’s national franchise • Posted strong investment performance, among the best in the asset management industry. Nearly 80% of fund assets were in the top two quartiles of their respective Lipper categories • Held assets under management at approximately $310 billion, despite declines of more than 20% in broad market measures • Increased associate satisfaction, a key factor in retaining the best advisors and building client satisfaction in the asset management industry since the 1970s • Net income totaled $404 million, a decline of 23% from 2001, due to one large credit charge-off • Shareholder value added was $113 million • Gained market share in investment-grade debt offerings, convertible • In one of the toughest corporate banking environments in recent years, and common stock offerings, M&A advisory and asset-backed securities • Achieved investment banking income just 3% down from previous year, despite weaker market environment for securities underwriting • Attained the lead investment bank position with a greater number of key issuer clients and significantly deepened relationships with investor clients across all product categories net income declined 12% to $1.72 billion, largely due to an 18% decline in trading-related revenue • Shareholder value added totaled $421 million • Return on equity was 15.5%, one of the best in the industry BANK OF AMERICA 2002 23 Financial Review Financial Review CONTENTS CONTENTS Management’s Discussion and Analysis of Results of Operations, Financial Condition Management’s Discussion and Analysis of Results of Operations, Financial Condition and Statistical Financial Information and Statistical Financial Information Report of Management Report of Management Report of Independent Accountants Report of Independent Accountants Consolidated Statement of Income Consolidated Statement of Income Consolidated Balance Sheet Consolidated Balance Sheet Consolidated Statement of Changes in Shareholders’ Equity Consolidated Statement of Changes in Shareholders’ Equity Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Board of Directors and Senior Managers Board of Directors and Senior Managers 24 BANK OF AMERICA 2002 24 BANK OF AMERICA 2002 Management’s Discussion and Analysis of Results of Operations and Financial Condition Bank of America Corporation and Subsidiaries This report 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,” 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 Corporation’s Annual Report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are rep- resentative 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 state- ments 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; unfavorable political conditions includ- ing acts or threats of terrorism and actions taken by governments in response to terrorism; litigation liabilities, 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 Federal Reserve Board, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and state regulators; competi- tion 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 prod- ucts, 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. The Corporation is 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 non-banking financial services and products both domestically and internationally through four business seg- ments: Consumer and Commercial Banking, Asset Management, Global Corporate and Investment Banking and Equity Investments. The following Management’s Discussion and Analysis of Results of Operations and Financial Condition should be read in conjunction with the Statistical Information beginning on page 56. When a note to the consolidated financial statements is referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition such as by the word “see,” then such note is incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition. Performance Overview Net income totaled $9.2 billion, or $5.91 per diluted common share in 2002, compared to $6.8 billion, or $4.18 per diluted common share in 2001. The return on average common shareholders’ equity was 19.44 percent in 2002 compared to 13.96 percent in 2001. Goodwill was not expensed in 2002 as a result of a new rule issued by the Financial Accounting Standards Board (FASB). During 2001, we expensed $662 million or $0.38 per diluted common share asso- ciated with goodwill. Prior year results also included $1.25 billion, or $0.77 per diluted common share, of after-tax business exit charges in the third quarter of 2001. In 2002, we saw continued strong financial performance in our Consumer and Commercial Banking business segment; however, a challenging economic environment for our market-sensitive busi- nesses and credit quality issues in the Global Corporate and Investment Banking and Asset Management segments negatively impacted financial results. In the fourth quarter of 2002, we increased our quarterly divi- dend to $0.64 per share bringing the 2002 total dividend to $2.44 per share. Our average total shareholder return (stock price appreciation and dividends paid) over the past three years was 15.9 percent, rank- ing us first in our peer group. Our one-year total shareholder return was 14.1 percent, second in our peer group. In addition, we repur- chased 109 million shares and issued 50 million shares under employee plans in 2002, resulting in a net return of capital to our shareholders of $4.8 billion. During 2002, we also experienced strong core business funda- mentals in the areas of customer satisfaction and product/market per- formance that have created momentum for 2003. Customer satisfaction continued to increase during the year, resulting in better retention and increased opportunities to deepen relationships with our customers. Delighted or highly satisfied cus- tomers, those who rate us a 9 or 10 on a 10-point scale, increased 10.4 percent from a year ago. An important factor driving the increase was a 24 percent reduction in errors reported by our customers. BANK OF AMERICA 2002 25 The provision for credit losses decreased $590 million, due in part 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 basis points. Decreases in commercial – domestic and consumer finance net charge-offs and $635 million of charge-offs in 2001 related to exiting the subprime real estate lending business were partially offset by increases in credit card and commercial – foreign net charge-offs. 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 were partially offset by increased data processing and marketing expenses. Noninterest expense in 2001 included $1.3 billion of business exit costs, $662 mil- lion in goodwill amortization expense and $334 million of litigation expenses in fourth quarter 2001. Excluding these items in 2001, nonin- terest expense was relatively unchanged compared to the prior year. Salaries expense declines were partially offset by increased employee benefit costs, 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 the Global Corporate and Investment Banking business, declined 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 the $45 million in costs associated with terminated contracts on discontin- ued software licenses in the third quarter of 2002 as well as higher volumes of online bill pay activity, check imaging and higher item pro- cessing 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 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 includ- ing returns as far back as 1971. As a result of this settlement, the Corporation recorded a $488 million reduction in income tax expense. On a net basis, we increased consumer checking accounts by approximately 528,000 in 2002 compared to a net increase of approx- imately 193,000 in 2001, driven by greater customer satisfaction, focused marketing and new products such as MyAccess Checking.™ Online banking is an important component in giving customers the flexibility to do banking in a fast and easy way, whenever it’s most convenient. Our success continued in 2002 as our active online banking customers reached more than 4.7 million by the end of the year, a 63 percent increase. Active bill pay customers more than doubled during the year to nearly 1.8 million. Monthly, our customers pay 9.9 million bills online totaling $2.7 billion. First mortgage originations reached $88.1 billion, as low mort- gage interest rates drove refinance volume, coupled with expanded market coverage from our deployment of LoanSolutions.® Total consumer real estate originations, which include first and second mortgages and home equity lines, surpassed $100 billion in 2002. The introduction of LoanSolutions® into our banking centers has expedited the mortgage application process, enabling 7,300 personal bankers to, in minutes, match customers with the right products to meet their needs. Despite a challenging market, we made significant market share gains in convertible and common stock offerings, mergers and acquisitions advisory services, and asset-backed securities in Global Corporate and Investment Banking. In December 2002, we agreed to purchase a 24.9 percent stake in Grupo Financiero Santander Serfin (GFSS), the subsidiary of Santander Central Hispano in Mexico, for $1.6 billion. GFSS is the third-largest and most profitable banking organization in Mexico. The transaction is expected to close in the first quarter of 2003. Financial Highlights For the Corporation in total, the increase in net interest income was more than offset by the decline in noninterest income. The impact of higher levels of securities and residential mortgage loans, higher levels of core deposit funding, the margin impact of higher trading- related 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 basis points from a year ago, primarily due to a favorable shift in loan mix, 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, partially offset by the securitization of subprime real estate loans and higher-trading related assets. Noninterest income declined $777 million 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 securities were $630 million, an increase of $155 million from 2001. 26 BANK OF AMERICA 2002 TABLE 1 Five-Year Summary of Selected Financial Data(1) (Dollars in millions, except per share information) 2002 2001 2000 1999 1998 Income statement Net interest income Noninterest income Total revenue Provision for credit losses Gains on sales of securities Noninterest expense Income before income taxes Income tax expense Net income Average common shares issued and outstanding (in thousands) Average diluted common shares issued and outstanding (in thousands) Performance ratios Return on average assets Return on average common shareholders’ equity Total equity to total assets (at year end) Total average equity to total average assets Dividend payout ratio Per common share data Earnings Diluted earnings Cash dividends paid Book value Average balance sheet Total loans and leases Total assets Total deposits Long-term debt Trust preferred securities Common shareholders’ equity Total shareholders’ equity Risk-based capital ratios (at year end) Tier 1 capital Total capital Leverage ratio Market price per share of common stock Closing High Low $ 20,923 13,571 34,494 3,697 630 18,436 12,991 3,742 9,249 $ 20,290 14,348 34,638 4,287 475 20,709 10,117 3,325 6,792 $ 18,349 14,582 32,931 2,535 25 18,633 11,788 4,271 7,517 $ 18,127 14,179 32,306 1,820 240 18,511 12,215 4,333 7,882 $ 18,298 12,189 30,487 2,920 1,017 20,536 8,048 2,883 5,165 1,520,042 1,594,957 1,646,398 1,726,006 1,732,057 1,565,467 1,625,654 1,664,929 1,760,058 1,775,760 1.40% 19.44 7.62 7.19 40.07 6.08 5.91 2.44 33.49 $ $ 336,819 662,401 371,479 60,207 5,838 47,552 47,613 1.05% 13.96 7.80 7.49 53.44 $ 4.26 4.18 2.28 31.07 $ 365,447 649,547 362,653 64,638 4,984 48,609 48,678 1.12% 15.96 7.42 7.02 45.02 $ 4.56 4.52 2.06 29.47 $ 392,622 671,573 353,294 65,338 4,955 47,057 47,132 1.28% 16.93 7.02 7.55 40.54 4.56 4.48 1.85 26.44 $ $ 362,783 616,838 341,748 52,619 4,955 46,527 46,601 0.88% 11.56 7.44 7.67 50.18 $ 2.97 2.90 1.59 26.60 $ 347,840 584,487 345,485 45,098 4,871 44,467 44,829 8.22% 12.43 6.29 8.30% 12.67 6.56 7.50% 11.04 6.12 7.35% 10.88 6.26 7.06% 10.94 6.22 $ 69.57 77.08 53.98 $ 62.95 65.54 45.00 $ 45.88 61.00 36.31 $ 50.19 76.38 47.63 $ 60.13 88.44 44.00 (1) As a result of the adoption of SFAS 142 on January 1, 2002, the Corporation no longer amortizes goodwill. Goodwill amortization expense was $662, $635, $635 and $633 in 2001, 2000, 1999 and 1998, respectively. Supplemental Financial Data In managing our business, we use certain non-GAAP (generally accepted accounting principles) performance measures and ratios, including financial information on an operating basis, shareholder value added, taxable-equivalent net interest income and core net interest income. We also calculate certain measures, such as the net interest yield and the efficiency ratio, on a taxable-equivalent basis. Other com- panies may define or calculate supplemental financial data differently. See Table 2 for supplemental financial data and corresponding recon- ciliations to GAAP financial measures for the five most recent years. Supplemental financial data presented on an operating basis is a non-GAAP basis of presentation that excludes exit, merger and restructuring charges. Table 2 includes earnings, earnings per share, shareholder value added, return on assets, return on equity, effi- ciency ratio and dividend payout ratio presented on an operating basis. Management believes that the exclusion of the exit, merger and restructuring charges provides a meaningful period-to-period comparison and is more reflective of normalized operations. BANK OF AMERICA 2002 27 Shareholder value added (SVA) is a key non-GAAP measure of performance used in managing our growth strategy orientation and that strengthens our focus on generating long-term growth and shareholder value. SVA is used in measuring 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 net income adjusted to exclude amortization of intangibles. The charge for the use of capital is calculated by multiplying 12 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, country and oper- ational risk. In 2002, we did not make any significant changes to the methodology used to allocate the cost of capital. Effective January 2003, the Corporation will charge 11 percent for the use of capital. Management believes that this decrease better reflects the changes in investors’ expected returns in a lower growth rate environment. SVA increased 22 percent to $3.8 billion in 2002 compared to the prior year, due to both the $547 million increase in operating cash basis earnings and the $1.1 billion reduction in average common share- holders’ equity. For additional discussion of SVA, see Business Segment Operations beginning on page 30. Management reviews net interest income on a taxable-equiv- alent basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a 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 taxable-equivalent basis is also used in our business segment reporting. Additionally, management reviews “core net interest income,” which adjusts reported net interest income on a taxable-equivalent basis for the impact of trading-related activities and loans origi- nated by the Corporation and sold into revolving credit card and commercial securitizations. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as the Corporation takes on the role of servicer and records servicing income and gains or losses on securitizations, where appropriate. For purposes of internal analysis, management combines trading- related net interest income with trading account profits, as dis- cussed in the Global Corporate and Investment Banking business segment discussion beginning on page 34, as trading strategies are evaluated based on total revenue. Core net interest income increased $344 million in 2002. This increase was driven by the impact of higher levels of securities and residential mortgage loans, higher levels of core deposit funding, con- sumer loan growth and the absence of 2001 losses associated with auto lease financing. The securitization of the subprime real estate loans and reduced commercial loan levels negatively impacted core net interest income relative to 2001. Core average earning assets decreased $13.1 billion in 2002, primarily due to exiting unprofitable commercial loan relationships, the decline in subprime real estate loans (net of the remaining securi- tization) and auto lease financing, partially offset by higher levels of securities and residential mortgage loans. The core net interest yield increased 20 basis points in 2002, mainly due to a favorable shift in loan mix, higher levels of core deposit funding, the absence of 2001 losses associated with auto lease financing and higher levels of securities and residential mort- gage loans, partially offset by the impact of the securitization of subprime real estate loans. 28 BANK OF AMERICA 2002 TABLE 2 Supplemental Financial Data and Reconciliations to GAAP Financial Measures (Dollars in millions, except per share information) 2002 2001 2000 1999 1998 Operating basis(1,2) Operating earnings Operating earnings per share Diluted operating earnings per share Shareholder value added Return on average assets Return on average common shareholders’ equity Efficiency ratio (taxable-equivalent basis) Dividend payout ratio Net interest income Taxable-equivalent basis data Net interest income Total revenue Net interest yield Efficiency ratio (taxable-equivalent basis) Core basis data(3) Core net interest income Average core earnings assets Core net interest yield Reconciliation of net income to operating earnings Net income Exit charges Merger and restructuring charges Related income tax benefit Operating earnings Reconciliation of EPS to operating EPS Earnings per share Exit charges, net of tax benefit Merger and restructuring charges, net of tax benefit Operating earnings per share Reconciliation of diluted EPS to diluted operating EPS Diluted earnings per share Exit charges, net of tax benefit Merger and restructuring charges, net of tax benefit Diluted operating earnings per share Reconciliation of net income to shareholder value added Net income Amortization expense Exit charges, net of tax benefit Merger and restructuring charges, net of tax benefit Capital charge Shareholder value added $ 9,249 6.08 5.91 3,760 1.40% 19.44 52.55 40.07 $ 21,511 35,082 3.75% 52.55 $ 20,063 455,200 4.41% $ 9,249 – – – 9,249 $ $ 6.08 – – 6.08 5.91 – – 5.91 $ 9,249 218 – – (5,707) 3,760 $ 8,042 5.04 4.95 3,087 1.24% 16.53 55.47 45.13 $ 7,863 4.77 4.72 3,081 1.17% 16.70 54.38 43.04 $ 8,240 4.77 4.68 3,544 1.34% 17.70 55.30 38.77 $ 6,490 3.73 3.64 2,056 1.11% 14.54 61.15 39.90 $ 20,633 34,981 3.68% 59.20 $ 18,671 33,253 3.20% 56.03 $ 18,342 32,521 3.45% 56.92 $ 18,461 30,650 3.69% 67.00 $ 19,719 468,317 $ 18,546 506,898 $ 18,583 472,329 4.21% 3.66% 3.93% $ $ $ $ 6,792 1,700 – (450) 8,042 4.26 0.78 – 5.04 4.18 0.77 – 4.95 6,792 878 1,250 – (5,833) 3,087 $ $ $ $ 7,517 – 550 (204) 7,863 4.56 – 0.21 4.77 4.52 – 0.20 4.72 7,517 864 – 346 (5,646) 3,081 $ $ $ $ 7,882 – 525 (167) 8,240 4.56 – 0.21 4.77 4.48 – 0.20 4.68 7,882 888 – 358 (5,584) 3,544 $ $ $ $ N/A N/A N/A 5,165 – 1,795 (470) 6,490 2.97 – 0.76 3.73 2.90 – 0.74 3.64 5,165 902 – 1,325 (5,336) 2,056 (1) Operating basis excludes exit, merger and restructuring charges. Exit charges in 2001 represented provision for credit losses of $395 and noninterest expense of $1,305, both of which were related to the exit of certain consumer finance businesses. Merger and restructuring charges were $550, $525 and $1,795 in 2000, 1999 and 1998, respectively. (2) As a result of the adoption of SFAS 142 on January 1, 2002, the Corporation no longer amortizes goodwill. Goodwill amortization expense was $662, $635, $635 and $633 in 2001, 2000, 1999 and 1998, respectively. (3) Information not available for 1998. Complex Accounting Estimates and Principles The Corporation’s significant accounting principles are described in Note 1 of the consolidated financial statements and are essential to understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Some of the Corporation’s 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 princi- ples to individual transactions to determine the most appropriate treat- ment. We have established procedures and processes to facilitate making the judgments necessary to prepare financial statements. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables most important in the estimation process. Management has used the best information available to make the estimations neces- sary to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables could change future valuations and impact net income. Allowance for Credit Losses The allowance for credit losses is management’s best estimate of the probable incurred credit losses in the lending portfolio and is discussed in further detail in the Credit Risk Management section beginning on page 41. The Corporation performs periodic and systematic detailed reviews of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These reviews include loss forecast modeling based on historical experiences and current events and conditions as well as individual loan valuations. In each analysis, numerous portfolio and economic assumptions are made. BANK OF AMERICA 2002 29 Principal Investing Principal Investing within the Equity Investments segment, discussed in more detail in Business Segment Operations, is comprised of a diversified portfolio of investments in privately held and publicly traded companies at all stages, from start-up to buyout. Some of these companies may need access to additional cash to support their long-term business models. Market conditions as well as com- pany performance may impact whether such funding is sourced from private investors or via capital markets. As of December 31, 2002, we had non-public investments of $5.4 billion. Trading Assets and Liabilities The Corporation engages in a variety of trading-related activities that are either for clients or our own accounts. The management process related to the trading positions is discussed in detail in the Market Risk Management section beginning on page 49. Positions recorded on the balance sheet are valued at fair value and the majority of the positions are based on or derived from actively quoted markets prices or rates. Valuations for trading account assets and liabilities are obtained from actively traded markets where valuations can be obtained from quoted market prices or observed transactions. The most significant factor affecting the valuation of trading assets or liabilities is the lack of liquidity, where trading in a position or a mar- ket sector has slowed significantly or ceased and quotes may not be available. Liquidity situations generally are triggered by the market’s perception of credit regarding a single company or a specific market sector, for example airlines or sub-prime. In these instances, valua- tions are derived from the limited market information available and other factors, principally from reviewing the issuer’s financial state- ments and changes in credit ratings made by one or more of the rating agencies. Valuations for derivative assets and liabilities not traded on an exchange, or over the counter, are obtained using mathematical models that require inputs of external rates and prices to generate continuous yield or pricing curves used to value the position. This “pricing risk” is greater for positions with either option- based or longer dated attributes where inputs are not readily available and model-based extrapolations of rate and price scenarios are used to generate valuations. In these situations, this risk is mitigated through the use of valuation adjustments. Accrued Taxes Management estimates tax expense based on the amount it expects to owe various tax authorities. Taxes are discussed in more detail in Note 18 of the consolidated financial statements. Accrued taxes represent the net estimated amount due or to be received from taxing authori- ties. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions tak- ing into account statutory, judicial and regulatory guidance in the context of our tax position. Goodwill The nature and accounting for goodwill is discussed in detail in Notes 1 and 9 of the consolidated financial statements. Assigned goodwill is subject to a market value recoverability test that records a loss if the value of goodwill is less than the amount recorded in the financial statements. Estimating the value of goodwill requires assumptions regarding future cash flows and comparable business valuations. Accounting Standards Our accounting for hedging activities, securitizations and off-balance sheet special purpose entities requires significant judgment in inter- preting and applying the accounting principles related to these mat- ters. Judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) and the applicable hedge criteria, the accounting for the transfer of financial assets and extinguishments of liabilities in accordance with Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125” (SFAS 140) and the determination of when certain special purpose entities should be consolidated in the Corporation’s balance sheet and statement of income. For a more complete discussion of these principles, see Notes 1, 5 and 8 of the consolidated financial statements. The remainder of management’s discussion and analysis of the Corporation’s results of operations and financial position should be read in conjunction with the consolidated financial statements and related notes presented on pages 72 through 111. See Note 1 for Recently Issued Accounting Pronouncements. Business Segment Operations We provide to our 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 non-financial measures. Financial measures consist primarily of revenue, net income and shareholder value added. Non-financial measures include, but are not limited to, market share and customer satisfaction. Total revenue includes net interest income on a 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 gen- erated by certain assets and liabilities used in our asset and liability management (ALM) activities. From time to time we refine the business segment strategy and reporting. As we continued to refine our business segment strategy in 2001, 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 ALM activities were moved to Corporate Other to reflect the fact that management decisions regard- ing this portion of the mortgage portfolio are driven by corporate ALM considerations and not by the business segments’ management. In the first quarter of 2002, certain commercial lending businesses in 30 BANK OF AMERICA 2002 the process of liquidation were transferred from Consumer and Commercial Banking to Corporate Other, and in the third quarter of 2001, certain consumer finance businesses in the process of liquida- tion (subprime real estate, auto leasing and manufactured housing) were transferred from Consumer and Commercial Banking to Corporate Other. See Note 20 of the consolidated financial statements for addi- tional business segment information, reconciliations to consolidated amounts and information on Corporate Other. Certain prior period amounts have been reclassified between segments and their compo- nents to conform to the current period presentation. Table 3 presents selected financial information for the business segments for 2002 and 2001. TABLE 3 Business Segment Summary (Dollars in millions) Net interest income(2) Noninterest income(3) Total revenue Provision for credit losses Noninterest expense(4) Net income Shareholder value added Return on average equity Efficiency ratio (taxable-equivalent basis) Net interest yield (taxable-equivalent basis) Average: Total loans and leases Total assets Total deposits Common equity/Allocated equity Year end: Total loans and leases Total assets Total deposits (Dollars in millions) Net interest income(2) Noninterest income(3) Total revenue Provision for credit losses(5) Noninterest expense(4,5) Net income (loss) Shareholder value added Return on average equity Efficiency ratio (taxable-equivalent basis) Net interest yield (taxable-equivalent basis) Average: Total loans and leases Total assets Total deposits Common equity/Allocated equity(6) Year end: Total loans and leases Total assets Total deposits n/m = not meaningful Total Corporation Consumer and Commercial Banking(1) Asset Management(1) 2002 2001 2002 2001 $ 21,511 13,571 $ 20,633 14,348 $ 14,538 8,451 $ 13,243 7,815 $ 35,082 3,697 18,436 9,249 3,760 19.4% 52.6 3.75 34,981 4,287 20,709 6,792 3,087 14.0% 59.2 3.68 22,989 1,805 11,558 6,088 4,054 33.1% 50.3 5.05 21,058 1,582 11,410 4,953 3,286 25.9% 54.2 5.01 2002 774 1,625 2,399 318 1,473 404 113 16.3% 61.4 3.24 $ 2001 742 1,733 2,475 121 1,537 522 312 23.5% 62.1 2.91 $ 336,819 662,401 371,479 47,552 342,755 660,458 386,458 $365,447 649,547 362,653 48,609 329,153 621,764 373,495 $ 183,341 312,011 283,261 18,406 187,068 339,959 297,653 $ 178,116 290,038 266,035 19,159 182,158 304,558 280,962 $ 23,251 25,409 12,030 2,474 $ 24,381 26,764 11,897 2,223 22,263 24,891 13,305 24,692 26,811 12,208 Equity Investments(1) Corporate Other Global Corporate and Investment Banking(1) 2002 2001 $ 4,992 3,841 $ 4,727 4,859 $ 8,833 1,209 4,977 1,723 421 15.5% 56.4 2.48 9,586 1,292 5,369 1,956 519 14.9% 56.0 2.45 2002 (152) (281) (433) 7 94 (329) (582) (15.5)% n/m n/m $ 62,934 241,325 64,769 11,121 57,569 219,938 67,216 $ 82,321 232,366 66,983 13,164 68,215 195,817 66,532 $ 440 6,179 – 2,123 437 6,064 – $ $ 2001 (150) 179 29 8 214 (115) (388) (4.9)% n/m n/m 477 6,583 13 2,365 433 6,315 – $ 2002 1,359 (65) 1,294 358 334 1,363 (246) n/m n/m n/m $ 2001 2,071 (238) 1,833 1,284 2,179 (524) (642) n/m n/m n/m $ 66,853 77,477 11,419 13,428 $ 80,152 93,796 17,725 11,698 75,418 69,606 8,284 53,655 88,263 13,793 (1) There were no material intersegment revenues among the segments. (2) Net interest income is presented on a taxable-equivalent basis. (3) Noninterest income in 2001 included the $83 SFAS 133 transition adjustment net loss which was included in trading account profits. The components of the transition adjustment by segment were a gain of $4 for Consumer and Commercial Banking, a gain of $19 for Global Corporate and Investment Banking and a loss of $106 for Corporate Other. (4) The Corporation adopted SFAS 142 on January 1, 2002. Accordingly, no goodwill amortization was recorded in 2002. (5) Corporate Other includes exit charges consisting of provision for credit losses of $395 and noninterest expense of $1,305 related to the exit of certain consumer finance businesses in the third quarter of 2001. (6) Corporate Other also included unallocated capital of $12.5 billion and $9.4 billion in 2002 and 2001, respectively. BANK OF AMERICA 2002 31 Consumer and Commercial Banking Consumer and Commercial Banking provides a wide range of products and services to individuals, small businesses and middle market com- panies through multiple delivery channels. The major components of Consumer and Commercial Banking are Banking Regions, Consumer Products and Commercial Banking. Banking Regions serves consumer households and small busi- nesses in 21 states and the District of Columbia through its network of 4,208 banking centers, 13,013 ATMs, telephone, and Internet channels on www.bankofamerica.com. Banking Regions provides a wide range of products and services, including deposit products such as check- ing, 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, check card, e-commerce and broker- age services to nearly two million small business relationships across the franchise. Banking Regions also includes Premier Banking, which provides high-touch banking and investment solutions to affluent clients with balances up to $3 million. Consumer Products provides specialized services such as 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 pro- grams 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 2002 as total revenue increased $1.9 billion, or nine percent. Net income rose $1.1 billion, or 23 percent. The increase in net income and lower economic capital, as a result of reductions in commercial loan levels in specific industries, drove the 23 percent increase in share- holder value added. Throughout the year our Consumer and Commercial Banking strategy has been to attract, retain and deepen customer relation- ships. A critical component of that strategy includes improvement of customer satisfaction. Customers reporting that they were delighted with their service increased 10.4 percent during the year. As a result of this improvement, we added 528,000 net new checking accounts for the year, which exceeded our goal, compared to 193,000 for 2001. Access to our services through on-line banking which saw a 63 percent increase in customers, our network of domestic banking centers, ATMs, telephone and internet channels, and our product innovations such as an expedited mortgage application process through LoanSolutions® were factors contributing to revenue growth and success with our customers. A favorable shift in loan mix from commercial to credit card and residential mortgage, overall loan and deposit growth and the results of ALM activities contributed to the $1.3 billion, or ten percent, increase in net interest income. These increases were partially offset by the compression of deposit interest margins. Net interest income was positively impacted by the $5.2 billion, or three percent, increase in average loans and leases compared to 2001. Average on-balance sheet credit card outstandings increased 29 percent, primarily due to balance transfers, the reduction in volun- tary attrition and an increase in new advances on previously securi- tized balances that are recorded on the Corporation’s balance sheet after the revolving period of the securitization. Average residential mortgage loans increased 38 percent primarily driven by the refinanc- ing environment that began in the fourth quarter of 2001. Offsetting these increases was a decline in average commercial loans of 12 per- cent driven by liquidations, lower hold levels, reduced utilization of existing facilities and soft loan demand. Deposit growth also positively impacted net interest income. Higher consumer deposit balances due to significant growth in net checking accounts, increased money market accounts due to an emphasis on total relationship balances and customer preference for stable investments in these uncertain economic times drove the $17.2 billion, or seven percent, increase in average deposits to $283.3 billion in 2002. Significant Noninterest Income Components (Dollars in millions) Service charges Card income Mortgage banking income 2002 $ 4,070 2,620 751 2001 $ 3,779 2,422 593 Increases in service charges, card income and mortgage banking income drove the $636 million, or eight percent, increase in nonin- terest income. These increases were partially offset by a decrease in trading account profits within Consumer Products. In 2002, a trad- ing loss of $24 million was recorded compared to a trading gain of $165 million in the prior year. The amount recorded in trading account profits represents the net mark-to-market adjustments on certain mortgage banking assets and the related derivative instruments. See Note 1 of the consolidated financial statements for additional infor- mation on mortgage banking assets. Both corporate and consumer service charges attributed to the $291 million, or eight percent, increase in service charges. Corporate service charges increased $163 million, or 17 percent, as customers opted to pay service charges rather than maintain additional deposit balances in the lower rate environment. Increased customer account 32 BANK OF AMERICA 2002 charges, partially offset by the impact of new and existing customers choosing accounts with lower or no service charges drove the $128 mil- lion, or five percent, increase in consumer service charges. Increases in both debit and credit card income drove the eight percent increase in card income. The increase in debit card income within Banking Regions of $143 million, or 22 percent, was driven by increases in purchase volumes. Higher annual, late, cash advance and overlimit fees partially offset by the impact of reduced securitized balances attributed to the $55 million, or three percent, increase in credit card income within Consumer Products. Card income included activity from the securitized portfolio of $168 million and $193 million in 2002 and 2001, respectively. Noninterest income, rather than net interest income, is recorded for assets that have been securitized as we take on the role of servicer and record servicing income and gains or losses on securitizations, where appropriate. New advances under these previously securitized balances will be recorded on our balance sheet after the revolving period of the secu- ritization, which has the effect of increasing loans on our balance sheet and increasing net interest income and charge-offs, with a cor- responding reduction in noninterest income. An increase in net mortgage production income driven by higher mortgage sales, partially offset by declines in servicing volume due to portfolio run-off were the main contributors to the $158 million, or 27 percent, increase in mortgage banking income within Consumer Products. An increase in total production of first mortgage loans origi- nated of $11.5 billion to $88.1 billion in 2002, is primarily attributed to the current refinancing boom and the successful deployment of LoanSolutions.® These factors more than offset our decision in the second quarter of 2001 to exit the correspondent loan origination channel in an effort to focus on the retail channel. We believe the retail channel allows us to be more customer focused and deepen our relationships with our customers as well as being more prof- itable. First mortgage loan origination volume was composed of approximately $60.0 billion of retail loans and $28.1 billion of whole- sale loans in 2002. Retail first mortgage origination volume was 68 per- cent of total volume in 2002 compared to 61 percent in 2001. An increase in mortgage prepayments resulting from the significant decrease in mortgage interest rates during 2002 drove the $28.4 bil- lion decline in the average portfolio of first mortgage loans serviced to $283.0 billion in 2002. Total consumer real estate originations surpassed $100 billion in 2002. Mortgage banking assets declined $1.8 billion or 46 percent from a year ago also due to higher prepay- ments in the lower interest rate environment. Higher provision in the credit card loan portfolio, partially offset by a decline in provision within Commercial Banking resulted in a $223 million, or 14 percent, increase in the provision for credit losses. The increase in credit card provision was primarily attributable to the increase in average on-balance sheet outstandings, portfolio seasoning of outstandings from new account growth in 2000 and 2001 and a weaker economic environment. Seasoning refers to the length of time passed since an account was opened. The reduction in the Commercial Banking provision was driven by the reduction in average commercial loans and leases and improved credit quality during 2002. Noninterest expense increased slightly, primarily attributable to increases in processing/support costs (which included increases related to e-commerce and debit card processing), marketing and promotional fees, data processing expense and personnel expense as well as the change in assumptions for the Bank of America Pension Plan. The increase in marketing and promotional fees for the segment was primarily due to increased advertising and marketing invest- ments in mortgage, online banking and bill pay and card products. The increase in data processing expense was primarily due to costs associated with terminated contracts on discontinued software licenses and due to an increase in online bill payers. An increase in employee benefits expense for the segment and an increase in incen- tive compensation due to higher mortgage production drove the increase in personnel expense. See Note 16 of the consolidated finan- cial statements for additional discussion of the change in assumption for the Bank of America Pension Plan. These increases were partially offset by the elimination of goodwill amortization. Goodwill amorti- zation expense in 2001 was $452 million. Asset Management Asset Management includes the Private Bank, Banc of America Investments and Banc of America Capital Management. The Private Bank’s goal is to assist individuals and families in building and pre- serving their wealth by providing investment, fiduciary, comprehensive credit and banking expertise to high-net-worth clients. Banc of America Investments provides investment, securities and financial planning services and includes both the full-service network of investment advi- sors and an extensive on-line investor service. Banc of America Capital Management is an asset management organization serving the needs of institutional clients, high-net-worth individuals and retail customers. Banc of America Capital Management manages money and distribution channels, provides investment solutions, offers institutional separate accounts and wrap programs and provides advice to clients through asset allocation expertise and software. Despite the 23 percent drop in the S&P 500 Index from a year ago, total revenue only declined $76 million, or three percent, in 2002. Net income decreased $118 million, or 23 percent. The decrease in net income drove the 64 percent decline in shareholder value added. During 2002, Asset Management grew its distribution capabilities to better serve the financial needs of its clients across the franchise, surpassing its goal of increasing the number of advisors by more than 20 percent. In addition, we continue to enhance the financial planning tools used to assist clients with their financial goals, and these financial planning tools have received industry recognition in the market place. Client Assets (Dollars in billions) Assets under management Client brokerage assets Assets in custody Total client assets December 31 2002 $ 310.3 90.9 46.6 $ 447.8 2001 $ 314.2 99.4 46.9 $ 460.5 BANK OF AMERICA 2002 33 Assets under management, which consist largely of mutual funds, equi- ties and bonds, generate fees based on a percentage of their market value. Compared to the prior year, assets under management remained relatively flat, as the decline in equity funds due to the weakened eco- nomic environment was partially offset by an increase in money market and other short-term fixed income funds. Client brokerage assets, a source of commission revenue, decreased $8.5 billion, or nine percent, compared to the prior year. Client brokerage assets consist largely of investments in bonds, mutual funds, annuities and equities. Assets in custody represent trust assets managed 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 $32 million, or four percent, primarily due to results of ALM activities, partially offset by the impact of declines in loan balances and loan yields. Average loans and leases declined $1.1 billion, or five percent. Significant Noninterest Income Components (Dollars in millions) Asset management fees(1) Brokerage income 2002 $ 1,087 435 Total investment and brokerage services $ 1,522 2001 $ 1,129 450 $ 1,579 (1) Includes personal and institutional asset management fees, mutual fund fees and fees earned on assets in custody. The increase in net interest income was offset by a $108 million, or six percent, decline in noninterest income. This decline was primarily due to a decrease in investment and brokerage services activities, which reflected the current market environment. Declines in personal asset management fees and brokerage income more than offset an increase in mutual fund fees. Provision expense increased $197 million, driven principally by the charge-off of one large credit in the Private Bank. The elimination of goodwill amortization of $51 million and lower revenue-related incentive compensation of $44 million were the pri- mary drivers of the $64 million, or four percent, decrease in noninterest expense. These decreases were partially offset by increased expenses related to the growth of the segment’s distribution capabilities. Global Corporate and Investment Banking Global Corporate and Investment Banking provides a broad range of financial services such as investment banking, capital markets, trade finance, treasury management, lending, leasing and financial advi- sory services to domestic and international corporations, financial institutions and government entities. Clients are supported through offices in 30 countries in four distinct geographic regions: U.S. and Canada; Asia; Europe, Middle East and Africa; and Latin America. Products and services provided include loan origination, merger and acquisition advisory, debt and equity underwriting and trading, cash management, derivatives, foreign exchange, leasing, leveraged finance, structured finance and trade services. Global Corporate and Investment Banking offers clients a com- prehensive range of global capabilities through three components: Global Investment Banking, Global Credit Products and Global Treasury Services. Global Investment Banking includes the Corporation’s invest- ment banking activities and risk management products. Global Investment Banking underwrites and makes markets in equity securi- ties, 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 bro- ker/dealers and prime-brokerage services. Debt and equity securi- ties research, loan syndications, mergers and acquisitions advisory services and private placements are also provided through Global Investment Banking. 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 mort- gage-related products. In support of these activities, the businesses will take positions in these products and capitalize on market-making activ- ities. The Global Investment Banking business also takes an active role in the trading of fixed income securities and 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 include leasing. Global Credit Products is also responsible for actively managing loan and counterparty risk in our portfolios 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 operations and cash flows on a local, regional, national and global level. Total revenue within Global Corporate and Investment Banking declined $753 million, or eight percent, primarily driven by a decline in trading–related revenue. Net income decreased $233 million, or 12 percent. The decline in cash basis earnings, partially offset by lower economic capital due to reductions in loan levels, drove the 19 per- cent decline in shareholder value added. Net interest income increased by $265 million, or six percent, as a result of higher net interest income from trading related activities and the results of ALM activities. Partially offsetting this increase were lower levels of commercial loans. Average loans and leases declined $19.4 billion, or 24 percent to $62.9 billion. Significant Noninterest Income Components (Dollars in millions) Service charges Investment and brokerage services Investment banking income Trading account profits 2002 $ 1,170 636 1,481 830 2001 $ 1,130 473 1,526 1,818 34 BANK OF AMERICA 2002 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Noninterest income declined $1.0 billion, or 21 percent, due to a sharp decline in trading account profits and a decline in investment banking income, partially offset by increases in investment and brokerage services and service charges. Service charges increased four percent to $1.2 billion as many corporate customers chose to pay higher fees rather than increase deposit balances in the lower rate environment. Investment and brokerage services increased 35 percent to $636 mil- lion primarily driven by a shift to commissions based on a fixed rate rather than a variable spread. Commissions based on a fixed rate are recorded in investment and brokerage services while those based on variable spread are recorded in trading account profits. Trading-related net interest income as well as trading account profits in noninterest income (“trading-related revenue”) are pre- sented in the following table as they are both considered in evaluating the overall profitability of our trading activities. Trading-related Revenue in Global Corporate and Investment Banking (Dollars in millions) Net interest income Trading account profits Total trading-related revenue Revenue by product Foreign exchange Interest rate Credit(1) Equities Commodities 2002 $ 1,970 830 $ 2,800 $ 530 886 914 384 86 2001 $ 1,609 1,818 $ 3,427 $ 541 923 887 906 170 Total trading-related revenue $ 2,800 $ 3,427 (1) Credit includes credit fixed income, credit derivatives and hedges of credit exposure. Trading-related revenue decreased $627 million in 2002, as the $988 million decrease in trading account profits was partially offset by a $361 million increase in the net interest income. The overall decrease was primarily due to a decline in revenue from equity prod- ucts of $522 million, which was attributable to a slowdown in market activities and a shift to commissions based on a fixed rate rather than a variable spread. Revenue from commodities contracts also con- tributed to the decline with a decrease of $84 million, attributable to prior year gains that resulted from the prior year’s volatile markets. Investment Banking Income in Global Corporate and Investment Banking (Dollars in millions) Investment banking income Securities underwriting Syndications Advisory services Other Total $ 2002 721 427 288 45 $ 2001 796 395 251 84 $ 1,481 $ 1,526 Overall, investment banking fees were strong relative to another year of declining market conditions. Market share gains were achieved in nearly all debt and equity capital raising services with our most signif- icant market share gains in high grade originations and convertible bond offerings. These market share gains served to minimize the decline of $45 million, or three percent, in investment banking income. The market for securities underwriting continued to decline, resulting in a $75 million decrease in securities underwriting fees, which was par- tially offset by increases in market share gains. Despite a smaller mar- ket for syndication fees, we continued to increase market share, which drove an increase in syndication fees of $32 million. Advisory services income increased $37 million, primarily due to increases in fees from restructuring clients’ balance sheets. The adverse economic environment in 2001 continued throughout 2002. While provision expense declined in 2002, we continued to be impacted by elevated loss levels, including sporadic, large borrower defaults. Declining loan levels and higher than normal recoveries soft- ened the negative impact of the weakened economic environment. In addition to credit losses reflected in provision expense, included in other income in 2002 were losses from writedowns of approximately $82 million related to partnership interests in leveraged leases to the airline industry. Noninterest expense declined by $392 million, or seven percent, driven by lower market-based compensation and the elimination of goodwill amortization. Goodwill amortization expense in 2001 was $117 million. It is anticipated that 2003 will be another challenging year for the investment banking industry. We will continue to monitor market developments and take actions necessary to adjust resources accord- ingly to maintain our focus on revenue, net income and shareholder value added. Equity Investments 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. Investments are made on both a direct and indirect basis in the U.S. and overseas. Direct investing activity focuses on advising portfolio companies on strategic directions and providing access to the Corporation’s global resources. Indirect investments represent passive limited partnership commit- ments to funds managed by experienced third party private equity investors who act as general partners. Equity Investments also includes the Corporation’s strategic alliances and investment portfolio. For 2002, both revenue and net income in Principal Investing decreased substantially, primarily due to higher Principal Investing impairment charges. The equity investment portfolio in Principal Investing remained relatively flat at $5.7 billion in 2002. BANK OF AMERICA 2002 35 Net interest income consists primarily of the internal funding cost associated with the carrying value of investments. Equity Investment Gains in Principal Investing (Dollars in millions) Cash gains Impairments Fair value adjustments Total $ 2002 432 (708) (10) $ (286) 2001 425 (335) (40) 50 $ $ Noninterest income primarily consists of equity investment gains (losses). Weakness in equity markets in 2002 and a $140 million gain in the strategic investments portfolio in the first quarter of 2001 related to the sale of an interest in the Star Systems ATM network were the primary drivers for the decline in equity investment gains (losses). Impairments recorded in both 2002 and 2001 were driven by continuing depressed levels of economic activity across many sectors and a lack of liquidity in the private or public equity markets which were compounded in 2001 by the terrorist attack on September 11. The Corporation recognized a reduction in values of certain equity positions primarily within the technology, media and telecom portfo- lios as well as value adjustments across many other industries both domestically and internationally. Risk Management Overview Our corporate governance structure enables us to manage all major aspects of our business through an integrated planning and review process that includes strategic, financial, associate and risk planning. We derive our revenue from assuming and managing customer risk for profit. Through a robust governance structure, risk and return is evaluated to produce sustainable revenue, to reduce earnings volatil- ity and increase shareholder value. Our business exposes us to four major risks: liquidity, credit, market and operational. Liquidity risk is the inability to accommodate liability maturities and withdrawals, fund asset growth and otherwise meet contractual obligations at reasonable market rates. Credit risk is the inability of a customer to meet its repayment or delivery obligations. Market risk is the fluctuation in asset values caused by changes in market prices and yields. Operational risk is the potential for loss resulting from events involving people, processes, technology, legal issues, external events, execution, regulatory or reputation. Board Committees Our governance structure begins with our Board of Directors. The Board of Directors evaluates risk through the Chief Executive Officer (CEO) and three Board committees: • Finance Committee reviews market, credit, liquidity and operational risk • Asset Quality Committee reviews credit risk • Audit Committee reviews scope and coverage of external and corporate audit activities Three Lines of Defense Management has established control processes and procedures to align risk-taking and risk management throughout our organization. These control processes and procedures are designed around “three lines of defense”: lines of business; Risk Management joined by other units such as Finance and Legal; and Corporate Audit. The lines of business are responsible for identifying, quantifying, mitigating and managing all risks. Except for trading-related business activities within Global Corporate Investment Banking, interest rate risk associated with our business activities is managed centrally in the Corporate Treasury function. Line of business management makes and executes the business plan, which puts it closest to the changing nature of risks and therefore best able to take actions to manage and mitigate those risks. Our management processes, structures and policies help us comply with laws and regulations and provide clear lines of sight for decision-making and accountability. Wherever practi- cal, we attempt to house decision-making authority as close to the customer as possible. The Risk Management organization translates approved busi- ness plans into approved limits, approves requests for changes to those limits, approves transactions as appropriate and works closely with business units to establish and monitor risk parameters. Each of the four business segments has a Risk Executive assigned to it who is responsible for oversight for all risks of the line of business. Corporate Audit provides an independent assessment of our management systems and internal control systems. Corporate Audit activities are designed to provide reasonable assurance that resources are adequately protected; significant financial, managerial and operating information is complete, accurate, and reliable; and employees’ actions are in compliance with Corporate policies, stan- dards, procedures, and applicable laws and regulations. Senior Management Committees To ensure our risk management goals and objectives are accomplished, oversight of our risk-taking and risk management activities is conducted through three senior management committees. The Risk and Capital Committee (RCC) establishes long-term strat- egy and short-term operating plans. RCC also establishes the risk appetite through corporate performance measures, capital allocations, aggregate risk levels, and overall capital planning. RCC reviews actual performance to plan and actual risk incurred to forecasted risk levels, including information regarding credit, market and operational risk. The Asset and Liability Committee (ALCO), a subcommittee of the Finance Committee, reviews portfolio hedging used for managing liq- uidity, market and credit portfolio risks as well as interest rate risk inherent in our balance sheet and trading risk inherent in our customer and proprietary trading portfolio. ALCO approves Value at Risk (VAR) limits for various trading activities in the Corporation. The Credit Risk Committee (CRC) establishes corporate credit practices and limits, including industry and country concentration lim- its, approval requirements and exceptions. CRC also reviews business asset quality results versus plan, portfolio management, hedging results and the adequacy of the allowance for credit losses. 36 BANK OF AMERICA 2002 Risk Management Controls We use various controls to manage risks at the line of business level and corporate-wide. For example, our planning and forecasting process facil- itates analysis of results versus plan and provides early indication of unplanned risk levels. Various line of business risk committees and forums are comprised of line personnel, Risk Management and other groups responsible for the internal control infrastructure (i.e. Finance, Legal, Compliance, Tax and/or Corporate Audit). Limits, the amount of exposure that may be taken in a product, relationship, region or indus- try, are set based on metrics thereby aligning our risk goals with those of each line of business. Models are used to estimate market and net interest income sensitivity. Modeling is used to estimate both expected and unexpected credit losses for each product and line of business. We employ hedging strategies to reduce concentrations and improve port- folio granularity and to manage interest rate risk in the portfolio. We have continued to strengthen the linkage between the associate per- formance management process and individual compensation to help associates work toward corporate wide goals. Finally, compliance plays a significant role in aiding our business units in risk management. Formal processes used in managing risk only represent one side of the equation. Corporate culture and the actions of our associ- ates are critical to effective risk management. Through our recently updated Code of Ethics, we set a high standard for our associates. The Code of Ethics provides a framework for all of our associates to conduct themselves with the highest integrity in the delivery of their product or service to our customers. The following sections, Liquidity Risk Management, Credit Risk Management beginning on page 41, Market Risk Management begin- ning on page 49 and Operational Risk Management beginning on page 53, address in more detail the specific procedures, measures and analyses of the four categories of risk that we manage. Liquidity Risk Management Liquidity Risk Liquidity is the ongoing ability to accommodate liability maturities and withdrawals, fund asset growth and otherwise meet contractual obli- gations through generally unconstrained access to funding at reason- able market rates. Liquidity management involves maintaining ample and diverse funding capacity, liquid assets and other sources of cash to accommodate fluctuations in asset and liability levels due to busi- ness shocks or unanticipated events. We manage liquidity at two primary levels. The first level is the liquidity of the parent company, which is the holding company that owns the banking and non-banking subsidiaries. The second level is the liquidity of the banking subsidiaries. The management of liquidity at both levels is essential because the parent company and banking subsidiaries each have different funding needs and sources and each are subject to certain regulatory guidelines and requirements. The Finance Committee is responsible for establishing our liquidity policy as well as approving operating and contingency procedures and monitoring liquidity on an ongoing basis, both of which may be del- egated to ALCO. Corporate Treasury is responsible for planning and executing our funding activities and strategy. A primary objective of liquidity risk management is to provide a planning mechanism for unanticipated changes in the demand or need of liquidity created by customer behavior or capital market conditions. In order to achieve this objective, liquidity management and business unit activities are managed consistent with a strategy of funding stabil- ity, flexibility and diversity. We emphasize maximizing and preserving customer deposits and other customer-based funding sources. Deposit rates and levels are monitored, and trends and significant changes are reported to ALCO and the Finance Committee. Deposit marketing strategies are reviewed for consistency with our liquidity policy objec- tives. Asset securitization also enhances funding diversity and stability and is considered a critical source of contingency funding. We develop and maintain contingency funding plans that sepa- rately address the parent company and banking subsidiaries liquidity. These plans evaluate market-based funding capacity under various levels of market conditions and specify actions and procedures to be implemented under liquidity stress. Further, these plans address alternative sources of liquidity, measure the overall ability to fund our operations and define roles and responsibilities for effectively manag- ing liquidity through a problem period. Our borrowing costs and ability to raise funds are directly impacted by our credit ratings and changes thereto. The credit rat- ings of the Corporation and Bank of America, N.A. are reflected in the table below. TABLE 4 Credit Ratings Bank of America Corporation Bank of America, N.A. Commercial Paper Senior Subordinated Debt Debt Short-Term Long-Term Moody’s S & P Fitch, Inc. P-1 A-1 F1+ Aa2 A+ AA- Aa3 A A+ P-1 A-1+ F1+ Aa1 AA- AA Primary sources of funding for the parent company include dividends received from its banking subsidiaries and proceeds from the issuance of senior and subordinated debt, commercial paper and equity. Primary uses of funds for the parent company include repay- ment of maturing debt and commercial paper, share repurchases, dividends paid to shareholders and subsidiary funding. Parent company liquidity is maintained at levels sufficient to fund holding company and non-bank affiliate operations during various stress scenarios in which access to normal funding sources is dis- rupted. The primary measure used in assessing the parent company’s liquidity is “Time to Required Funding” in a stress environment. This measure assumes that the parent company is unable to generate funds from debt or equity issuance, receives no dividend income from subsidiaries, and no longer pays dividends to shareholders. Projected liquidity demands are met with available liquidity until the liquidity is exhausted. Under this scenario, the amount of time which elapses before the current liquid assets are exhausted is considered the Time to Required Funding. ALCO approves the target range set for this metric and monitors adherence to the target. In order to remain in the target range, management uses the Time to Required Funding meas- urement to determine the timing and extent of future debt issuances and other actions. BANK OF AMERICA 2002 37 Primary sources of funding for the banking subsidiaries include customer deposits, wholesale funding and asset securitizations and sales. Primary uses of funds for the banking subsidiaries include repayment of maturing obligations and growth in the core and dis- cretionary asset portfolios, including loan demand. Our discretionary portfolio consists of securities, certain residential mortgages held for asset and liability management purposes, and our swap portfolio. ALCO regularly reviews the funding plan for the banking sub- sidiaries and focuses on maintaining prudent levels of wholesale borrowing. Also for the banking subsidiaries, expected wholesale borrowing capacity over a 12-month horizon compared to current outstandings is evaluated using a variety of business environments. These environments have differing earnings performance, customer relationship and ratings scenarios. Funding exposure related to our role as liquidity provider to certain off-balance sheet financing enti- ties is also measured under a stress scenario. In this measurement, ratings are downgraded such that the off-balance sheet financing entities are not able to issue commercial paper and backup facilities that we provide are drawn upon. In addition, potential draws on credit facilities to issuers with ratings below a certain level are ana- lyzed to assess potential funding exposure. Our primary business activities allow us to obtain funds from our customers in many ways and require us to provide funds to our cus- tomers in many different forms. A key element of our success is the ability to balance the cash provided from our deposit base and the capital markets against cash used in our activities. Our customers’ demand for loans and deposits can be seen by assessing our average balance sheet. One ratio used to monitor trends is the “loan to domestic deposit” (LTD) ratio. Our LTD ratio trend is positive evidence of our improving liquidity position. The ratio was 97 percent at December 31, 2002. Just two years ago, our LTD ratio was 126 percent. The following provides information regarding our deposit and funding activities and needs, followed by a discussion of our customer lending activity and needs. We originate loans both for retention on the balance sheet and for distribution. As part of our originate-to-distribute strategy, com- mercial loan originations are distributed through syndication struc- tures and residential mortgages originated by the mortgage group are frequently distributed in the secondary market. In addition, in con- nection with our balance sheet management activities, from time to time we may retain mortgage loans originated as well as purchase and sell loans based on our assessment of new market conditions. TABLE 5 Average Balance Sheet (Dollars in millions) Assets Time deposits and other short-term investments Fed funds sold and reverse repos Trading account assets Securities Loans and leases Other assets Total assets Liabilities and equity Domestic interest-bearing deposits Foreign interest-bearing deposits Short-term borrowings Trading account liabilities Debt and trust preferred securities Noninterest-bearing deposits Other liabilities Shareholders’ equity 2002 2001 $ 10,038 45,640 79,562 75,298 336,819 115,044 $ 6,723 35,202 66,418 60,372 365,447 115,385 $ 662,401 $ 649,547 $ 225,464 36,549 104,153 31,600 66,045 109,466 41,511 47,613 $ 215,171 49,952 92,476 29,995 69,622 97,529 46,124 48,678 Total liabilities and equity $ 662,401 $ 649,547 Deposits and Other Funding Sources Deposits, a key source of funding, increased in 2002. We typically cate- gorize our deposits into either core or market-based deposits. Core deposits, which are generally customer-based, are an important stable, low-cost funding source and typically react more slowly to interest rate changes than market-based deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest- bearing deposits. Our core deposits were up seven percent from a year ago. The increase was due to significant growth in net checking accounts, increased money market accounts due to an emphasis on total relationship balances and customer preference for stable invest- ments in these uncertain economic times. The decline in consumer CDs and IRAs was primarily driven by a change in product mix to money mar- ket and other deposit accounts. Market-based deposit funding was down from a year ago as we were able to utilize more core deposits to fund loans and other assets. Deposits on average represented 56 per- cent of total sources of funds during both 2002 and 2001. 38 BANK OF AMERICA 2002 TABLE 6 Average Deposits (Dollars in millions) Deposits by type Domestic interest-bearing: 2002 2001 These commitments, as well as guarantees, are more fully dis- cussed in Note 13 of the consolidated financial statements. The following table summarizes the total unfunded, or off-bal- ance sheet, credit extension commitment amounts by expiration date. Savings NOW and money market accounts Consumer CDs & IRAs Negotiable CDs & other time deposits Total domestic interest-bearing $ 21,691 131,841 67,695 4,237 225,464 $ 20,208 114,657 74,458 5,848 215,171 Foreign interest-bearing: Banks located in foreign countries Governments & official institutions Time, savings & other Total foreign interest-bearing Total interest-bearing Noninterest-bearing Total deposits Core and market-based deposits Core deposits Market-based deposits Total deposits 15,464 2,316 18,769 36,549 262,013 109,466 23,397 3,615 22,940 49,952 265,123 97,529 $ 371,479 $ 362,652 $ 330,693 40,786 $ 306,852 55,800 $ 371,479 $ 362,652 Additional sources of funds include short-term borrowings, long-term debt and shareholders’ equity. Short-term borrowings, a relatively low-cost source of funds, were up as proceeds from repurchase agreements were used to fund asset growth. Long-term debt of $9.4 billion was issued during the year. Repayments of long-term debt were $14.5 billion in 2002. Obligations and Commitments The Corporation has contractual obligations to make future payments on debt and lease agreements. These types of obligations are more fully dis- cussed in Notes 11, 12 and 13 of the consolidated financial statements. Table 7 presents total debt and lease obligations at Decem- ber 31, 2002. TABLE 7 Debt and Lease Obligations Due in 1 Year or Less $ 8,219 – 1,166 $ 9,385 (Dollars in millions) Debt and capital leases(1) Trust preferred securities(1) Operating lease obligations Total (1) Includes principal payments only. December 31, 2002 Thereafter $ 52,926 6,031 6,212 $ 65,169 Total $ 61,145 6,031 7,378 $ 74,554 Many of our lending relationships contain both funded and unfunded elements. The funded portion is represented by the average balance sheet levels. The unfunded component of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Loan commitments declined as a reduction in commercial com- mitments of $13.2 billion was partially offset by a $4.4 billion increase in consumer commitments. TABLE 8 Credit Extension Commitments (Dollars in millions) Loan commitments(1) Standby letters of credit Expires in 1 Year or Less $ 98,101 and financial guarantees Commercial letters of credit 20,002 2,674 Legally binding commitments Credit card lines Total 120,777 73,779 December 31, 2002 Thereafter $ 114,603 Total $ 212,704 10,835 435 125,873 – 30,837 3,109 246,650 73,779 $ 194,556 $ 125,873 $ 320,429 (1) Equity commitments of $2.2 billion and $2.5 billion primarily related to obligations to fund existing venture capital equity investments were included in loan commit- ments at December 31, 2002 and 2001, respectively. Off-Balance Sheet Financing Entities In addition to traditional lending, we also support our customers’ financing needs by facilitating their access to the commercial paper markets. These markets provide an attractive, lower-cost financing alternative for our customers. Our customers sell assets, such as high-grade trade or other receivables or leases, to a commercial paper financing entity, which in turn issues high-grade short-term commercial paper that is collateralized by the assets sold. Additionally, some customers receive the benefit of commercial paper financing rates related to certain lease arrangements. We facil- itate these transactions and collect fees from the financing entity for the services it provides (including administration, trust services and marketing the commercial paper). We receive fees for providing combinations of liquidity, standby letters of credit (SBLCs) or similar loss protection commitments, and derivatives to the commercial paper financing entities. These forms of asset support are senior to the first layer of asset support provided by customers through over-collateralization. The rating agencies require that a certain percentage of the commercial paper entity’s assets be supported by both the seller’s over-collateralization and our SBLC in order to receive their respective investment rating. The SBLC would be drawn on only when the over-collateralization pro- vided by the seller is not sufficient to cover losses of the related asset. Liquidity commitments made to the commercial paper entity are designed to fund scheduled redemptions of commercial paper if there is a market disruption or the new commercial paper cannot be issued to fund the redemption of the maturing commercial paper. The liquid- ity facility has the same legal priority as the commercial paper. We do not enter into any other form of guarantee with these entities. BANK OF AMERICA 2002 39 We manage our credit risk on these commitments by subjecting them to our normal underwriting and risk management processes. At December 31, 2002 and 2001, the Corporation had off-balance sheet liquidity commitments and SBLCs to these financing entities of $34.2 billion and $36.1 billion, respectively. Substantially all of these liquidity commitments and SBLCs mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these financing entities were approximately $484 mil- lion and $256 million for 2002 and 2001, respectively. We generally do not purchase any commercial paper issued by these financing entities other than during the underwriting process when we act as issuing agent nor do we purchase any of the commer- cial paper for our own account. We do not consolidate these types of entities based on the accounting guidance contained in ARB No. 51, “Consolidated Financial Statements”, SFAS No. 94, “Consolidation of All Majority-Owned Subsidiaries”, EITF Issue No. D-14, “Transactions Involving Special Purpose Entities”, and EITF Issue No. 90-15, “Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions”. Derivative instruments related to these entities are marked to market through the statement of income. SBLCs and liquidity commitments are accounted for pur- suant to SFAS No. 5, “Accounting for Contingencies”(SFAS 5), and are discussed further in Note 13 to the consolidated financial statements. In January 2003, the FASB issued a new rule that addresses off- balance sheet financing entities. As a result, we expect that we will have to consolidate our multi-seller asset backed conduits beginning in the third quarter of 2003, as required by the rule. As of December 31, 2002, the assets of these entities were approximately $25.0 billion. The actual amount that will be consolidated is dependent on actions taken by the Corporation and our customers between December 31, 2002 and the third quarter of 2003. Management is assessing alternatives with regards to these entities including restructuring the entities and/or alternative sources of cost-efficient funding for our customers and expects that the amount of assets consolidated will be less than the $25.0 billion due to these actions and those of our customers. Revenues from administration, liquidity, letters of credit and other services provided to these entities were approximately $121 million in 2002 and $125 million in 2001. The new rule requires that for entities to be consolidated that those assets be initially recorded at their car- rying amounts at the date the requirements of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value the first date the new rule applies. Any difference between the net amount added to the Corporation’s balance sheet and the amount of any previously recog- nized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change. Had we adopted the rule in 2002, there would have been no material impact to net income. See Note 1 of the consolidated financial statements for a discussion regard- ing management’s estimated impact of the new rule in 2003. In addition, to control our capital position, diversify funding sources and provide customers with commercial paper investments, from time to time we will sell assets to off-balance sheet commercial paper entities. The commercial paper entities are special purpose entities that have been isolated beyond our reach or that of our creditors, even in the event of bankruptcy or other receivership. Assets sold to the entities consist primarily of high-grade corporate or municipal bonds, collateralized debt obligations and asset-backed securities. These entities issue collateralized commercial paper to third party market participants and passive derivative instruments to us. Assets sold to the entities typically have an investment rating rang- ing from Aaa/AAA to Aa/AA. We may provide liquidity, SBLCs or similar loss protection commitments to the entity, or we may enter into a derivative with the entity in which we assume certain risks. The liq- uidity facility and derivative have the same legal standing with the commercial paper. The derivative provides interest rate, currency and a pre-spec- ified amount of credit protection to the entity in exchange for the commercial paper rate. This derivative is provided for in the legal documents and helps to alleviate any cash flow mismatches. In some cases, if an asset’s rating declines below a certain investment quality as evidenced by its investment rating or defaults, we are no longer exposed to the risk of loss. At that time, the commercial paper holders assume the risk of loss. In other cases, we agree to assume all of the credit exposure related to the referenced asset. Legal documents for each entity specify asset quality levels that require the entity to auto- matically dispose of the asset once the asset falls below the speci- fied quality rating. At the time the asset is disposed, we are required to reimburse the entity for any credit-related losses depending on the pre-specified level of protection provided. We also receive fees for the services we provide to the entities, and we manage any credit or market risk on commitments or deriva- tives through normal underwriting and risk management processes. Derivative activity related to these entities is included in Note 5 of the consolidated financial statements. At December 31, 2002 and 2001, the Corporation had off-balance sheet liquidity commitments, SBLCs and other financial guarantees to the financing entities of $4.5 billion and $4.3 billion, respectively. Substantially all of these liquidity commit- ments, SBLCs and other financial guarantees mature within one year. These amounts are included in Table 8. Net revenues earned from fees associated with these entities were $37 million and $49 million in 2002 and 2001, respectively. We generally do not purchase any of the commercial paper issued by these types of financing entities other than during the underwriting process when we act as issuing agent nor do we pur- chase any of the commercial paper for our own account. We do not consolidate these types of entities because they are considered Qualified Special Purpose Entities as defined in SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. Derivative instruments related to these entities are marked to market through the statement of income. SBLCs and liquidity commitments are accounted for pur- suant to SFAS 5 and are discussed further in Note 13 to the con- solidated financial statements. 40 BANK OF AMERICA 2002 Because we provide liquidity and credit support to these financ- ing entities, our credit ratings and changes thereto will affect the borrowing cost and liquidity of these entities. In addition, significant changes in counterparty asset valuation and credit standing may also affect the liquidity of the commercial paper issuance. Disruption in the commercial paper markets may result in our having to fund under these commitments and SBLCs discussed above. We manage these risks, along with all other credit and liquidity risks, within our policies and practices. See Notes 1 and 8 of the consolidated financial state- ments for additional discussion of off-balance sheet financing entities. Capital Management The final component of liquidity risk is capital management, which focuses on the level of shareholders’ equity. Period-end shareholders’ equity increased from a year ago, driven by net income, shares issued under employee plans and unrealized gains on securities. These increases were offset by share repurchases and dividends paid. The net impact of share repurchases and issuances under employee plans to earnings per share was $0.11 per share in 2002. We anticipate that future share repurchases will at least equal shares issued under our various stock option plans. See Note 14 of the consolidated financial statements for additional disclosures related to repurchase programs. As a regulated financial services company, we are governed by certain regulatory capital requirements. The regulatory Tier 1 Capital Ratio was 8.22 percent at December 31, 2002, a decrease of eight basis points from a year ago. The minimum Tier 1 Ratio required is four percent. At December 31, 2002, the Corporation was classified as well-capitalized for regulatory purposes, the highest classification. Our current estimate of the possible impact on our capital ratios of the FASB’s new rule on accounting for off-balance sheet financing entities, as previously discussed, is 25-30 basis points. For additional information on the regulatory capital ratios along with a description of the components of risk-based capital, capital adequacy require- ments and prompt corrective action provisions, see Note 15 of the consolidated financial statements. On October 23, 2002, the Board approved a $0.04 per share, or seven percent, increase in the quarterly common dividend. This increase brings the common dividend to $0.64 per share for the fourth quarter of 2002 and $2.44 for the year ended December 31, 2002. The Corporation from time to time sells put options on its com- mon stock to independent third parties. The put option program was undertaken with the goal of partially offsetting the cost of share repur- chases. At December 31, 2002, there were 6.5 million put options out- standing with exercise prices ranging from $61.86 per share to $70.72 per share, which expire from February 2003 to July 2003. Should the outstanding options at December 31, 2002 be exercised in the future, the per-share cost to the Corporation, net of the premium already received, will range from $54.87 to $64.07, or a weighted average of $58.68. The closing market price of the Corporation’s common stock on December 31, 2002 was $69.57 per share. Economic capital is allocated to business units based on an assessment of risk. The allocated amount of capital varies according to the characteristics of the individual product offerings within the busi- ness units. Capital is allocated separately based on the following types of risk: credit, market and operational. Average total economic capital allocated to business units was $35.1 billion in 2002 and $39.2 billion in 2001. Average unallocated economic capital (not allocated to business units) was $12.5 billion in 2002 and $9.4 billion in 2001. Credit Risk Management Credit risk arises from the inability of a customer to meet its repay- ment obligation. Credit risk exists in our outstanding loans and leases, derivative assets, letters of credit and financial guarantees, accept- ances and unfunded loan commitments. For additional information on derivatives and credit extension commitments, see Notes 5 and 13 of the consolidated financial statements. Credit exposure (defined to include loans and leases, letters of credit, derivatives, acceptances, assets held for sale and binding unfunded commitments) associated with a client represents the maximum loss potential arising from all these product classifications. Our commercial and consumer credit extension and review procedures take into account credit exposures that are both funded and unfunded. We manage credit risk associated with our business activities based on the risk profile of the borrower, repayment source and the nature of underlying collateral given current events and conditions. At a macro level we segregate our loans in two major groups – com- mercial and consumer. Commercial Portfolio Credit Risk Management Commercial credit risk management begins with an assessment of the credit risk profile of an individual borrower (or counterparty) based on an analysis of the borrower’s financial position in conjunction with cur- rent industry and economic or geopolitical trends. As part of the overall credit risk assessment of a borrower, each commercial credit exposure is assigned a risk rating and is subject to approval based on existing credit approval standards. Risk ratings are a factor in determining the level of assigned economic capital and the allowance for credit losses. Credit decisions are determined by the lines of business with approvals from Risk Management. In making decisions regarding credit we con- sider risk rating, collateral, and industry and single name concentration limits while also balancing the total client relationship and SVA. Credit exposures are continuously monitored by both lines of business and Risk Management personnel for possible adjustment if there has been a change in a borrower/counterparty’s ability to per- form under its obligations. Additionally, we manage the size of our credit exposure through syndications, loan sales, credit derivatives and securitizations. These activities play an important role in reducing credit exposures where it has been determined that credit risk con- centrations are unacceptable or for other risk mitigation purposes. BANK OF AMERICA 2002 41 19,910 5.8 22,271 6.8 TABLE 10 Significant Industry Non-Real Estate Outstanding Commercial Loans and Leases Concentrations of Credit Risk Portfolio credit risk is evaluated toward a goal that concentrations of credit exposure do not result in unacceptable levels of risk. Concentrations of credit exposure can be measured in various ways including industry, product, geography and customer relationship. Risk due to borrower concentrations is more prevalent in the com- mercial portfolio and is categorized into various perspectives within the domestic and foreign commercial portfolio. We review non-real estate commercial loans by industry and real estate loans by geo- graphic location and by property type. Additionally, within our inter- national portfolio, we also evaluate borrowings by region and by country. Tables 10, 11 and 12 summarize these concentrations. While we have experienced improvement in certain portfolios dur- ing these uncertain times, most notably in the Commercial Banking loan portfolio, we also have witnessed how the negative economic environment has impacted certain industries, particularly in our large corporate loan portfolio. Such industries have and are continuing to experience heightened distress, particularly the telecommunica- tions, media, merchant power and merchant energy sectors (included in the utilities and energy industries) and domestic scheduled airline sector (included in the transportation industry). Further, the poor global economic environment has negatively impacted various regions and certain countries continue to experience significant dis- tress, specifically Brazil and Argentina. Table 10 reflects significant industry non-real estate outstanding com- mercial loans and leases by Standard and Poor’s industry classifications. December 31 (Dollars in millions) Retailing Diversified financials Leisure and sports, hotels and restaurants Transportation Materials Food, beverage and tobacco Capital goods Commercial services and supplies Media Utilities Education and government Health care equipment and services Telecommunications services Energy Consumer durables and apparel Religious and social organizations Banks Insurance Technology hardware and equipment Food and drug retailing Other(1) Total 2002 $ 10,165 8,344 8,139 8,030 7,972 7,335 7,088 6,449 5,911 5,590 5,206 3,912 3,105 3,076 2,591 2,426 1,881 1,616 1,368 1,344 23,417 $ 124,965 2001 $ 10,651 7,916 9,193 9,508 10,399 8,543 9,691 7,637 5,244 4,860 4,936 4,809 4,560 3,800 3,725 2,213 2,999 2,113 2,527 1,603 24,317 $ 141,244 (1) Other includes $5,134 and $6,032 of loans outstanding to Individuals and Trusts repre- senting 1.5 percent and 1.8 percent of total loans outstanding at December 31, 2002 and 2001, respectively. Banc of America Strategic Solutions, Inc. (SSI) is a wholly-owned subsidiary of the Corporation which manages problem asset resolu- tion and the coordination of exit strategies, if applicable, including bulk sales, collateralized debt obligations and other resolutions of domestic and international commercial distressed assets. For addi- tional discussion, see “Problem Loan Management” on page 48. Consumer Portfolio Credit Risk Management Credit risk management for consumer credit occurs throughout a bor- rower’s credit cycle. Statistical techniques are used to establish product pricing, risk appetite, operating processes and metrics to balance risks and rewards appropriately. Consumer exposure is grouped by product and other attributes for purposes of evaluating credit risk. Statistical models are built using detailed behavioral and demographic informa- tion from external sources such as credit bureaus as well as extensive internal historical experience. These models form the foundation of our consumer credit risk management process and are used extensively to determine approve/decline credit decisions, collections management, portfolio management, adequacy of the allowance for credit losses and economic capital allocation for credit risk. Table 9 presents outstanding loans and leases. TABLE 9 Outstanding Loans and Leases(1) (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total December 31 2002 2001 $ 105,053 19,912 30.6% 5.8 $ 118,205 23,039 35.9% 7.0 295 0.1 145,170 42.3 108,197 23,236 31,068 8,384 24,729 1,971 197,585 31.6 6.8 9.1 2.4 7.2 0.6 57.7 383 163,898 78,203 22,107 30,317 12,652 19,884 2,092 165,255 0.1 49.8 23.8 6.7 9.2 3.9 6.0 0.6 50.2 $ 342,755 100.0% $ 329,153 100.0% (1) The Corporation used credit derivatives to provide credit protection (single name credit default swaps, basket credit default swaps and CLOs) for loan counterparties in the amounts of $16.7 billion and $14.5 billion at December 31, 2002 and 2001, respectively. 42 BANK OF AMERICA 2002 A measure of the risk diversification is the distribution of loans by loan size. Over 99 percent of the non-real estate outstanding commercial loans and leases are less than $50 million, representing 86 percent of total non-real estate outstanding commercial loans and leases. Table 11 presents outstanding commercial real estate loans by geographic region and by property type. The amounts presented do not include outstanding loans and leases which were made on the general creditworthiness of the borrower, for which real estate was obtained as security and for which the ultimate repayment of the credit is not dependent on the sale, lease, rental or refinancing of the real estate. Accordingly, the outstandings presented do not include commercial loans secured by owner-occupied real estate. As depicted in the table, we believe the commercial real estate portfolio is well- diversified in terms of both geographic region and property type. Over 99 percent of the commercial real estate loans outstanding are less than $50 million, representing 95 percent of total commercial real estate loan outstandings. TABLE 11 Outstanding Commercial Real Estate Loans (Dollars in millions) By Geographic Region(1) California Southwest Florida Northwest Midwest Mid-Atlantic Carolinas Midsouth Geographically diversified Northeast Other states Non-US Total By Property Type Office buildings Apartments Residential Shopping centers/retail Industrial/warehouse Land and land development Hotels/motels Multiple use Miscellaneous commercial Unsecured Other Non-US Total December 31 2002 2001 $ 4,769 2,945 2,424 2,067 1,696 1,332 1,324 1,166 1,075 667 445 295 $ 20,205 $ 3,953 3,556 3,153 2,400 1,884 1,307 853 718 378 356 1,352 295 $ 20,205 $ 5,225 3,239 2,399 2,363 1,688 1,430 1,472 1,276 1,950 750 478 384 $ 22,654 $ 4,567 3,797 3,157 2,754 2,011 1,501 1,186 694 289 433 1,881 384 $ 22,654 (1) Distributions based on geographic location of collateral. Foreign Portfolio Table 12 sets forth total foreign exposure by region at December 31, 2002 and 2001. Total regional foreign exposure is defined to include credit exposure plus securities and other investments. Reported exposure includes both gross local country exposure and cross- border exposure. Gross local country exposure includes amounts payable to the Corporation by residents of the country in which the credit is booked, regardless of the currency in which the claim is denominated. Management does not net local funding or liabilities against local country exposures as allowed by the FFIEC. Cross-border exposure includes amounts payable to the Corporation by residents of countries outside of the country where the credit is booked, regardless of the currency in which the claim is denominated. TABLE 12 Regional Foreign Exposure and Selected Emerging Markets Exposure(1) (Dollars in millions) Regional Foreign Exposure Asia Europe Africa Middle East Latin America Other(2) Total Selected Emerging Markets Asia Central and Eastern Europe Latin America Total Total Regional Foreign Exposure at December 31 2002 2001 $ 13,912 43,034 80 435 3,915 8,709 $ 14,546 40,087 128 571 6,371 9,447 $ 70,085 $ 71,150 $ 10,296 364 3,915 $ 11,301 393 6,371 $ 14,575 $ 18,065 (1) Exposures for Asia and Latin America have been reduced by $12 and $763, respec- tively, at December 31, 2002, and $10 and $573, respectively, at December 31, 2001. Such amounts represent the fair value of U.S. Treasury securities held as collateral outside the country of exposure. (2) Other includes Canada, Australia, New Zealand, Bermuda, Cayman Islands and supranational entities. Our total foreign exposure was $70.1 billion at December 31, 2002, a decrease of $1.1 billion from December 31, 2001. Our foreign exposure was concentrated in Western Europe, which accounted for $42.7 bil- lion, or 61 percent of total foreign exposure. Growth in exposure in Western Europe in 2002 was across a broad base of diverse products and industries. Foreign exposure to entities in countries defined as emerging markets was $14.6 billion, or 21 percent of total foreign exposure, with the bulk of the emerging markets exposure in Asia ($10.3 bil- lion). The decrease in foreign exposure in Asia is primarily due to Hong Kong with a decrease of $451 million and India with a decrease of $407 million. The decrease in foreign exposure in Latin America is primarily due to Brazil with a decrease of $1.3 billion and Mexico with a decrease of $638 million. BANK OF AMERICA 2002 43 The Corporation has been devoting particular attention to Argentina and Brazil, which have been significantly impacted by negative global economic pressure. Throughout 2001, Argentina’s economy and political environ- ment deteriorated sharply, finally ending in December 2001 with the collapse of the Argentine peso. As a result of these events, at the end of 2001, the Argentine government defaulted on its obligations and during all of 2002, local companies faced serious difficulties servicing their debt. In response to the economic climate in Argentina, the Corporation reduced its credit exposure in the country in 2002 by $280 million to $465 million. Of that $465 million, $339 million represented traditional credit exposure (loans, letters of credit, etc.) predominantly to Argentine subsidiaries of foreign multinational corporations. Additional credit exposure was attributable to $62 mil- lion in Argentina government bonds. Net charge-offs in 2002 totaled $113 million. The allowance for credit losses associated with out- standing loans and leases related to Argentina was $154 million at December 31, 2002. In response to uncertain economic conditions in Brazil, the Corporation has reduced its credit exposure by 53 percent to $1.2 bil- lion at December 31, 2002. The decline was due to loan maturities and lower level of local issuer risk. Of this amount, $562 million repre- sented traditional credit exposure (loans, letters of credit, etc.) and $290 million was Brazilian government securities. Derivatives expo- sure totaled $55 million. The allowance for credit losses related to Brazil consisted of $60 million related to traditional credit expo- sure. An additional $6 million is reserved for derivatives exposure. Nonperforming Assets and Net Charge-offs We routinely review the loan and lease portfolio to determine if any credit exposure should be placed on nonperforming status. An asset is placed on nonperforming status when it is determined that princi- pal and interest are not expected to be fully collected in accordance with its contractual terms. Nonperforming asset levels, presented in Table 13, continue to be adversely affected by the weakened eco- nomic environment. Sales of nonperforming assets during 2002 totaled $543 million, comprised of $296 million of nonperforming commercial loans, $105 million of nonperforming residential mortgage loans and $142 million of foreclosed properties. In 2001 and continuing in 2002 sporadic large single company events and issues in certain industries have impacted nonperform- ing assets and consequently our provision for credit losses. These losses resulted from a multitude of factors including business failures as a result of financial reporting fraud, the prolonged weak economic environment and industry specific issues. It is difficult to predict the timing of such event risk and as a consequence the timing and amount of loss potential is more difficult to estimate. Nonperforming commercial – domestic loans decreased $342 mil- lion to 2.65 percent of commercial – domestic loans at December 31, 2002 from 2.64 percent at December 31, 2001. Nonperforming commer- cial – foreign loans increased $898 million to 6.83 percent of com- mercial – foreign loans at December 31, 2002 from 2.00 percent at December 31, 2001. The increase was primarily attributable to media and telecommunications services firms located in Western Europe and in Latin America. Credit exposure to companies in the telecommunications service industry that were in bankruptcy at December 31, 2002 totaled $190 million, with associated reserves of $44 million. Net charge-offs associated with credit exposure to these telecommunica- tions services companies were $105 million for 2002. At December 31, 2002 and 2001, Argentine nonperforming loans were $278 million and $40 million, respectively. Nonperforming loans in Brazil were $90 million at December 31, 2002 compared to $2 mil- lion at December 31, 2001. Within the consumer portfolio, nonperforming loans increased $54 million to $733 million, or 0.37 percent of consumer loans, at December 31, 2002 from $679 million or 0.41 percent at December 31, 2001, primarily due to higher levels of residential mortgage loans being held in the portfolio, partially offset by the sale of nonperforming residential mortgage loans during the first quarter of 2002. The Corporation also had approximately $4 million and $48 mil- lion of troubled debt restructured loans at December 31, 2002 and 2001, respectively, that were accruing interest and were not included in nonperforming assets. TABLE 13 Nonperforming Assets(1) (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Foreign consumer Total consumer Total nonperforming loans Foreclosed properties Total nonperforming assets December 31 2001 $ 3,123 461 240 3 3,827 556 80 27 9 7 679 4,506 402 $ 4,908 2002 $ 2,781 1,359 161 3 4,304 612 66 30 19 6 733 5,037 225 $ 5,262 (1) In 2002, $668 in interest income was contractually due on nonperforming loans and troubled debt restructured loans. Of this amount, $193 was actually recorded as interest income in 2002. 44 BANK OF AMERICA 2002 Table 14 presents the additions to and reductions in nonperforming assets in the commercial and consumer portfolios during 2002 and 2001. TABLE 14 Nonperforming Assets Activity (Dollars in millions) Balance, January 1 Commercial Additions to nonperforming assets: New nonaccrual loans and foreclosed properties Advances on loans Total commercial additions Reductions in nonperforming assets: Paydowns, payoffs and sales Returns to performing status Charge-offs(1) Total commercial reductions Total commercial net additions to nonperforming assets Consumer Additions to nonperforming assets: New nonaccrual loans and foreclosed properties Total consumer additions Reductions in nonperforming assets: Paydowns, payoffs and sales Returns to performing status Charge-offs(1) Transfers (to) from assets held for sale(2,3) Total consumer reductions Total consumer net reductions in nonperforming assets Total net additions to (reductions in) nonperforming assets Balance, December 31 2002 $ 4,908 2001 $ 5,457 4,963 244 5,207 (2,171) (149) (2,354) (4,674) 533 1,694 1,694 (957) (886) (107) 77 (1,873) (179) 354 4,797 197 4,994 (2,065) (313) (2,289) (4,667) 327 2,723 2,723 (881) (1,360) (261) (1,097) (3,599) (876) (549) $ 5,262 $ 4,908 (1) Certain loan products, including commercial credit card, consumer credit card and consumer non-real estate loans, are not classified as nonperforming; therefore, the charge-offs on these loans are not included above. (2) Includes assets held for sale that were foreclosed and transferred to foreclosed properties. (3) Transfers in 2001 were primarily related to the exit of the subprime real estate lending business. Commercial – domestic loans past due 90 days or more and still Commercial – domestic loans past due 90 days or more and still accruing interest were $223 million and $215 million at December 31, 2002 and 2001, respectively. Consumer loans past due 90 days or more and still accruing interest were $541 million and $459 million at December 31, 2002 and 2001, respectively. As a matter of corporate practice, we do not discuss specific client relationships; however, due to the publicity and interest surrounding Enron Corporation and its related entities (Enron), we made an excep- tion. In the fourth quarter of 2001, our total exposure to Enron was $503 million before a charge-off of $210 million, as well as a $21 million write-off of Enron securities related to a collateralized loan obligation. During 2002, the Corporation had an additional $48 million of charge- offs related to Enron. The Corporation’s exposure (after charge-offs) related to Enron was $185 million and $272 million at December 31, 2002 and 2001, respectively, of which $136 million and $184 million was secured. Nonperforming loans related to Enron were $159 million and $226 million at December 31, 2002 and 2001, respectively. The Corporation also has other assets that represent possible credit risk. Included in Other Assets are loans held for sale and lever- aged lease partnership interests of $13.8 billion and $387 million, respectively, at December 31, 2002 and $8.4 billion and $485 million, respectively, at December 31, 2001. Included in these balances are nonperforming loans held for sale and leveraged lease partnership interests of $118 million and $2 million, respectively, at December 31, 2002 and $1.0 billion and $0, respectively, at December 31, 2001. The Corporation utilizes actual loan net charge-offs in its analysis of the adequacy of the allowance for credit losses. Net charge-offs are presented in Table 15. Commercial – domestic loan net charge-offs decreased $478 mil- lion in 2002 compared to 2001, primarily due to lower domestic gross charge-offs in Global Corporate and Investment Banking and Commercial Banking and higher recoveries, partially offset by charge-offs related to one large credit in the Private Bank. Commercial – foreign loan net charge-offs increased $313 million in 2002 compared to 2001, primarily due to charge-offs in emerging markets including Argentina, as well as in telecommunications serv- ices, media, and utilities industries in Western Europe. Net charge-offs on consumer finance loans decreased $771 mil- lion in 2002 compared to 2001, primarily due to $635 million in exit- related charge-offs in the third quarter of 2001 as well as continued runoff in the portfolio. BANK OF AMERICA 2002 45 Credit card net charge-offs increased $422 million to $1.1 billion in 2002 compared to 2001. The increase in net charge-offs was prima- rily a result of portfolio seasoning of outstandings from new account growth in 2000 and 2001, new advances on previously securitized bal- ances, and a weaker economic environment. New advances under these previously securitized balances are recorded on our balance sheet after the revolving period of the securitization, which has the effect of increasing loans on our balance sheet, increasing net inter- est income and increasing charge-offs, with a corresponding reduc- tion in noninterest income. Allowance for Credit Losses To help us identify credit risks and assess the overall collectibility of our lending portfolios, we conduct periodic and systematic detailed reviews. The allowance for credit losses represents management’s estimate of probable losses in the portfolio. Within the allowance, reserves are allocated to each product type based on specific and formula components, as well as a general reserve. See Note 1 of the consolidated financial statements for addi- tional discussion on the Corporation’s allowance for credit losses. The specific component of the allowance for credit losses covers those commercial loans that are our nonperforming or impaired. An allowance is established when the discounted cash flows (or col- lateral value or observable market price) is lower than the carrying value of that loan. For purposes of computing the specific loss com- ponent of the allowance, larger impaired loans are evaluated indi- vidually and smaller impaired loans are evaluated as a pool using historical loss experience for the respective product type and risk rating of the loan. In Table 17, this component of the allowance is characterized as commercial impaired. The formula component of the allocated allowance covers per- forming commercial loans and leases, letters of credit and consumer loans. The allowance for commercial loans and letters of credit is established by credit type by analyzing historical loss experience, by internal risk rating, current economic conditions and performance trends within each portfolio segment. The formula component allowance for consumer loans is based on aggregated portfolio seg- ment evaluations generally by credit product type. Loss forecast mod- els are utilized for consumer products which consider a variety of factors including, but not limited to, historical loss experience, esti- mated defaults or foreclosures based on portfolio trends, delinquen- cies and credit scores. These components of the allowance are characterized as commercial non-impaired and total consumer, respectively, in Table 17. A general portion of allowance for credit losses is maintained to cover uncertainties that affect our estimate of probable losses. These uncertainties include the imprecision inherent in the forecasting methodologies, certain industry and geographic concentrations (including global economic uncertainty) and exposures related to legally binding commitments that have not yet been drawn. Manage- ment assesses each of these components to determine the overall level of the general portion. The relationship of the general com- ponent to the total allowance for credit losses may fluctuate from period to period. Management evaluates the adequacy of the allowance for credit losses based on the combined total of specific, formula and general components. The Corporation monitors differences between estimated and actual incurred credit losses. This monitoring process includes periodic assessments by senior management of credit portfolios and the models used to estimate incurred losses in those portfolios. Additions to the allowance for credit losses are made by charges to the provision for credit losses. Credit exposures (excluding deriva- tives) deemed to be uncollectible are charged against the allowance for credit losses. Table 15 presents a rollforward of the allowance for credit losses. Recoveries of previously charged off amounts are cred- ited to the allowance for credit losses. The provision for credit losses was $3.7 billion and $4.3 billion for 2002 and 2001, respectively. The allowance for credit losses was $6.9 billion at December 31, 2002 and 2001. The allowance for credit losses as a percentage of total outstanding loans and leases was 2.00 percent at December 31, 2002 compared to 2.09 percent at December 31, 2001. 46 BANK OF AMERICA 2002 Table 15 presents the activity in the allowance for credit losses for 2002 and 2001. TABLE 15 Allowance for Credit Losses (Dollars in millions) Balance, January 1 Loans and leases charged off Commercial – domestic Commercial – foreign Commercial real estate – domestic Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance(1) Credit card Other consumer domestic Foreign consumer Total consumer Total loans and leases charged off Recoveries of loans and leases previously charged off Commercial – domestic Commercial – foreign Commercial real estate – domestic Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Other consumer domestic Foreign consumer Total consumer Total recoveries of loans and leases previously charged off Net charge-offs Provision for credit losses(2) Other, net Balance, December 31 Loans and leases outstanding at December 31 Allowance for credit losses as a percentage of loans and leases outstanding at December 31 Average loans and leases outstanding during the year Net charge-offs as a percentage of average outstanding loans and leases during the year Allowance for credit losses as a percentage of nonperforming loans at December 31 Ratio of the allowance for credit losses at December 31 to net charge-offs (1) Includes $635 related to the exit of the subprime real estate lending business in 2001. (2) Includes $395 related to the exit of the subprime real estate lending business in 2001. 2002 2001 $ 6,875 $ 6,838 (1,793) (566) (45) (2,404) (56) (40) (355) (333) (1,210) (57) (5) (2,056) (4,460) 322 45 8 375 14 14 145 78 116 21 – 388 763 (3,697) 3,697 (24) 6,851 $ $ 342,755 2.00% $ 336,819 1.10% 136.01 1.85 (2,120) (249) (46) (2,415) (39) (32) (389) (1,137) (753) (73) (6) (2,429) (4,844) 171 41 7 219 13 13 139 111 81 23 1 381 600 (4,244) 4,287 (6) 6,875 $ $ 329,153 2.09% $ 365,447 1.16% 152.58 1.62 BANK OF AMERICA 2002 47 December 31, 2001. Specific reserves on impaired loans increased $156 million in 2002 reflecting an increase in our investment in specific loans considered impaired which was $4.1 billion at December 31, 2002 compared to $3.9 billion at December 31, 2001. Commercial – domestic impaired loans declined $585 million to $2.6 billion at December 31, 2002 compared to December 31, 2001. Commercial – for- eign impaired loans increased $854 million to $1.4 billion. Commercial real estate impaired loans decreased $81 million to $159 million. The allowance for credit losses in the consumer portfolio was $1.9 billion at December 31, 2002, consistent with December 31, 2001. Growth in the credit card and residential mortgage portfolios was offset by the application of updated performance trends that decreased consumer real estate reserve rates. Management expects continued growth in the credit card portfolio. General reserves at December 31, 2002 were $1.2 billion, down $100 million from December 31, 2001, representing approximately 18 percent of the total allowance for credit losses. Management reviewed and adjusted the margin of imprecision and the binding unfunded loan commitment components of the general reserve due to updated information and factors. Partially offsetting these adjust- ments were increases to industry concentration components. Problem Loan Management In 2001, the Corporation realigned certain problem loan management activities into a wholly-owned subsidiary, Banc of America Strategic Solutions, Inc. (SSI). SSI was established to better align the manage- ment of commercial loan credit workout operations. The Corporation believes that economic returns will improve with more effective and efficient management processes afforded a closely aligned end-to- end function. The Corporation believes that economic returns will be maximized by assisting borrowing companies in refinancing with other lenders or through the capital markets, facilitating the sale of entire borrowing companies or certain assets/subsidiaries, negotiat- ing traditional restructurings using borrowing company cash flows to repay debts, selling individual assets in the secondary market when the market prices are attractive relative to assessed collateral values and by executing collateralized debt obligations or otherwise dis- posing of assets in bulk. From time to time, the Corporation may contribute or sell certain loans to SSI. In September 2001, Bank of America, N.A. (BANA), a wholly- owned subsidiary of the Corporation, contributed to SSI, a consoli- dated subsidiary of BANA, commercial loans with a gross book balance of $3.2 billion in exchange for a class of preferred and for a class of common stock of SSI. For financial reporting under GAAP, the loan contribution was accounted for at carryover book basis as appropriate for entities under common control, and there was no change in the designation or measurement of the loans because the individual loan resolution strategies were not affected by the realign- ment or contribution. From time to time, management may identify certain loans to be considered for accelerated disposition. At that time, such loans or pools of loans would be redesignated as held for sale and remeasured at lower of cost or market. For reporting purposes, the Corporation allocates its allowance across products; however, the allowance is available to absorb all credit losses without restriction. Table 16 represents our current allocation by product type and Table 17 presents an allocation by component. During the fourth quarter of 2002, the Corporation updated his- toric loss rate factors used in estimating the allowance for loan losses to incorporate more current information. The most significant result was a decrease in the allowance for commercial – domestic real estate and an increase in the allowance for commercial – domestic loans. TABLE 16 Allocation of the Allowance for Credit Losses (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer General Total December 31 2002 $ 2,392 886 439 9 3,726 108 49 361 323 1,031 9 1,881 1,244 2001 $ 1,974 766 924 8 3,672 145 83 367 433 821 10 1,859 1,344 $ 6,851 $ 6,875 TABLE 17 Allocation of the Allowance for Credit Losses (Dollars in millions) Amount Percent Amount Percent December 31 2002 2001 Commercial non-impaired Commercial impaired $ 2,807 919 41.0% $ 2,909 763 13.4 Total commercial Total consumer General Total 3,726 1,881 1,244 54.4 27.5 18.2 3,672 1,859 1,344 $ 6,851 100% $ 6,875 100% 42.3% 11.1 53.4 27.0 19.5 While the allowance for commercial credit losses remained relatively flat at $3.7 billion, individual product reserves changed as a result of updated reserve rates based on a review of performance trends and port- folio deterioration. Commercial–domestic reserves increased $418 mil- lion year-to-year to end at $2.4 billion on December 31, 2002. This reflects an increased reserve rate partially offset by a $13.2 billion decrease in loans between December 31, 2002 and December 31, 2001. Similarly, commercial-foreign reserves increased $120 million reflecting increased reserve rates due to portfolio deterioration and partially offset by a $3.1 billion decrease in the portfolio. Reserves for commercial real estate-domestic loans decreased $485 million from December 31, 2001 due to updated reserve rates based on portfolio performance and a loan portfolio reduction of $2.4 billion since 48 BANK OF AMERICA 2002 The loan contribution was effected as an exchange for tax pur- poses. As is common in workout situations, the loans had a tax basis higher than their fair market value. Under the Internal Revenue Code (the Code), SSI received a carryover tax basis in the contributed loans. In addition, under the Code, the aggregate tax basis of the class of preferred and the class of common stock received in the exchange was equal to the basis of the loans contributed. Under the Code, the preferred stock’s allocated tax basis was equal to its fair market value and the common stock was allocated the remaining tax basis, resulting in a tax basis in excess of its fair market value and book basis. We took into account the tax loss which results from the difference in tax basis and fair market value, recognized on the sale of this class of common stock to an unrelated third party, as well as the carryover tax basis in the contributed loans. The Corporation believes that recognition of the tax loss continues to be appropriate. During September 2002, commercial loans with a gross book bal- ance of $2.7 billion were sold to SSI. For tax purposes, under the Code, the sale was treated as a taxable exchange. The tax and accounting treatment of this sale had no financial statement impact on the Corporation because the sale was a transfer among entities under common control, and there was no change in the individual loan reso- lution strategies. Market Risk Management Market risk is the potential loss due to adverse changes in market prices and yields. Market risk is inherent in most of the Corporation’s operating positions and/or activities including customers’ loans, deposits, securities and long-term debt (interest rate risk), trading assets and liability positions and derivatives. Our market-sensitive assets and liabilities are generated through our customer and propri- etary trading operations, asset/liability management activities and to a lesser degree from our mortgage banking activities. Loans and deposits generated through our traditional banking business gener- ate interest income and expense, respectively, and the value of the cash flows change based on general economic levels, most impor- tantly, the level of interest rates. We manage trading risk within our proscribed risk appetite using hedging techniques. Trading positions are subject to all primary risk drivers, including interest rate, foreign exchange, equity and commod- ity. Trading positions are reported at market value with changes reflected in income, which is the estimated current cash exchange value. Our traditional banking loan and deposit products are non-trad- ing positions and are reported at amortized cost for assets or the amount owed for liabilities and not market value. While existing accounting rules require a historical cost view of traditional banking assets and liabilities, these positions are still subject to changes in economic value based on varying market conditions. The effect of changes in the economic value of our loans and deposits is reflected in the levels of future income and expense produced by these posi- tions versus levels that would be generated by current levels of interest rates. To hedge this risk, we use various financial instru- ments, both on- and off-balance sheet, to manage the risk, commonly referred to as ALM. Trading Risk Management Trading revenues (including trading account profits and related net interest income) represent the amount earned from our trading posi- tions, which include trading account assets and liabilities, derivative positions and mortgage banking assets. Trading positions are taken in a diverse range of financial instruments and markets and are marked to market. Most are recorded based on actively quoted market prices or values. The remaining positions are recorded based on man- agement’s assessment of market value using market indicators and mathematical models. Trading profit can be volatile and is largely driven by general market conditions and customer demand. Profit is dependent on the volume and type of transactions, the level of risk assumed, and the volatility of price and rate movements at any given time within the ever-changing market environment. A histogram of daily revenue or loss is a simple graphic depict- ing trading volatility and tracking success of trading-related revenue. Trading-related revenue encompasses both proprietary trading and customer-related activities. In 2002, positive trading-related revenue was recorded for 215 of 251 trading days. Furthermore, of the 36 days that showed negative revenue, only 12 were greater than $10 million, and the largest loss was $32 million. Histogram of Daily Trading-related Revenue Twelve Months Ended December 31, 2002 s y a D f o r e b m u N 80 70 60 50 40 30 20 10 0 <-50 -50 to -40 -40 to -30 -30 to -20 -20 to -10 -10 to 0 0 to 10 10 to 20 20 to 30 30 to 40 40 to 50 >50 Revenue (Dollars in millions) BANK OF AMERICA 2002 49 To evaluate risk in our trading activities, we focus on the actual and potential volatility of individual positions as well as portfolios. At a portfolio and corporate level, we use Value at Risk (VAR) modeling and stress testing. VAR is a key limit used to measure market risk. Trader lim- its and VAR are used to manage day-to-day risks and are subject to test- ing where we compare expected performance to actual performance. This testing provides us a real life view of our models’ predictive accu- racy. All limit excesses are communicated to senior management. A VAR model estimates a range of hypothetical scenarios within which the next day’s profit or loss is expected. These estimates are impacted by the nature of the positions in the portfolio and the cor- relation within the portfolio. Within any VAR model, there are significant and numerous assumptions that will differ from company Table 18 presents actual daily VAR for both 2002 and 2001. TABLE 18 Trading Activities Market Risk to company. Our VAR model assumes a 99 percent confidence level. Statistically this means that over a three to five year period, one out of 100 trading days, or on average, two to three times a year, losses will exceed the model-calculated range. Actual losses did not exceed VAR in 2002 or 2000 but exceeded it once in 2001. There are numerous assumptions and estimates associated with modeling, and actual results could differ. In addition to the review of our assumptions with senior management, we mitigate these uncertainties through close monitoring and by examining and updating assumptions on an ongoing basis. If the results of our analysis indicate higher than expected levels of risk, proactive meas- ures are taken to adjust risk levels. (Dollars in millions) Foreign exchange Interest rate Credit(3) Real estate/mortgage(4) Equities Commodities Total trading portfolio Average VAR(1) $ 3.2 28.8 14.8 19.2 8.8 9.2 40.1 $ 2002 High VAR(2) 7.1 40.3 21.6 61.6 18.2 15.4 69.8 Low VAR(2) Average VAR(1) $ 0.5 17.3 6.5 2.5 4.3 3.4 19.2 $ 7.2 34.3 10.9 33.2 15.4 4.3 52.7 $ 2001 High VAR(2) 12.8 47.0 17.3 55.5 25.1 10.9 69.9 $ Low VAR(2) 1.9 23.0 3.0 8.8 8.9 0.9 35.8 (1) The average VAR for the total portfolio is less than the sum of the VARs of the individual portfolios due to risk offsets arising from the diversification of the portfolio. (2) The high and low for the total portfolio may not equal the sum of the individual components as the highs or lows of the individual portfolios may have occurred on different trading days. (3) Credit includes credit fixed income, credit derivatives, hedges of credit exposure and mortgage banking assets. (4) Real estate/mortgage, which is included in the credit category in the Trading-Related Revenue table in Note 4 of the consolidated financial statements, includes capital market real estate and mortgage banking certificates. During the fourth quarter of 2002, we completed an enhancement of our methodology used in the VAR risk aggregation calculation. This approach utilizes historical market conditions over the last three years to derive estimates of trading risk and provides for the natural aggregation of trading risk across different groups. Historically, we used a mathematical method to allocate risk across different trading groups that did not assume the benefit of correlation across markets. This change resulted in a lower VAR calculation in 2002. Prior year VAR amounts have not been restated to reflect this change. Stress Testing Because the very nature of a VAR model suggests results can exceed our estimates, we “stress test” our portfolio. Stress testing estimates the value change in our trading portfolio due to abnormal market movements. Various stress scenarios are run regularly against the trading portfolio to verify that, even under extreme market moves, the Corporation will preserve its capital; to determine the effects of signifi- cant historical or hypothetical events; and to determine the effects of specific, extreme hypothetical, but plausible events. The results of the stress scenarios are calculated daily and reported to senior manage- ment as part of the regular reporting process. The results of certain specific, extreme hypothetical scenarios are presented to ALCO peri- odically. Examples of these specific stress scenarios include calculat- ing the effects on the overall portfolio of an extreme Federal Reserve Board tightening or easing of interest rates, the effects of a prolonged conflict in the Middle East and a recession in Japan and its correspon- ding ripple effects globally. In addition, for interest rate sensitive products and portfolios, we gauge the interest rate sensitivity through the use of a DV01 (Dollar Value of One Basis Point) method, which computes the impact of a one basis point (or 1/100 or 0.01 percent) movement in interest rates. The calculations are done on individual portfolios and at the aggregate level. This method is a useful tool for risk management, particularly at the individual trader level, but must be complemented with other tools. 50 BANK OF AMERICA 2002 Securities The securities portfolio is integral to our ALM activities. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and regulatory requirements and on- and off- balance sheet positions. The securities portfolio at December 31, 2002 ended down from a year ago. In 2002, we purchased securities of $146 billion, sold $137 billion and received paydowns of $25 billion. During the year, we continuously monitored the interest rate risk position of the portfolio and repositioned the securities portfolio in order to manage convexity risk and to take advantage of interest rate fluctuations. Through sales of the securities portfolio, we realized $630 million in gains on sales of securities during the year. Residential Mortgage Portfolio We repositioned the discretionary mortgage loan portfolio to manage prepayment risk resulting from the unusually low rate environment. The residential mortgages designated solely for ALM activities grew primarily through whole loan purchase activity. In 2002, we purchased $55.0 billion of residential mortgages in the wholesale market for our discretionary portfolio and interest rate risk management. During the same period, we sold $22.7 billion of whole mortgage loans and recog- nized $500 million in gains on the sales. Interest Rate and Foreign Exchange Derivative Contracts Interest rate derivative contracts and foreign exchange derivative contracts are utilized in our ALM process. We use derivatives as an effi- cient, low-cost tool to manage our interest rate risk. We use derivatives to hedge or offset the changes in cash flows or market values of our balance sheet. See Note 5 of the consolidated financial statements for additional information on the Corporation’s hedging activities. Our interest rate contracts are generally non-leveraged generic interest rate and basis swaps, options, futures and forwards. In addition, we use foreign currency contracts to manage the foreign exchange risk associated with foreign-denominated assets and liabilities, as well as our equity investments in foreign subsidiaries. Table 20 reflects the notional amounts, fair value, weighted average receive fixed and pay fixed rates, expected maturity and estimated duration of our ALM derivatives at December 31, 2002 and 2001. Management believes the fair value of the ALM interest rate and for- eign exchange portfolios should be viewed in the context of the com- bined discretionary and non-discretionary portfolios. Interest Rate Risk Management Our ALM process, managed through ALCO, is used to manage interest rate risk associated with non-trading financial instruments. Interest rate risk represents the most significant market risk exposure to our non-trading financial instruments. Our overall goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the potential volatility to our net interest income caused by changes in market interest rates. In managing interest rate risk of our non-trading financial instruments we look at two broad portfolios – non-discretionary and discretionary. The non-discretionary portfolio consists of our customer-driven loan and deposit positions and securities required to support legal and regulatory requirements. To manage the resulting interest rate sensitiv- ity of the non-discretionary portfolio, we utilize a discretionary portfo- lio of securities, residential mortgage loans and derivatives. Strategically positioning our discretionary portfolio allows us to man- age the interest rate sensitivity in our non-discretionary portfolio. Complex sensitivity simulations are used to estimate the impact on net interest income of numerous interest rate scenarios, balance sheet trends and strategies. These simulations estimate levels of short-term financial instruments, securities, loans, deposits, borrow- ings and ALM derivative instruments. In addition, these simulations incorporate assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. In addition to net interest income sensitivity simulations, market value sensitivity measures are also utilized. The Balance Sheet Management division maintains a net interest income forecast utilizing different rate scenarios, including a most likely scenario. The most likely scenario is designed around an eco- nomic forecast that is meant to estimate our expectation of the most likely path of rates for the upcoming horizon. The Balance Sheet Management division constantly updates the net interest income forecast for changing assumptions and differing outlooks based on actual results. Net interest income risk is measured based on rate shocks over different time horizons versus a current stable interest rate environ- ment. Assumptions used in these calculations are similar to those used in our corporate planning and forecasting process. The overall interest rate risk position and strategies are reviewed on an ongoing basis with ALCO and other committees as appropriate. Table 19 pro- vides our estimated net interest income at risk over the subsequent year from December 31, 2002 and 2001 resulting from a 100 basis point gradual (over 12 months) increase or decrease in interest rates. TABLE 19 Estimated Net Interest Income at Risk December 31, 2002 December 31, 2001 -100 bp +100 bp (2.4)% (0.8) 1.5% 0.4 BANK OF AMERICA 2002 51 TABLE 20 Asset and Liability Management Interest Rate and Foreign Exchange Contracts (Dollars in millions, average estimated duration in years) Open interest rate contracts Total receive fixed swaps Notional amount Weighted average receive rate Total pay fixed swaps Notional amount Weighted average pay rate Basis swaps Notional amount Total swaps Option products Fair Value $ 4,449 (1,825) (3) 2,621 650 December 31, 2002 Expected Maturity Total 2003 2004 2005 2006 2007 Thereafter $116,520 $ 3,132 $ 3,157 $ 5,719 $ 14,078 $ 16,213 $ 74,221 4.29% 1.76% 3.17% 4.66% 4.50% 3.90% 4.46% $ 61,680 $ 10,083 $ 5,694 $ 7,993 $ 15,068 $ 6,735 $ 16,107 3.60% 1.64% 2.46% 3.90% 3.17% 3.62% 5.48% $ 15,700 $ – $ 9,000 $ 500 $ 4,400 $ $ – – $ 1,800 $ 607 Net notional amount(1) $ 48,374 $ 1,000 $ 6,767 $ 40,000 $ – Futures and forward rate contracts (88) Net notional amount(1) $ 8,850 $ (6,150) $ 15,000 Total open interest rate contracts Closed interest rate contracts(2,3) Net interest rate contract position Open foreign exchange contracts 3,183 955 4,138 313 Notional amount $ 4,672 $ 78 $ 648 $ 102 $ 1,581 $ 96 $ 2,167 Total ALM contracts $ 4,451 (Dollars in millions, average estimated duration in years) Open interest rate contracts Total receive fixed swaps Notional amount Weighted average receive rate Total pay fixed swaps Notional amount Weighted average pay rate Basis swaps Notional amount Total swaps Option products Net notional amount(1) Total open interest rate contracts Closed interest rate contracts(2,3) Net interest rate contract position Open foreign exchange contracts Notional amount Fair Value $ 784 (322) – 462 907 1,369 1,071 2,440 (285) Total ALM contracts $ 2,155 December 31, 2001 Expected Maturity Total 2002 2003 2004 2005 2006 Thereafter $ 64,472 $ 1,510 $ 5.74% 7.04% 266 8.27% $ 10,746 $ 8,341 $ 9,608 $ 34,001 5.31% 5.79% 5.37% 5.89% $ 21,445 $ 11,422 $ 4,319 $ 3.97% 2.61% 4.21% 122 6.09% $ 2,664 $ 6.77% 60 5.83% $ 2,858 6.34% $ 15,700 $ 7,000 $ $ – – $ – $ 9,000 $ 500 $ 4,400 $ 1,800 $ 7,000 $ 6,968 $ 465 $ 283 $ 576 $ 1,180 $ 2,335 $ 2,129 Average Estimated Duration 4.89 4.07 Average Estimated Duration 4.68 2.26 (1) Reflects the net of long and short positions. (2) Represents the unamortized net realized deferred gains associated with closed contracts. As a result, no notional amount is reflected for expected maturity. (3) The amount of unamortized net realized deferred gains associated with closed ALM swaps was $923 and $966 at December 31, 2002 and 2001, respectively. The amount of unamortized net realized deferred gains associated with closed ALM options was $21 and $114 at December 31, 2002 and 2001, respectively. The amount of unamortized net realized deferred gains (losses) associated with closed ALM futures and forward contracts was $11 and $(9) at December 31, 2002 and 2001, respectively. There were no unamortized net realized deferred gains or losses associated with closed foreign exchange contracts at December 31, 2002 and 2001. Of these unamortized net realized deferred gains, $234 was included in accumulated other comprehensive income and the remainder is primarily included as a basis adjustment of long-term senior debt at December 31, 2002. 52 BANK OF AMERICA 2002 Consistent with our strategy of managing interest rate sensitivity, the net receive fixed interest rate swap position increased by $11.8 billion to $54.8 billion at December 31, 2002. This increase primarily occurred in the last half of 2002. Option products in our ALM process may include option collars or spread strategies, which involve the buying and selling of options on the same underlying security or interest rate index. These strategies may involve caps, floors and options on index futures contracts. The Corporation adopted SFAS 133 on January 1, 2001. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. We have not significantly altered our overall interest rate risk management objective and strategy as a result of adopting SFAS 133. For further information on SFAS 133, see Note 1 of the consolidated financial statements. Mortgage Banking Risk Mortgage production activities create unique interest rate and prepay- ment risk between the loan commitment date (pipeline) and the date the loan is sold to the secondary market. To manage interest rate risk, we enter into various financial instruments including interest rate swaps, forward delivery contracts, Euro dollar futures and option con- tracts. The notional amount of such contracts was $25.3 billion at December 31, 2002 with associated net unrealized losses of $224 mil- lion. At December 31, 2001, the notional amount of such contracts was $27.8 billion with associated net unrealized gains of $69 million. These contracts have an average expected maturity of less than 90 days. Prepayment risk represents the loss in value associated with a high rate loan paying off in a low rate environment and the loss of servicing value when loans prepay. We manage prepayment risk using various financial instruments including purchased options and swaps. The notional amounts of such contracts at December 31, 2002 and 2001 were $53.1 billion and $65.1 billion, respectively. The related unrealized gain was $955 million and $301 million at December 31, 2002 and 2001, respectively. These amounts are included in the Derivatives table in Note 5 of the consolidated financial statements. See Note 1 for additional discussion of these financial instruments in the mortgage banking assets section. Operational Risk Management Operational risk is the potential for loss resulting from events involv- ing people, processes, technology, legal/regulatory issues, external events, execution and reputation. Successful operational risk man- agement is particularly important to a diversified financial services company like ours because of the very nature, volume and complexity of our various businesses. In keeping with the corporate governance structure, the lines of businesses are responsible for all the risks within the business includ- ing operational risks. Such risks are managed through corporate wide or business segment specific policies and procedures, controls and monitoring tools. Examples of these include personnel management practices, data reconciliation processes, fraud management units, transaction processing monitoring and analysis, systems interruptions and new product introduction processes. The Corporate Operational Risk Executive, reporting to the Chief Risk Officer, provides oversight to accelerate and facilitate consistency of effective policies, best practices, controls and monitoring tools for managing and assessing all types of operational risks across the company. The Operational Risk Executive also works with the busi- ness segment executives and their risk counterparts to implement appropriate policies, processes and assessments at the segment level. In addition, the Corporate Audit group places special emphasis on operational risk management processes, at both the corporate and segment levels, in its assessments and testing. Operational risks fall into two major categories, business specific and corporate-wide affecting all business lines. Operational Risk Management plays a different role in each category. For business specific risks, Operational Risk Management works with the seg- ments to ensure consistency in policies, processes, and assessments. With respect to corporate-wide risks, such as information security, legal and compliance, Operational Risk business recovery, Management assesses the risks, develops a consolidated corporate view and communicates that view to the business level. At the business segment level, there are four business segment risk executives that are responsible for oversight of all operational risks in the business segments they support. In their management of these specific risks, they utilize corporate-wide operational risk poli- cies, processes, and assessments. A specific example is our manage- ment of outsourced activities. To ensure that we meet our business segment objectives and manage the risks associated with these activities, vendor contracts contain specific corporate standards that allow for the tracking of service performance levels. In addition, we also have our Corporate Audit group perform independent assess- ments of vendor management processes and key vendor processes, the latter including on-site work at our more significant vendors. To manage corporate-wide risks, we maintain specialized sup- port groups, such as Legal, Information Security, Business Recovery, Supply Chain Management, Finance, Compliance and Technology and Operations. These groups assist the lines of business in the devel- opment and implementation of risk management practices specific to the needs of the individual businesses. An example of such an effort is our company-wide implementation of the anti-money laun- dering aspects of the USA Patriot Act. Operational Risk Management, working in conjunction with sen- ior business segment executives, has developed two key tools to help manage, monitor, and summarize operational risk. The first tool the businesses and executive management utilize is a company-wide quarterly self-assessment process, which identifies and evaluates the status of risk issues, including mitigation plans if appropriate. The goal of this process, which originates at the segment level, is to ensure that the overall operating environment for segments is being continuously assessed and appropriately enhanced for changing conditions. This self-assessment is also used for identifying emerging operational risk issues and determining how they should be managed – at the business segment or corporate level. The risks identified in this process are also integrated into our quarterly financial forecasting process. The second process is a metrics review of key risk indicators. Each business has identified metrics for each category of operational risk noted above. The resulting review is used to identify trends and issues on both a corporate and a segment level. BANK OF AMERICA 2002 53 The approach described above allows the Corporation to have a dis- cipline that anticipates and mitigates the losses from operational risks. 2001 Compared to 2000 The following discussion and analysis provides a comparison of the Corporation’s results of operations for 2001 and 2000. This discussion should be read in conjunction with the consolidated financial state- ments and related notes on pages 72 through 111. In addition, Tables 1 and 2 contain financial data to supplement this discussion. Overview Net income totaled $6.8 billion, or $4.18 per common share (diluted), in 2001 compared to $7.5 billion, or $4.52 per common share (diluted), in 2000. The return on average common shareholders’ equity was 13.96 percent in 2001 compared to 15.96 percent in 2000. Earnings excluding charges related to the Corporation’s strate- gic decision to exit certain consumer finance businesses in 2001 and restructuring in 2000 were $8.0 billion, or $4.95 per common share (diluted), in 2001 compared to $7.9 billion, or $4.72 per common share (diluted), in 2000. Excluding these charges, the return on average common shareholders’ equity was 16.53 percent in 2001 compared to 16.70 percent in 2000. Shareholder value added (SVA), which excludes exit and restructuring charges, remained essentially unchanged at $3.1 billion. For additional information on the use of non-GAAP financial measures and reconciliations to corresponding GAAP measures, see the Supplemental Financial Data section begin- ning on page 27. Total revenue was $34.6 billion, an increase of $1.7 billion from 2000. Net interest income increased $1.9 billion to $20.3 billion. The increase was primarily due to changes in interest rates on the Corporation’s asset and liability positions and investment portfolio repositioning, an increased trading-related contribution, higher deposit and equity levels and a favorable shift in loan mix. These fac- tors were partially offset by the impact of the money market deposit pricing initiative and a decrease in auto lease financing contributions. Noninterest income was $14.3 billion, a $234 million decrease. Service charges increased $401 million, or nine percent, driven by higher business volumes and corporate customers opting to pay higher fees rather than maintain additional deposit balances in the lower rate environment. Income from investment and brokerage services increased $183 million, or ten percent, largely due to higher corporate investment and brokerage services, new asset manage- ment business and the completed acquisition of Marsico Capital Management LLC (Marsico), partially offset by lower broker activity due to decreased trade volume. Mortgage banking income increased $81 million, or 16 percent, primarily reflecting higher origination activity and increased gains from higher loan sales to the secondary market, partially offset by increased prepayments on mortgage loans as a result of the declining interest rate environment. Investment banking income increased $67 million, or four percent, as strong growth in fixed income origination was offset by weaker demand for syndications, equity underwriting and advisory services. Equity investment gains decreased $763 million, or 72 percent, driven by the weaker equity markets. Card income increased $192 million, or nine percent, primarily due to new account growth in both credit and debit card and increased purchase volume on existing accounts. Trading account profits decreased $81 million, or four percent, as the SFAS 133 transition adjustment net loss and declines in trading results in Corporate Treasury were offset by improved trading results in Global Corporate and Investment Banking and favorable net mark-to-mar- ket adjustments on mortgage banking certificates and the related derivative instruments. The provision for credit losses increased $1.8 billion in 2001 and included $395 million associated with exiting the subprime real estate lending business. Net charge-offs increased $1.8 billion to $4.2 bil- lion, or 1.16 percent of average loans and leases, primarily due to credit quality deterioration in the commercial – domestic portfolio and an increase in credit card charge-offs as well as $635 million in charge- offs associated with exiting the subprime real estate lending business. Nonperforming assets were $4.9 billion, or 1.49 percent of loans, leases and foreclosed properties at December 31, 2001, a $549 million decrease from December 31, 2000. The decrease was primarily a result of the transfer of $1.2 billion of nonperforming subprime real estate loans to loans held for sale as well as nonperforming loan sales, partially offset by increases in the commercial – domestic loan portfolio that resulted from credit deterioration as companies were affected by the weakening economic environment. The allowance for credit losses totaled $6.9 billion or 2.09 percent of total loans and leases at December 31, 2001, a 35 basis point increase from 1.74 per- cent of total loans and leases at December 31, 2000. 54 BANK OF AMERICA 2002 Noninterest expense increased $2.1 billion, primarily driven by business exit costs of $1.30 billion in 2001, higher personnel, litiga- tion, professional fees, data processing and marketing expenses, par- tially offset by the restructuring charge in 2000. Higher personnel expense was driven by a $150 million severance charge in the fourth quarter of 2001 related to ongoing efficiency improvement programs, higher revenue-related incentive compensation and increased salaries expense. The Corporation recorded $334 million in litigation expense in the fourth quarter of 2001 related to small settlements and an addi- tion to the legal reserve to cover increased exposure to existing litiga- tion. Higher professional fees reflected the increase in initiatives related to the Corporation’s strategy to improve customer satisfaction, the launch of a company-wide Six Sigma quality and productivity program and implementation of a new integrated planning process. A tax benefit of $418 million, generated as a result of the Corporation’s realignment of certain problem loan management activ- ities into a wholly-owned subsidiary (SSI), resulted in a 17 percent effective tax rate for the fourth quarter of 2001. The effective tax rates for 2001 and 2000 were 32.9 percent and 36.2 percent, respectively. For additional information on SSI, see “Problem Loan Management” beginning on page 48. Business Segment Operations Consumer and Commercial Banking Total revenue increased $1.6 billion, or eight percent, in 2001 com- pared to 2000. Net interest income increased $856 million, or seven percent, due to a favorable shift in loan mix, overall loan and deposit growth and the Corporation’s treasury asset and liability activities. This increase was partially offset by the impact of the money market deposit pricing initiative as the Corporation offered more com- petitive money market savings rates. Noninterest income increased $736 million, or 10 percent, driven by a nine percent increase in service charges, a nine percent increase in card income and strong mortgage banking revenue. Net income in 2001 rose $478 million, or 11 percent, due to the increases in net interest income and non- interest income discussed above, partially offset by an increase in the provision for credit losses and a four percent increase in non- interest expense. The provision for credit losses increased $551 mil- lion, or 53 percent, reflecting higher charge-offs in the commercial and credit card loan portfolios. Asset Management Total revenue remained flat at $2.5 billion in 2001, as the increase in net interest income was offset by a decline in noninterest income. Net interest income increased $78 million, or 12 percent, due to the Corporation’s treasury asset and liability activities and growth in the commercial and residential mortgage loan portfolios. Noninterest income decreased $68 million, or four percent, as a decline in other income was partially offset by an increase in investment and broker- age services income. The increase in investment and brokerage serv- ices income was due to new asset management business and the completed acquisition of Marsico, partially offset by lower broker activity due to decreased trade volume. Net income decreased $66 mil- lion, or 11 percent, in 2001, primarily due to a $74 million increase in pro- vision expense largely related to one loan that was charged off in the second quarter of 2001 and increased noninterest expense. Noninterest expense increased $75 million, or five percent, reflecting investments in new private banking offices, the acquisition of Marsico and personnel supporting the revenue growth initiatives, partially offset by one-time business divestiture expenditures in 2000. Assets under management increased $36.1 billion, or 13 percent, primarily driven by the growth in money market funds and the addition of the remaining Marsico Funds. Global Corporate and Investment Banking In 2001, total revenue increased $1.1 billion, or 14 percent, primarily due to $663 million, or 24 percent, growth in trading-related revenue. Net interest income increased $912 million, or 24 percent, as a result of higher trading-related activities and the Corporation’s treasury asset and liability activities, partially offset by lower commercial loan levels. Noninterest income increased $230 million, or five percent, as increases in investment and brokerage services, corporate service charges, trad- ing account profits and investment banking income were partially offset by a decline in other income. Net income increased $133 million, or seven percent, in 2001 as revenue growth was partially offset by higher credit-related costs and noninterest expense. The provision for credit losses increased $540 million to $1.3 billion due to credit quality deteri- oration in the commercial – domestic loan portfolio of Global Credit Products. A $373 million, or seven percent, increase in noninterest expense was primarily due to higher market-related incentives and other expenses in line with revenue growth. Equity Investments In 2001, both revenue and net income decreased substantially primarily due to lower equity investment gains. Equity investment gains decreased $753 million to $240 million. Principal Investing recorded cash gains of $425 million, offset by impairment charges of $335 mil- lion and fair value adjustment losses of $40 million. Equity investment gains in the strategic investments portfolio included $140 million in the first quarter of 2001 related to the sale of an interest in the Star Systems ATM network. BANK OF AMERICA 2002 55 Statistical Financial Information Bank of America Corporation and Subsidiaries TABLE I Average Balances and Interest Rates – Taxable-Equivalent Basis (Dollars in millions) Earning assets Time deposits placed and other short-term investments Federal funds sold and securities purchased under agreements to resell Trading account assets Securities(1) Loans and leases(2): Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total loans and leases Other earning assets Total earning assets(3) Cash and cash equivalents Other assets, less allowance for credit losses Total assets Interest-bearing liabilities Domestic interest-bearing deposits: Savings NOW and money market deposit accounts Consumer CDs and IRAs Negotiable CDs, public funds and other time deposits Total domestic interest-bearing deposits Foreign interest-bearing deposits(4): Banks located in foreign countries Governments and official institutions Time, savings and other Total foreign interest-bearing deposits Total interest-bearing deposits Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings Trading account liabilities Long-term debt and trust preferred securities Total interest-bearing liabilities(3) Noninterest-bearing sources: Noninterest-bearing deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest spread Impact of noninterest-bearing sources Net interest income/yield on earning assets Average Balance 2002 Interest Income/Expense $ 243 870 3,860 4,100 7,370 824 1,043 17 9,254 6,423 1,213 2,145 856 2,195 74 12,906 22,160 1,517 32,750 138 1,369 2,968 128 4,603 442 43 346 831 5,434 2,089 1,261 2,455 11,239 $ 10,038 45,640 79,562 75,298 109,724 21,287 21,161 408 152,580 97,204 22,807 30,264 10,533 21,410 2,021 184,239 336,819 26,164 573,521 21,166 67,714 $ 662,401 $ 21,691 131,841 67,695 4,237 225,464 15,464 2,316 18,769 36,549 262,013 104,153 31,600 66,045 463,811 109,466 41,511 47,613 $ 662,401 Yield/Rate 2.42% 1.91 4.85 5.44 6.72 3.87 4.93 4.23 6.06 6.61 5.32 7.09 8.12 10.25 3.68 7.01 6.58 5.80 5.71 0.64 1.04 4.39 3.03 2.04 2.86 1.86 1.84 2.27 2.07 2.01 3.99 3.72 2.42 $ 21,511 3.29 0.46 3.75% (1) The average balance and yield on securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes the impact of interest rate risk management contracts, which increased (decreased) interest income on the underlying assets $1,983, $978 and $(48) in 2002, 2001 and 2000, respectively. These amounts were substantially offset by corresponding decreases or increases in the income earned on the underlying assets. Interest expense includes the impact of interest rate risk management contracts, which (increased) decreased interest expense on the underlying liabilities $(141), $63 and $(36) in 2002, 2001 and 2000, respectively. These amounts were substantially offset by corresponding decreases or increases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see Interest Rate Risk Management. (4) Primarily consists of time deposits in denominations of $100,000 or more. 56 BANK OF AMERICA 2002 Average Balance 2001 Interest Income/Expense Yield/Rate Average Balance 2000 Interest Income/Expense $ 6,723 35,202 66,418 60,372 133,569 26,492 24,607 348 185,016 81,472 22,013 30,374 27,709 16,641 2,222 180,431 365,447 26,154 560,316 22,542 66,689 $ 649,547 $ 20,208 114,657 74,458 5,848 215,171 23,397 3,615 22,940 49,952 265,123 92,476 29,995 69,622 457,216 97,529 46,124 48,678 $ 649,547 $ 318 1,414 3,653 3,761 9,879 1,567 1,700 20 13,166 5,920 1,625 2,466 2,242 1,879 127 14,259 27,425 2,065 38,636 213 2,498 3,853 290 6,854 1,053 152 827 2,032 8,886 4,167 1,155 3,795 18,003 $ 20,633 4.73% 4.02 5.50 6.23 7.40 5.90 6.91 6.08 7.12 7.27 7.38 8.12 8.09 11.29 5.80 7.90 7.50 7.90 6.90 1.05 2.18 5.17 4.96 3.19 4.49 4.21 3.62 4.07 3.35 4.51 3.85 5.45 3.94 2.96 0.72 3.68% Yield Rate 6.91% 5.60 5.62 6.07 8.12 7.21 8.88 8.87 8.08 7.41 8.97 8.70 8.35 12.07 8.77 8.23 8.15 8.57 7.45 1.34 2.94 5.43 6.31 3.81 6.01 5.75 5.47 5.71 4.20 6.05 3.74 7.06 5.09 $ 336 2,354 2,751 5,111 12,025 2,114 2,299 27 16,465 6,754 1,748 2,689 2,917 1,241 195 15,544 32,009 926 43,487 314 2,941 4,205 481 7,941 1,130 513 1,423 3,066 11,007 7,957 892 4,960 24,816 $ 4,863 42,021 48,938 84,211 148,168 29,316 25,878 304 203,666 91,091 19,492 30,915 34,956 10,279 2,223 188,956 392,622 10,812 583,467 24,766 63,340 $ 671,573 $ 23,452 99,927 77,409 7,626 208,414 18,788 8,922 26,024 53,734 262,148 131,492 23,843 70,293 487,776 91,146 45,519 47,132 $ 671,573 $ 18,671 2.36 0.84 3.20% BANK OF AMERICA 2002 57 TABLE II Analysis of Changes in Net Interest Income – Taxable-Equivalent Basis (Dollars in millions) Volume Rate Change Volume Rate Change Increase (decrease) in interest income Time deposits placed and other short-term investments Federal funds sold and securities purchased $ 157 $ (232) $ (75) $ 129 $ (147) $ (18) From 2001 to 2002 From 2000 to 2001 Due to Change in(1) Net Due to Change in(1) Net under agreements to resell Trading account assets Securities Loans and leases: Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total loans and leases Other earning assets Total interest income Increase (decrease) in interest expense Domestic interest-bearing deposits: Savings NOW and money market deposit accounts Consumer CDs and IRAs Negotiated CDs, public funds and other time deposits Total domestic interest-bearing deposits Foreign interest-bearing deposits: Banks located in foreign countries Governments and official institutions Time, savings and other Total foreign interest-bearing deposits Total interest-bearing deposits Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings Trading account liabilities Long-term debt and trust preferred securities Total interest expense Net increase in net interest income 421 723 930 (1,759) (311) (238) 5 1,147 58 (9) (1,390) 538 (10) (965) (516) (591) (750) (432) (419) (8) (644) (470) (312) 4 (222) (43) 2 (550) 15 376 (353) (80) (359) (54) (148) (90) (1,505) (532) (82) (252) (55) (333) 530 62 (196) (2,608) 44 (1,144) (544) 207 339 (2,509) (743) (657) (3) (3,912) 503 (412) (321) (1,386) 316 (53) (1,353) (5,265) (548) (5,886) (75) (1,129) (885) (162) (2,251) (611) (109) (481) (1,201) (3,452) (2,078) 106 (1,340) (6,764) (383) 982 (1,446) (1,179) (204) (114) 4 (717) 227 (46) (603) 768 – (557) (80) 96 (967) (343) (485) (11) (117) (350) (177) (72) (130) (68) 1,315 (176) (43) 430 (162) (112) 276 (305) (168) (58) (873) (190) (79) (353) (56) (428) (2,362) 230 (45) (1,428) 33 (1,120) (940) 902 (1,350) (2,146) (547) (599) (7) (3,299) (834) (123) (223) (675) 638 (68) (1,285) (4,584) 1,139 (4,851) (101) (443) (352) (191) (1,087) (77) (361) (596) (1,034) (2,121) (3,790) 263 (1,165) (6,813) $ 878 $ 1,962 (1) The changes for each category of interest income and expense are divided between the portion of change attributable to the variance in volume or rate for that category. The change in rate/volume variance has been allocated to the rate variance. 58 BANK OF AMERICA 2002 58 BANK OF AMERICA 2002 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) TABLE III Core Net Interest Income (Dollars in millions) Net interest income As reported on a taxable-equivalent basis Less: Trading-related net interest income Add: Impact of revolving securitizations Core net interest income Average earning assets As reported Less: Trading-related earning assets Add: Impact of revolving securitizations Core average earning assets Net interest yield on earning assets As reported Add: Impact of trading-related activities Add: Impact of revolving securitizations Core net interest yield on earning assets TABLE IV Selected Loan Maturity Data(1) (Dollars in millions) Commercial – domestic Commercial real estate – domestic Foreign(2) Total selected loans Percent of total Sensitivity of loans to changes in interest rates for loans due after one year: Fixed interest rates Floating or adjustable interest rates Total (1) Loan maturities are based on the remaining maturities under contractual terms. (2) Loan maturities include consumer and commercial foreign loans. 2002 2001 2000 1999 $ 21,511 (1,970) 522 $ 20,063 $ 573,521 (124,593) 6,272 $ 455,200 $ 20,633 (1,609) 695 $ 19,719 $ 560,316 (102,111) 10,112 $ 468,317 $ 18,671 (1,044) 919 $ 18,546 $ 583,467 (89,921) 13,352 $ 506,898 $ 18,342 (688) 929 $ 18,583 $ 531,511 (73,028) 13,846 $ 472,329 3.75% 0.60 0.06 4.41% 3.68% 0.47 0.06 4.21% 3.20% 0.38 0.08 3.66% 3.45% 0.40 0.08 3.93% December 31, 2002 Due in 1 Year or Less $ 37,656 9,066 14,324 $ 61,046 Due After 1 Year Through 5 Years $ 41,831 8,345 2,562 $ 52,738 Due After 5 Years $ 19,665 2,499 807 $ 22,971 Total $ 99,152 19,910 17,693 $ 136,755 44.6% 38.6% 16.8% 100.0% $ 6,780 45,958 $ 52,738 $ 11,380 11,591 $ 22,971 BANK OF AMERICA 2002 59 BANK OF AMERICA 2002 59 TABLE V Short-Term Borrowings (Dollars in millions) Federal funds purchased At December 31 Average during year Maximum month-end balance during year Securities sold under agreements to repurchase At December 31 Average during year Maximum month-end balance during year Commercial paper At December 31 Average during year Maximum month-end balance during year Other short-term borrowings At December 31 Average during year Maximum month-end balance during year TABLE VI Debt and Lease Obligations (Dollars in millions) Long-term debt and capital leases(1) Trust preferred securities(1) Operating lease obligations Total debt and lease obligations (1) Includes principal payments only. 2002 2001 2000 Amount Rate Amount Rate Amount Rate $ 5,167 5,470 9,663 1.15% 1.63 – $ 5,487 6,267 8,718 1.45% 3.99 – $ 4,612 4,506 7,149 5.92% 6.44 – 59,912 67,751 99,313 114 1,025 1,946 25,120 29,907 41,235 1.44 1.73 – 1.20 1.73 – 1.29 2.71 – 42,240 54,826 70,674 1,558 4,156 7,410 20,659 27,227 39,391 1.25 4.01 – 1.99 4.91 – 2.13 5.56 – 44,799 79,217 90,062 6,955 9,645 10,762 35,243 38,124 45,271 6.26 5.93 – 6.54 6.41 – 5.97 6.18 – December 31, 2002 Due in 1 Year or Less 8,219 – 1,166 $ $ 9,385 Due After 1 Year Through 3 Years Due After 3 Years Through 5 Years $ 17,005 – 2,174 $ 19,179 $ 12,723 – 1,864 $ 14,587 Due After 5 Years $ 23,198 6,031 2,174 $ 31,403 $ Total 61,145 6,031 7,378 $ 74,554 60 BANK OF AMERICA 2002 60 BANK OF AMERICA 2002 TABLE VII Credit Extension Commitments (Dollars in millions) Loan commitments(1) Standby letters of credit and financial guarantees Commercial letters of credit Legally binding commitments Credit card lines Total $ Expires in 1 Year or Less 98,101 20,002 2,674 120,777 73,779 December 31, 2002 Expires After 1 Year Through 3 Years Expires After 3 Years Through 5 Years $ 45,321 6,440 162 51,923 – $ 27,616 985 1 28,602 – Expires After 5 Years $ 41,666 3,410 272 45,348 – Total $ 212,704 30,837 3,109 246,650 73,779 $ 194,556 $ 51,923 $ 28,602 $ 45,348 $ 320,429 (1) Equity commitments of $2.2 billion and $2.5 billion primarily related to obligations to fund existing venture capital investments were included in loan commitments at December 31, 2002 and 2001, respectively. TABLE VIII Outstanding Loans and Leases(1) (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent 2002 2001 December 31 2000 1999 1998 Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign $ 105,053 19,912 19,910 295 Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total 30.6 5.8 5.8 0.1 42.3 31.6 6.8 9.1 2.4 7.2 0.6 57.7 $ 118,205 23,039 22,271 383 163,898 78,203 22,107 30,317 12,652 19,884 2,092 165,255 35.9 7.0 6.8 0.1 49.8 23.8 6.7 9.2 3.9 6.0 0.6 50.2 $ 146,040 31,066 26,154 282 203,542 84,394 21,598 29,859 36,398 14,094 2,308 188,651 37.2 7.9 6.7 0.1 51.9 21.5 5.5 7.6 9.3 3.6 0.6 48.1 $ 143,450 27,978 24,026 325 195,779 81,860 17,273 31,997 32,490 9,019 2,244 174,883 145,170 108,197 23,236 31,068 8,384 24,729 1,971 197,585 $ 342,755 100.0 $ 329,153 100.0 $ 392,193 100.0 $ 370,662 38.7 7.5 6.5 0.1 52.8 22.1 4.7 8.6 8.8 2.4 0.6 47.2 100.0 $ 137,422 31,495 26,912 301 196,130 73,608 15,653 31,918 23,992 12,425 3,602 161,198 38.5 8.8 7.5 0.1 54.9 20.6 4.4 8.9 6.7 3.5 1.0 45.1 $ 357,328 100.0 (1) The Corporation used credit derivatives to provide credit protection (single name credit default swaps, basket credit default swaps and CLOs) for loan counterparties in the amounts of $16.7 billion and $14.5 billion at December 31, 2002 and 2001, respectively. BANK OF AMERICA 2002 61 BANK OF AMERICA 2002 61 TABLE IX Selected Emerging Markets (Dollars in millions) Region/Country Asia China Hong Kong(5) India Indonesia Korea (South) Malaysia Pakistan Philippines Singapore Taiwan Thailand Other Total Central and Eastern Europe Russian Federation Turkey Other Total Latin America Argentina Brazil Chile Colombia Mexico Venezuela Other Total Total Loans and Loan Commitments Other Financing(1) Derivative Assets Securities/ Other Investments(2) Total Cross- Border Exposure(3) Gross Local Country Exposure(4) Total Foreign Exposure December 31, 2002 Increase/ (Decrease) from December 31, 2001 $ 80 157 405 82 154 9 7 30 170 294 36 3 $ 1,427 $ $ $ – 30 14 44 249 298 118 76 708 105 104 $ 1,658 $ 3,129 $ $ $ $ $ $ 14 56 48 – 322 3 – 31 7 205 10 17 713 – 9 23 32 47 240 9 6 168 4 89 563 $ 1,308 $ $ $ $ $ $ $ 54 82 70 17 20 1 – 4 86 35 19 1 389 – – 45 45 2 55 8 5 128 6 3 207 641 $ $ $ $ $ $ 5 19 191 215 78 152 6 1 400 114 29 780 $ 1,294 35 109 32 15 8 2 – 10 10 52 26 – $ 183 404 555 114 504 15 7 75 273 586 91 21 $ 61 3,400 818 6 732 225 – 81 1,395 503 172 75 $ 244 3,804 1,373 120 1,236 240 7 156 1,668 1,089 263 96 $ (31) (451) (407) (155) 26 (106) (12) (166) 270 176 (125) (24) 299 $ 2,828 $ 7,468 $ 10,296 $ (1,005) $ $ $ 5 58 273 336 376 745 141 88 1,404 229 225 $ 3,208 $ 6,372 $ $ $ $ – – 28 28 89 430 – – 185 3 – 707 $ 8,203 $ $ $ 5 58 301 364 465 1,175 141 88 1,589 232 225 $ $ $ 5 (69) 35 (29) (280) (1,299) (108) (51) (638) (9) (71) $ 3,915 $ 14,575 $ (2,456) $ (3,490) (1) Includes acceptances, standby letters of credit, commercial letters of credit and formal guarantees. (2) Amounts outstanding in the table above for Philippines, Argentina, Mexico, Venezuela and Latin America Other have been reduced by $12, $90, $505, $131 and $37, respectively, at December 31, 2002, and $10, $0, $436, $105 and $32, respectively, at December 31, 2001. Such amounts represent the fair value of U.S. Treasury securities held as collateral outside the country of exposure. (3) Cross-border exposure includes amounts payable to the Corporation by residents of countries other than the one in which the credit is booked, regardless of the currency in which the claim is denominated, consistent with FFIEC reporting rules. (4) Gross local country exposure includes amounts payable to the Corporation by residents of countries in which the credit is booked, regardless of the currency in which the claim is denominated. Management does not net local funding or liabilities against local exposures as allowed by the FFIEC. (5) Gross local country exposure to Hong Kong consisted of $1,828 of consumer loans and $1,572 of commercial exposure at December 31, 2002. The consumer loans were collateralized primarily by residential real estate. The commercial exposure was primarily to local clients and was diversified across many industries. 62 BANK OF AMERICA 2002 62 BANK OF AMERICA 2002 TABLE X Nonperforming Assets(1) (Dollars in millions) Nonperforming loans Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Foreign consumer Total consumer Total nonperforming loans Foreclosed properties Total nonperforming assets 2002 2001 2000 1999 At December 31 $ 2,781 1,359 161 3 4,304 612 66 30 19 6 733 5,037 225 $ 5,262 $ 3,123 461 240 3 3,827 556 80 27 9 7 679 4,506 402 $ 4,908 $ 2,777 486 236 3 3,502 551 32 19 1,095 9 1,706 5,208 249 $ 1,163 486 191 3 1,843 529 46 19 598 7 1,199 3,042 163 $ 1998 812 314 299 4 1,429 722 50 21 246 14 1,053 2,482 282 $ 5,457 $ 3,205 $ 2,764 Nonperforming assets as a percentage of: Total assets Outstanding loans, leases and foreclosed properties Nonperforming loans as a percentage of outstanding loans and leases 0.80% 1.53 1.47 0.79% 1.49 1.37 0.85% 1.39 1.33 0.51% 0.86 0.82 0.45% 0.77 0.69 (1) In 2002, $668 in interest income was contractually due on nonperforming loans and troubled debt restructured loans. Of this amount, $193 was actually recorded as interest income in 2002. BANK OF AMERICA 2002 63 BANK OF AMERICA 2002 63 TABLE XI Allowance for Credit Losses (Dollars in millions) Balance, January 1 Loans and leases charged off Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance(1) Credit card Other consumer domestic Foreign consumer Total consumer Total loans and leases charged off Recoveries of loans and leases previously charged off Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Other consumer domestic Foreign consumer Total consumer Total recoveries of loans and leases previously charged off Net charge-offs Provision for credit losses(2) Other, net Balance, December 31 Loans and leases outstanding at December 31 Allowance for credit losses as a percentage of loans and leases outstanding at December 31 Average loans and leases outstanding during the year Net charge-offs as a percentage of average outstanding loans and leases during the year Allowance for credit losses as a percentage of nonperforming loans at December 31 Ratio of the allowance for credit losses at December 31 to net charge-offs 2002 2001 2000 1999 1998 $ 6,875 $ 6,838 $ 6,828 $ 7,122 $ 6,778 (1,793) (566) (45) – (2,404) (56) (40) (355) (333) (1,210) (57) (5) (2,056) (4,460) 322 45 8 – 375 14 14 145 78 116 21 – 388 763 (2,120) (249) (46) – (2,415) (39) (32) (389) (1,137) (753) (73) (6) (2,429) (4,844) 171 41 7 – 219 13 13 139 111 81 23 1 381 600 (1,412) (117) (31) (1) (1,561) (36) (29) (395) (512) (392) (66) (4) (1,434) (2,995) 125 31 18 3 177 9 9 149 178 54 18 1 418 595 (820) (161) (19) (1) (1,001) (35) (24) (434) (445) (571) (52) (20) (1,581) (2,582) 109 17 25 – 151 7 12 150 170 76 13 3 431 582 (714) (262) (21) – (997) (33) (27) (486) (594) (857) (43) (13) (2,053) (3,050) 97 20 21 – 138 4 10 138 186 93 11 3 445 583 (3,697) 3,697 (24) (4,244) 4,287 (6) (2,400) 2,535 (125) (2,000) 1,820 (114) (2,467) 2,920 (109) $ 6,851 $ 6,875 $ 6,838 $ 6,828 $ 7,122 $ 342,755 $ 329,153 $ 392,193 $ 370,662 $ 357,328 2.00% 2.09% 1.74% 1.84% 1.99% $ 336,819 $ 365,447 $ 392,622 $ 362,783 $ 347,840 1.10% 1.16% 0.61% 0.55% 0.71% 136.01 1.85 152.58 1.62 131.30 2.85 224.48 287.01 3.41 2.89 (1) Includes $635 related to the exit of the subprime real estate lending business in 2001. (2) Includes $395 related to the exit of the subprime real estate lending business in 2001. 64 BANK OF AMERICA 2002 TABLE XII Allocation of the Allowance for Credit Losses (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent 2002 2001 At December 31 2000 1999 1998 Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign $ 2,392 886 439 9 Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer General Total 34.9 12.9 6.4 0.2 54.4 1.6 0.7 5.3 4.7 15.0 0.1 27.4 18.2 $ 1,974 766 924 8 3,672 145 83 367 433 821 10 1,859 1,344 28.7 11.1 13.5 0.1 53.4 2.1 1.2 5.4 6.3 11.9 0.1 27.0 19.6 $ 1,993 796 989 7 3,785 151 77 320 722 549 11 1,830 1,223 29.1 11.6 14.5 0.1 55.3 2.2 1.1 4.7 10.6 8.0 0.2 26.8 17.9 $ 1,875 930 927 11 3,743 160 60 355 712 348 11 1,646 1,439 27.4 13.6 13.6 0.2 54.8 2.3 0.9 5.2 10.4 5.1 0.2 24.1 21.1 $ 1,540 1,327 925 – 3,792 137 46 474 711 501 26 1,895 1,435 21.6 18.6 13.0 – 53.2 1.9 0.6 6.7 10.0 7.0 0.4 26.6 20.2 3,726 108 49 361 323 1,031 9 1,881 1,244 $ 6,851 100.0 $ 6,875 100.0 $ 6,838 100.0 $ 6,828 100.0 $ 7,122 100.0 TABLE XIII Exposure Exceeding One Percent of Total Assets(1,2) (Dollars in millions) United Kingdom Germany Canada Japan December 31 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 $ Public Sector 167 139 355 363 2,118 2,188 933 652 1,038 2,191 1,319 4,925 Banks $ 3,554 2,807 1,962 2,898 2,571 2,249 682 331 409 537 676 599 Private Sector $ 11,320 8,889 6,167 3,761 2,251 2,062 4,045 4,385 5,973 888 889 883 Total Exposure $ 15,041 11,835 8,484 7,022 6,940 6,499 5,660 5,368 7,420 3,616 2,884 6,407 Exposure as a Percentage of Total Assets 2.28% 1.90 1.32 1.06 1.12 1.01 0.86 0.86 1.16 0.55 0.46 1.00 (1) Exposure includes cross-border claims by the Corporation’s foreign offices as follows: loans, accrued interest receivable, acceptances, time deposits placed, trading account assets, securities, derivative assets, other interest-earning investments and other monetary assets. Amounts also include unused commitments, standby letters of credit, commercial letters of credit and formal guarantees. (2) Sector definitions are based on the FFIEC instructions for preparing the Country Exposure Report. BANK OF AMERICA 2002 65 BANK OF AMERICA 2002 65 TABLE XIV Trading Risk and Return Daily VAR and Trading-related Revenue 80 60 40 20 0 -20 -40 -60 -80 ) s n o i l l i m n i s r a l l o D ( Daily Trading- related Revenue VAR 12/31/01 3/31/02 6/30/02 9/30/02 12/31/02 Asset Positions $ 1,328 2,625 3,953 (2,238) 3,211 (10) 4,916 (3,452) Liability Positions $ 1,010 2,625 3,635 (2,068) 3,403 (53) 4,917 (3,452) $ 1,464 $ 1,465 December 31, 2002 Asset Positions $ 2,385 1,806 282 443 $ 4,916 (3,452) $ 1,464 Liability Positions $ 2,570 1,679 226 442 $ 4,917 (3,452) $ 1,465 TABLE XV Non-Exchange Traded Commodity Contracts (Dollars in millions) Net fair value of contracts outstanding at January 1, 2002 Effects of legally enforceable master netting agreements Gross fair value of contracts outstanding at January 1, 2002 Contracts realized or otherwise settled Fair value of new contracts Other changes in fair value Gross fair value of contracts outstanding at December 31, 2002 Effects of legally enforceable master netting agreements Net fair value of contracts outstanding at December 31, 2002 TABLE XVI Non-Exchange Traded Commodity Contract Maturities (Dollars in millions) Maturity less than 1 year Maturity 1-3 years Maturity 4-5 years Maturity in excess of 5 years Gross fair value of contracts Effects of legally enforceable master netting agreements Net fair value of contracts 66 BANK OF AMERICA 2002 TABLE XVII Selected Quarterly Financial Data(1) (Dollars in millions, except per share information) Fourth Third Second First Fourth Third Second First 2002 Quarters 2001 Quarters Income statement Net interest income Noninterest income Total revenue Provision for credit losses Gains (losses) on sales of securities Noninterest expense Income before income taxes Income tax expense Net income Average common shares issued and outstanding (in thousands) Average diluted common shares issued and $ 5,374 3,430 8,804 1,165 304 4,832 3,111 497 2,614 $ 5,302 3,220 8,522 804 189 4,620 3,287 1,052 2,235 $ 5,094 3,481 8,575 888 93 4,490 3,290 1,069 2,221 $ 5,153 3,440 8,593 840 44 4,494 3,303 1,124 2,179 $ 5,417 3,398 8,815 1,401 393 5,324 2,483 426 2,057 $ 5,204 3,429 8,633 1,251 97 5,911 1,568 727 841 $ $ 5,030 3,741 8,771 800 (7) 4,821 3,143 1,120 2,023 4,639 3,780 8,419 835 (8) 4,654 2,922 1,052 1,870 1,499,557 1,504,017 1,533,783 1,543,471 1,570,083 1,599,692 1,601,537 1,608,890 outstanding (in thousands) 1,542,482 1,546,347 1,592,250 1,581,848 1,602,886 1,634,063 1,632,964 1,631,099 Performance ratios Return on average assets Return on average common shareholders’ equity Total equity to total assets (period end) Total average equity to total average assets Dividend payout ratio Per common share data Earnings Diluted earnings Cash dividends paid Book value Average balance sheet Total loans and leases Total assets Total deposits Common shareholders’ equity Total shareholders’ equity Risk-based capital ratios (period end) Tier 1 capital Total capital Leverage ratio Market price per share of common stock Closing High Low 1.49% 1.33% 1.38% 1.39% 1.25% 21.58 7.62 6.91 36.76 1.74 1.69 0.64 33.49 19.02 7.31 6.97 40.25 1.49 1.45 0.60 32.07 $ $ 18.47 7.48 7.47 41.40 1.45 1.40 0.60 31.47 18.64 7.77 7.44 42.48 1.41 1.38 0.60 31.15 $ 16.70 7.80 7.50 45.53 1.31 1.28 0.60 31.07 $ $ $343,099 695,468 381,381 48,015 48,074 $ 340,484 669,149 373,933 46,592 46,652 $ 335,684 646,599 365,986 48,213 48,274 $ 327,801 637,678 364,403 47,392 47,456 $ 333,354 651,797 368,171 48,850 48,916 0.52% 6.78 7.83 7.66 106.49 $ 0.52 0.51 0.56 31.66 $ 357,726 642,184 363,328 49,134 49,202 1.24% 1.17% 16.67 7.88 7.43 44.35 1.26 1.24 0.56 30.75 $ 15.86 8.02 7.38 48.14 1.16 1.15 0.56 30.47 $ $ 383,500 655,557 363,348 48,640 48,709 $ 387,889 648,698 355,618 47,794 47,866 8.22% 12.43 6.29 8.13% 12.38 6.35 8.09% 12.42 6.47 8.48% 12.93 6.72 8.30% 12.67 6.56 7.95% 12.12 6.59 7.90% 12.09 6.50 7.65% 11.84 6.41 $ 69.57 71.99 53.98 $ 63.80 71.94 57.90 $ 70.36 77.08 66.82 $ 68.02 69.61 57.51 $ 62.95 64.99 52.10 $ 58.40 65.54 50.25 $ 60.03 62.18 48.65 $ 54.75 55.94 45.00 (1) As a result of the adoption of SFAS 142 on January 1, 2002, the Corporation no longer amortizes goodwill. Goodwill amortization expense was $160, $165, $169 and $168 in the fourth, third, second and first quarters, respectively, of 2001. BANK OF AMERICA 2002 67 TABLE XVIII Quarterly Average Balances and Interest Rates – Taxable-Equivalent Basis (Dollars in millions) Earning assets Time deposits placed and other short-term investments Federal funds sold and securities purchased under agreements to resell Trading account assets Securities(1) Loans and leases(2): Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total loans and leases Other earning assets Total earning assets(3) Cash and cash equivalents Other assets, less allowance for credit losses Total assets Interest-bearing liabilities Domestic interest-bearing deposits: Savings NOW and money market deposit accounts Consumer CDs and IRAs Negotiable CDs, public funds and other time deposits Total domestic interest-bearing deposits Foreign interest-bearing deposits(4): Banks located in foreign countries Governments and official institutions Time, savings and other Total foreign interest-bearing deposits Total interest-bearing deposits Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings Trading account liabilities Long-term debt and trust preferred securities Total interest-bearing liabilities(3) Noninterest-bearing sources: Noninterest-bearing deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Net interest spread Impact of noninterest-bearing sources Net interest income/yield on earning assets $ Average Balance 8,853 49,169 84,181 83,751 105,333 20,538 20,359 426 146,656 108,019 23,347 30,643 8,943 23,535 1,956 196,443 343,099 32,828 601,881 21,242 72,345 $ 695,468 $ 22,142 137,229 66,266 3,400 229,037 15,286 1,737 17,929 34,952 263,989 123,434 30,445 65,702 483,570 117,392 46,432 48,074 $ 695,468 Fourth Quarter 2002 Interest Income/ Expense $ $ 56 208 994 1,078 1,777 180 245 4 2,206 1,699 300 523 174 613 17 3,326 5,532 417 8,285 35 325 728 17 1,105 104 7 76 187 1,292 558 289 609 2,748 $ 5,537 Yield/ Rate 2.49% 1.68 4.71 5.15 6.70 3.48 4.77 3.93 5.97 6.28 5.10 6.76 7.75 10.33 3.48 6.74 6.41 5.07 5.48 0.63% 0.94 4.36 1.97 1.91 2.70 1.68 1.68 2.12 1.94 1.79 3.77 3.71 2.26 3.22 0.44 3.66% (1) The average balance and yield on securities are based on the average of historical amortized cost balances. (2) Nonperforming loans are included in the respective average loan balances. Income on such nonperforming loans is recognized on a cash basis. (3) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $517, $397, $509 and $560 in the fourth, third, second and first quarters of 2002 and $473 in the fourth quarter of 2001, 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) decreased interest expense on the underlying liabilities $(62), $(69), $(65) and $55 in the fourth, third, second and first quarters of 2002 and $(40) in the fourth quarter of 2001, respectively. These amounts were substantially offset by corresponding decreases or increases in the interest paid on the underlying liabilities. For further information on interest rate contracts, see Interest Rate Risk Management. (4) Primarily consists of time deposits in denominations of $100,000 or more. 68 BANK OF AMERICA 2002 68 BANK OF AMERICA 2002 68 BANK OF AMERICA 2002 Third Quarter 2002 Second Quarter 2002 First Quarter 2002 Fourth Quarter 2001 Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense 63 178 1,017 1,120 1,728 206 265 4 2,203 1,733 314 530 201 583 19 3,380 5,583 387 8,348 $ $ 10,396 40,294 85,129 76,484 106,039 21,256 20,576 425 148,296 104,590 23,275 30,029 10,043 22,263 1,988 192,188 340,484 27,461 580,248 20,202 68,699 $ 2.41% $ 10,673 48,426 1.76 78,113 4.76 67,291 5.85 6.47 3.85 5.10 3.92 5.90 6.61 5.35 7.01 7.97 10.38 3.83 7.00 6.52 5.61 5.73 111,522 21,454 21,486 393 154,855 94,726 22,579 30,021 11,053 20,402 2,048 180,829 335,684 22,005 562,192 21,200 63,207 63 270 961 939 1,887 212 258 5 2,362 1,602 305 542 226 510 19 3,204 5,566 353 8,152 2.37% $ 10,242 $ 2.23 4.93 5.59 44,682 70,613 73,542 6.78 3.97 4.83 5.14 6.12 6.77 5.41 7.25 8.20 10.01 3.71 7.10 6.65 6.42 5.81 116,160 21,917 22,251 389 160,717 81,104 22,010 30,360 12,134 19,383 2,093 167,084 327,801 22,231 549,111 22,037 66,530 61 215 888 963 1,978 226 275 4 2,483 1,389 294 550 255 490 19 2,997 5,480 358 7,965 2.43% $ 1.94 5.06 5.24 6.90 4.17 5.01 4.00 6.26 6.88 5.42 7.34 8.46 10.26 3.71 7.24 6.76 6.52 5.86 64 253 920 1,090 2,138 278 316 4 2,736 1,385 340 583 296 498 21 3,123 5,859 707 8,893 7,255 $ 38,825 67,535 71,454 121,399 23,789 23,051 375 168,614 78,366 22,227 30,363 13,035 18,656 2,093 164,740 333,354 36,782 555,205 23,182 73,410 $ 669,149 $ 646,599 $ 637,678 $ 651,797 $ 22,047 132,939 67,179 4,254 226,419 17,044 2,188 18,686 37,918 123 10 86 219 264,337 1,414 526 342 601 2,883 108,281 33,038 64,880 470,536 109,596 42,365 46,652 $ 669,149 $ 36 362 746 51 0.64% $ 21,841 129,856 1.08 68,015 4.40 4,635 4.73 $ 34 346 764 30 0.64% $ 20,716 $ 1.07 4.51 2.43 127,218 69,359 4,671 33 335 730 32 0.64% $ 20,132 $ 1.07 4.27 2.82 121,758 71,895 5,196 42 426 898 44 1,195 2.09 224,347 1,174 2.10 221,964 1,130 2.06 218,981 1,410 2.85 1.85 1.83 2.29 2.12 1.93 4.11 3.71 2.44 14,048 2,449 18,860 35,357 108 12 90 210 259,704 1,384 97,579 31,841 65,940 529 344 633 455,064 2,890 3.10 1.89 1.91 2.38 2.14 2.17 4.34 3.84 2.55 15,464 2,904 19,620 37,988 107 14 93 214 259,952 1,344 86,870 31,066 67,694 477 285 612 445,582 2,718 2.79 1.96 1.93 2.29 2.10 2.23 3.72 3.62 2.47 20,771 2,965 21,858 45,594 170 20 113 303 264,575 1,713 87,291 29,921 68,141 700 268 707 449,928 3,388 106,282 36,979 48,274 $ 646,599 104,451 40,189 47,456 $ 637,678 103,596 49,357 48,916 $ 651,797 3.29 0.46 3.75% $ 5,465 3.26 0.49 3.75% $ 5,262 3.39 0.46 3.85% $ 5,247 $ 5,505 Yield/ Rate 3.47% 2.60 5.43 6.10 6.99 4.63 5.45 4.49 6.44 7.05 6.07 7.61 9.04 10.58 4.02 7.54 6.99 7.67 6.37 0.83% 1.39 4.96 3.39 2.56 3.22 2.74 2.06 2.63 2.57 3.18 3.55 4.15 2.99 3.38 0.57 3.95% BANK OF AMERICA 2002 69 Report of Management Bank of America Corporation and Subsidiaries The management of Bank of America Corporation is responsible for the preparation, integrity and objectivity of the consolidated financial statements of the Corporation. The consolidated financial statements and notes have been prepared by the Corporation in accordance with accounting principles generally accepted in the United States of America and, in the judgment of management, present fairly the Corporation’s financial position and results of operations. The financial information contained elsewhere in this report is consistent with that in the consolidated financial statements. The financial statements and other financial information in this report include amounts that are based on management’s best estimates and judgments giving due consideration to materiality. The Corporation maintains a system of internal accounting con- trols to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of con- solidated financial statements in accordance with accounting princi- ples generally accepted in the United States of America. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the cir- cumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. However, management believes that the internal control system provides rea- sonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected on a timely basis and corrected through the normal course of business. As of December 31, 2002, management believes that the internal controls are in place and operating effectively. The Corporate Audit Division reviews, evaluates, monitors and makes recommendations on both administrative and accounting control and acts as an integral, but independent, part of the system of internal controls. The independent accountants were engaged to perform an independent audit of the consolidated financial statements. In deter- mining the nature and extent of their auditing procedures, they have evaluated the Corporation’s accounting policies and procedures and the effectiveness of the related internal control system. An independ- ent audit provides an objective review of management’s responsibility to report operating results and financial condition. Their report appears on page 71. The Board of Directors discharges its responsibility for the Corporation’s consolidated financial statements through its Audit Committee. The Audit Committee has direct oversight responsibility for corporate audit and the independent accountants and meets periodically with these groups and management to discuss the scope and results of their work, the adequacy of internal accounting controls and the quality of financial reporting. Kenneth D. Lewis Chairman, President and Chief Executive Officer James H. Hance, Jr. Vice Chairman and Chief Financial Officer 70 BANK OF AMERICA 2002 70 BANK OF AMERICA 2002 70 BANK OF AMERICA 2002 Report of Independent Accountants Bank of America Corporation and Subsidiaries To the Board of Directors and Shareholders of Bank of America Corporation: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Bank of America Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Corporation’s management; our respon- sibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall finan- cial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Charlotte, North Carolina January 15, 2003 BANK OF AMERICA 2002 71 BANK OF AMERICA 2002 71 BANK OF AMERICA 2002 71 Consolidated Statement of Income Bank of America Corporation and Subsidiaries (Dollars in millions, except per share information) Interest income Interest and fees on loans and leases Interest and dividends on securities Federal funds sold and securities purchased under agreements to resell Trading account assets Other interest income Total interest income Interest expense Deposits Short-term borrowings Trading account liabilities Long-term debt Total interest expense Net interest income Noninterest income Consumer service charges Corporate service charges Total service charges Consumer investment and brokerage services Corporate investment and brokerage services Total investment and brokerage services Mortgage banking income Investment banking income Equity investment gains (losses) Card income Trading account profits Other income Total noninterest income Total revenue Provision for credit losses Gains on sales of securities Noninterest expense Personnel Occupancy Equipment Marketing Professional fees Amortization of intangibles Data processing Telecommunications Other general operating Business exit costs Restructuring charges Total noninterest expense Income before income taxes Income tax expense Net income Net income available to common shareholders Per common share information Earnings Diluted earnings Dividends Average common shares issued and outstanding (in thousands) See accompanying notes to consolidated financial statements. 72 BANK OF AMERICA 2002 72 BANK OF AMERICA 2002 72 BANK OF AMERICA 2002 72 BANK OF AMERICA 2002 Year Ended December 31 2002 2001 2000 $ 22,030 4,035 870 3,811 1,415 32,161 $ 27,279 3,706 1,414 3,623 2,271 38,293 $ 31,869 4,976 2,354 2,725 1,241 43,165 5,434 2,089 1,260 2,455 11,238 20,923 2,986 2,290 5,276 1,544 693 2,237 751 1,545 (280) 2,620 778 644 13,571 34,494 3,697 630 9,682 1,780 1,124 753 525 218 1,017 481 2,856 – – 18,436 12,991 3,742 $ 9,249 $ 9,244 6.08 $ 5.91 $ $ 2.44 1,520,042 8,886 4,167 1,155 3,795 18,003 20,290 2,865 2,078 4,943 1,546 566 2,112 593 1,579 291 2,422 1,842 566 14,348 34,638 4,287 475 9,829 1,774 1,115 682 564 878 776 484 3,302 1,305 – 20,709 10,117 3,325 6,792 6,787 $ $ 11,007 7,957 892 4,960 24,816 18,349 2,654 1,889 4,543 1,466 463 1,929 512 1,512 1,054 2,229 1,923 880 14,582 32,931 2,535 25 9,400 1,682 1,173 621 452 864 667 527 2,697 – 550 18,633 11,788 4,271 7,517 7,511 $ $ 4.26 $ 4.18 $ $ 2.28 1,594,957 4.56 $ 4.52 $ $ 2.06 1,646,398 Consolidated Balance Sheet Bank of America Corporation and Subsidiaries (Dollars in millions) Assets Cash and cash equivalents Time deposits placed and other short-term investments Federal funds sold and securities purchased under agreements to resell (includes $44,779 and $27,910 pledged as collateral) Trading account assets (includes $35,515 and $22,550 pledged as collateral) Derivative assets Securities: Available-for-sale (includes $32,919 and $37,422 pledged as collateral) Held-to-maturity, at cost (market value – $1,001 and $1,009) Total securities Loans and leases Allowance for credit losses Loans and leases, net of allowance for credit losses Premises and equipment, net Mortgage banking assets Goodwill Core deposit intangibles and other intangibles Other assets Total assets Liabilities Deposits in domestic offices: Noninterest-bearing Interest-bearing Deposits in foreign offices: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Trading account liabilities Derivative liabilities Commercial paper and other short-term borrowings Accrued expenses and other liabilities Long-term debt Trust preferred securities Total liabilities Commitments and contingencies (Note Thirteen) Shareholders’ equity Preferred stock, $0.01 par value; authorized – 100,000,000 shares; issued and outstanding – 1,356,749 and 1,514,478 shares Common stock, $0.01 par value; authorized – 5,000,000,000 shares; issued and outstanding – 1,500,691,103 and 1,559,297,220 shares Retained earnings Accumulated other comprehensive income Other Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. December 31 2002 2001 $ 24,973 6,813 $ 26,837 5,932 44,878 63,996 34,310 68,122 1,026 69,148 342,755 (6,851) 335,904 6,717 2,110 11,389 1,095 59,125 $ 660,458 28,108 47,344 22,147 84,450 1,049 85,499 329,153 (6,875) 322,278 6,414 3,886 10,854 1,294 61,171 $ 621,764 $ 122,686 232,320 $ 112,064 220,703 1,673 29,779 386,458 65,079 25,574 23,566 25,234 17,052 61,145 6,031 610,139 1,870 38,858 373,495 47,727 19,452 14,868 22,217 27,459 62,496 5,530 573,244 58 65 496 48,517 1,232 16 50,319 $ 660,458 5,076 42,980 437 (38) 48,520 $ 621,764 BANK OF AMERICA 2002 73 BANK OF AMERICA 2002 73 BANK OF AMERICA 2002 73 Consolidated Statement of Changes in Shareholders’ Equity Bank of America Corporation and Subsidiaries (Dollars in millions, shares in thousands) Balance, December 31, 1999 Net income Net unrealized gains on available-for-sale and marketable equity securities Net unrealized gains on foreign currency translation adjustments Cash dividends: Common Preferred Common stock issued under employee plans Common stock repurchased Conversion of preferred stock Other Balance, December 31, 2000 Net income Net unrealized gains on available-for-sale and marketable equity securities Net unrealized gains on foreign currency translation adjustments Net gains on derivatives Cash dividends: Common Preferred Common stock issued under employee plans Common stock repurchased Conversion of preferred stock Other Balance, December 31, 2001 Net income Net unrealized gains on available-for-sale and marketable equity securities Net unrealized gains on foreign currency translation adjustments Net losses on derivatives Cash dividends: Common Preferred Common stock issued under employee plans Common stock repurchased Conversion of preferred stock Other Balance, December 31, 2002 Preferred Stock Common Stock Shares Amount $77 1,677,273 $11,671 Retained Earnings $35,681 7,517 Accumulated Other Comprehensive Income (Loss)(1) Other Total Share- holders’ Equity Compre- hensive Income $(2,658) $(339) $44,432 7,517 $07,517 (3,382) (6) 5 $39,815 6,792 (3,627) (5) 5 $42,980 9,249 (3,704) (5) 1,910 2 1,910 1,910 2 2 $(746) 80 15 1,088 $437 974 3 (93) (3,382) (6) 294 (3,256) 226 (13) 117 $(126) $47,628 6,792 $09,429 $06,792 80 80 15 1,088 15 1,088 (3,627) (5) 1,121 (4,716) 62 26 144 $(38) $48,520 9,249 $07,975 $09,249 974 3 (93) 974 3 (93) (3,704) (5) 2,632 (7,466) 21 (3) $48,517 (89) $(1,232 33 $(016 209 $50,319 (89) $10,044 3,781 (67,577) 177 (22) 1,613,632 (5) $72 68 (3,256) 5 125 $8,613 27,301 (81,939) 298 5 $65 1,559,297 (7) 1,059 (4,716) 7 113 $5,076 50,004 (108,900) 265 25 $58 1,500,691 (7) 2,611 (7,466) 7 268 $(00496 (1) Accumulated Other Comprehensive Income (Loss) consisted of net unrealized gains (losses) on available-for-sale and marketable equity securities of $494, $(480) and $(560) at December 31, 2002, 2001 and 2000, respectively; foreign currency translation adjustments of $(168), $(171) and $(186) at December 31, 2002, 2001 and 2000, respectively; and net gains on derivatives of $995 and $1,088 at December 31, 2002 and 2001, respectively. See accompanying notes to consolidated financial statements. 74 BANK OF AMERICA 2002 74 BANK OF AMERICA 2002 74 BANK OF AMERICA 2002 74 BANK OF AMERICA 2002 Consolidated Statement of Cash Flows Bank of America Corporation and Subsidiaries (Dollars in millions) Operating activities Net income Reconciliation of net income to net cash provided by (used in) operating activities: Provision for credit losses Gains on sales of securities Business exit costs Restructuring charges Depreciation and premises improvements amortization Amortization of intangibles Deferred income tax (benefit) expense Net (increase) decrease in trading and hedging instruments Net increase in other assets Net increase (decrease) in accrued expenses and other liabilities Other operating activities, net Net cash provided by (used in) operating activities Investing activities Net increase in time deposits placed and other short-term investments Net (increase) decrease in federal funds sold and securities purchased under agreements to resell Proceeds from sales of available-for-sale securities Proceeds from maturities of available-for-sale securities Purchases of available-for-sale securities Proceeds from maturities of held-to-maturity securities Proceeds from sales and securitizations of loans and leases Other changes in loans and leases, net Purchases and originations of mortgage banking assets Net purchases of premises and equipment Proceeds from sales of foreclosed properties (Acquisition) divestiture of business activities, net Net cash provided by (used in) investing activities Financing activities Net increase in deposits Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase Net increase (decrease) in commercial paper and other short-term borrowings Proceeds from issuance of long-term debt and trust preferred securities Retirement of long-term debt and trust preferred securities Proceeds from issuance of common stock Common stock repurchased Cash dividends paid Other financing activities, net Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 Supplemental cash flow disclosures Cash paid for interest Cash paid for income taxes Year Ended December 31 2002 2001 2000 $ 9,249 $ 6,792 $ 7,517 3,697 (630) – – 886 218 (377) (12,357) (6,880) (11,345) 5,532 (12,007) 4,287 (475) 1,305 – 854 878 (385) (19,865) (14,336) 5,004 3,228 (12,713) 2,535 (25) – 550 920 864 647 819 (11,294) 1,934 (958) 3,509 (881) (484) (685) (16,770) 137,702 26,777 (146,010) 43 28,068 (37,184) (919) (939) 142 (110) (10,081) (53) 125,824 11,722 (126,537) 145 10,781 18,201 (1,148) (835) 353 (417) 37,552 9,857 34,671 6,396 (19,132) 380 15,751 (42,720) (208) (642) 260 843 4,771 12,963 9,251 17,155 17,352 3,017 10,850 (15,364) 2,632 (7,466) (3,709) (66) 20,209 15 (1,864) 26,837 $ 24,973 (1,684) (19,981) 14,853 (20,619) 1,121 (4,716) (3,632) (51) (25,458) (57) (676) 27,513 $ 26,837 (25,150) (5,376) 23,451 (11,078) 294 (3,256) (3,388) (343) (7,691) (65) 524 26,989 $ 27,513 $ 11,253 3,999 $ 19,257 3,121 $ 24,241 2,130 Net transfers of loans and leases from loans held for sale (included in other assets) to the loan portfolio amounted to $8,468 and $247 in 2002 and 2000, respectively. Net transfers of loans and leases from the loan portfolio to loans held for sale amounted to $428 in 2001. Loans transferred to foreclosed properties amounted to $285, $533 and $305 in 2002, 2001 and 2000, respectively. There were no loans and loans held for sale securitized and retained in the available-for-sale portfolio in 2002. Loans and loans held for sale securitized and retained in the available-for-sale securities portfolio amounted to $29,985 and $2,483 in 2001 and 2000, respectively. See accompanying notes to consolidated financial statements. BANK OF AMERICA 2002 75 BANK OF AMERICA 2002 75 BANK OF AMERICA 2002 75 Notes to Consolidated Financial Statements Bank of America Corporation and Subsidiaries 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 U.S. and in selected international markets. At December 31, 2002, the Corporation operated its banking activities primarily under two charters: Bank of America, N.A. and Bank of America, N.A. (USA). NOTE 1 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. All significant inter- company accounts and transactions have been eliminated. Results of operations of companies purchased are included from the dates of acquisition. Certain prior period amounts have been reclassified to conform to current year classifications. Assets held in an agency or fiduciary capacity are not included in the consolidated financial state- ments. The Corporation accounts for investments in companies that it owns a voting interest of 20 percent to 50 percent and for which it may have significant influence over operating and financing decisions using the equity method of accounting. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in equity investment gains. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assump- tions that affect reported amounts and disclosures. Actual results could differ from those estimates. Significant estimates made by management are discussed in these notes as applicable and in Complex Accounting Estimates and Principles beginning on page 29. Recently Issued Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46 “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46). FIN 46 provides a new framework for identifying variable interest entities (VIEs) and deter- mining when a company should include the assets, liabilities, noncon- trolling interests and results of activities of a VIE in its consolidated financial statements. FIN 46 is effective immediately for VIEs created after January 31, 2003 and is effective beginning in the third quarter of 2003 for VIEs created prior to issuance of the interpretation. As a result, Management expects that the Corporation will have to consolidate its multi-seller asset backed conduits. As of December 31, 2002, the assets of these entities were approximately $25.0 billion. The actual amount that will be consolidated is dependent on actions taken by the Corporation and its customers between December 31, 2002 and the third quarter of 2003. Management is assessing alterna- tives with regards to these entities including restructuring the entities and/or alternative sources of cost-efficient funding for our customers and expects that the amount of assets consolidated will be less than the $25.0 billion due to these actions and those of our customers. The new rule requires that for entities to be consolidated that those assets be initially recorded at their carrying amounts at the date the require- ments of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value the first date the new rule applies. Any difference between the net amount added to the Corporation’s balance sheet and the amount of any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change. Management is currently evaluating the impact of this new rule on the financial statements. See Note 8 for additional disclosure regarding these types of entities. Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123,” (SFAS 148) was adopted by the Corporation on January 1, 2003. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Under the provisions of SFAS 148, the Corporation is transitioning to the fair value-based method of accounting for stock-based employee compensation costs using the prospective method. Under the prospective method, all stock options granted under plans before the adoption date will con- tinue to be accounted for under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) unless these stock options are modified or settled subsequent to adoption. SFAS 148 will be effective for all stock option awards granted in 2003 and thereafter. Management estimates that the impact of this new accounting will be approximately $115 million additional pre-tax compensation expense in 2003. Prior to January 1, 2003, the Corporation accounted for its stock-based employee compensation plans under the recognition and measurement provisions of APB 25. Under APB 25, the Corporation accounted for stock options using the intrinsic value method and no compensation expense was recognized as the grant price was equal to the strike price. Under the fair value method, stock option compensation expense is measured on the date of grant using an option-pricing model. The option-pricing model is based on certain assumptions and changes to those assumptions may result in different fair value estimates. 76 BANK OF AMERICA 2002 76 BANK OF AMERICA 2002 76 BANK OF AMERICA 2002 In accordance with SFAS 123, the Corporation provides dis- closures as if the Corporation had adopted the fair value-based method of measuring all outstanding employee stock options in 2002, 2001 and 2000 as indicated in the following table. The disclosure requirement of SFAS 123 recognizes the impact of all outstanding employee stock options while the prospective method that the Corporation intends to follow under SFAS 148 recognizes the impact of only newly issued employee stock options. (Dollars in millions, except per share data) Net income Net income available to common shareholders Earnings per common share Diluted earnings per common share 2002 $ 9,249 9,244 6.08 5.91 As Reported 2001 $ 6,792 6,787 4.26 4.18 2000 $ 7,517 7,511 4.56 4.52 2002 $ 8,836 8,831 5.81 5.64 Pro Forma 2001 $ 6,441 6,436 4.04 3.96 2000 $ 7,215 7,209 4.38 4.34 In determining the pro forma disclosures above, the fair value of options granted was estimated on the date of grant using the Black- Scholes option-pricing model and assumptions appropriate to each plan. The Black-Scholes model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. The weighted average grant date fair values of the options granted during 2002, 2001 and 2000 were based on the following assumptions: Key Employee Stock Plan Broad-based plans Key Employee Stock Plan Broad-based plans Risk-Free Interest Rates Dividend Yield 2002 5.00% 4.14 2001 5.05% 4.89 Expected Lives (Years) 2002 7 4 2001 7 4 2000 6.74% 6.57 2000 7 4 2002 4.76% 4.37 2001 4.50% 5.13 2000 4.62% 4.62 2002 26.86% 31.02 Volatility 2001 26.68% 31.62 2000 25.59% 30.27 Compensation expense under the fair-value based method is recognized over the vesting period of the related stock options. Accordingly, the pro forma results of applying SFAS 123 in 2002, 2001 and 2000 may not be indicative of future amounts. In November 2002, the Emerging Issues Task Force (EITF) finalized the minutes to its discussion of EITF Issue 02-3, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities” (EITF 02-3), which included clarification of the FASB staff’s view that an entity should not recognize an unrealized gain or loss at inception of a derivative instrument unless the fair value of that instrument is obtained from a quoted market price in an active market or is other- wise evidenced by comparison to other observable current market transactions or based on a valuation technique incorporating observ- able market data. This view is applicable to all derivative instruments held for trading purposes entered into on or after November 21, 2002. EITF 02-3 did not have a material impact on the Corporation’s results of operations or financial condition. FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,” (FIN 45) was issued in November 2002. FIN 45 requires that a liability be recognized at the inception of certain guarantees for the fair value of the obligation, including the ongoing obligation to stand ready to perform over the term of the guarantee. Guarantees, as defined in FIN 45, include contracts that contingently require the Corporation to make payments to a guaranteed party based on changes in an underlying that is related to an asset, liability or equity security of the guaranteed party, performance guarantees, indemnification agreements or indirect guar- antees of indebtedness of others. This new accounting is effective for certain guarantees issued or modified after December 31, 2002. In addition, FIN 45 requires certain additional disclosures that are located in Notes 8 and 13. Management does not expect that the adop- tion of FIN 45 will have a material impact on the Corporation’s results of operations or financial condition. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142). SFAS 142 became effective for the Corporation on January 1, 2002 and primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. SFAS 142 requires that goodwill be recorded at the reporting unit level. The Corporation defines reporting units as an operating segment or one level below. The Corporation has evaluated the lives of intangible assets as required by SFAS 142 and no change was made regarding lives upon adoption. SFAS 142 prohibits the amortization of goodwill but requires that it be tested for impair- ment at least annually at the reporting unit level. Goodwill was tested for impairment and no impairment charges were recorded. BANK OF AMERICA 2002 77 BANK OF AMERICA 2002 77 BANK OF AMERICA 2002 77 Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (SFAS 133) as amended by Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of Effective Date of Financial Accounting Standards Board Statement No. 133,” and Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133,” was adopted by the Corporation on January 1, 2001. The impact of adopting SFAS 133 to net income was a loss of $52 million (net of related income tax benefits of $31 million) and a net transition gain of $9 million (net of related income taxes of $5 million) included in other comprehensive income on January 1, 2001. On January 8, 2003, the Federal Financial Institutions Examination Council (FFIEC) issued guidance on “Account Management and Loss Allowance Guidance for Credit Card Lending.” This guidance addresses account management, allowance for loan losses and fee recogni- tion practices for institutions that offer credit card programs. The Corporation is in compliance with the material portions set forth in this guidance. Therefore, it will not have an impact on the Corporation’s results of operations or financial condition. Cash and Cash Equivalents Cash on hand, cash items in the process of collection and amounts due from correspondent banks and the Federal Reserve Bank are included in cash and cash equivalents. Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as collateralized financ- ing transactions and are recorded at the amounts at which the secu- rities were acquired or sold plus accrued interest. The Corporation’s policy is to obtain the use of securities purchased under agreements to resell. The market value of the underlying securities, which collater- alize the related receivable on agreements to resell, is monitored, including accrued interest. Additional collateral is requested when deemed appropriate. Collateral The Corporation has accepted collateral that it is permitted by con- tract or custom to sell or repledge. At December 31, 2002, the fair value of this collateral was approximately $47.9 billion of which $29.9 billion was sold or repledged. At December 31, 2001, the fair value of this collateral was approximately $30.4 billion of which $21.5 billion was sold or repledged. The primary source of this col- lateral is reverse repurchase agreements. The Corporation pledges securities as collateral in transactions that are primarily repurchase agreements, public and trust deposits, treasury tax and loan and other short-term borrowings. This collateral can be sold or repledged by the counterparties to the transactions. In addition, the Corporation obtains collateral in connection with its derivative activities. Required collateral levels vary depending on the credit risk rating and the type of counterparty. Generally, the Corporation accepts collateral in the form of cash, U.S. Treasury secu- rities and other marketable securities. Trading Instruments Financial instruments utilized in trading activities are stated at fair value. Fair value is generally based on quoted market prices. If quoted market prices are not available, fair values are estimated based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. Realized and unrealized gains and losses are recognized in trading account profits. Derivatives and Hedging Activities All derivatives are recognized on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements which allow the Corporation to settle positive and negative positions with the same counterparty on a net basis. For exchange traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The Corporation designates a derivative as held for trading or hedging purposes when it enters into a derivative contract. Derivatives designated as held for trading activities are included in the Corporation’s trading portfolio with changes in fair value reflected in trading account profits. Some credit derivatives used by the Corporation do not qualify for hedge accounting under SFAS 133 and despite being effective economic hedges, changes in these derivatives are included in trading account profits. 78 BANK OF AMERICA 2002 78 BANK OF AMERICA 2002 78 BANK OF AMERICA 2002 If a derivative instrument in a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Similarly, if a derivative instrument in a cash flow hedge is terminated or the hedge designa- tion removed, related amounts accumulated in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects income. Securities Debt securities are classified based on management’s intention on the date of purchase and recorded on the balance sheet as of the trade date. Debt securities which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Securities that are bought and held princi- pally for the purpose of resale in the near term are classified as trad- ing instruments and are stated at fair value with unrealized gains and losses included in trading account profits. All other debt securities are classified as available-for-sale and carried at fair value with net unrealized gains and losses included in shareholders’ equity on an after-tax basis. Interest and dividends on securities, including amortization of premiums and accretion of discounts, are included in interest income. Realized gains and losses from the sales of securities are determined using the specific identification method. Marketable equity securities, which are included in other assets, are carried at fair value. Net unrealized gains and losses are included in shareholders’ equity, net of tax; income is included in noninterest income. Venture capital investments for which there are active market quotes are carried at estimated fair value, subject to liquidity dis- counts, sales restrictions or regulatory rules. Net unrealized gains and losses are recorded in noninterest income. Venture capital invest- ments for which there are not active market quotes are initially valued at cost. Subsequently, these investments are adjusted to reflect changes in valuation as a result of initial public offerings or other- than-temporary declines in value. The Corporation formally documents at inception all relation- ships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions as required by SFAS 133. Additionally, the Corporation uses regression analysis at the hedge’s inception and quarterly thereafter to assess whether the derivative used in its hedg- ing transaction is expected to be or has been highly effective in offset- ting changes in the fair value or cash flows of the hedged items. The Corporation discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value in earnings. The Corporation uses its derivatives designated for hedging activities as either fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The Corporation primarily man- ages interest rate and foreign currency exchange rate sensitivity through the use of derivatives. Fair value hedges are used to limit the Corporation’s exposure to changes in the fair value of its fixed interest- bearing assets or liabilities that are due to interest rate volatility. Cash flow hedges are used to minimize the variability in cash flows of inter- est-bearing assets or liabilities or anticipated transactions caused by interest rate fluctuations. Changes in the fair value of derivatives des- ignated for hedging activities that are highly effective as hedges are recorded in earnings or other comprehensive income, depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge, respectively. A highly effective hedging relationship is one in which the Corporation achieves offsetting changes in fair value or cash flows between 80 percent and 120 percent for the risk being hedged. Hedge ineffectiveness and gains and losses on the excluded component of a derivative in assessing hedge effectiveness are recorded in earnings. SFAS 133 retains certain concepts under Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” (SFAS 52) for foreign currency exchange hedg- ing. Consistent with SFAS 52, the Corporation records changes in the fair value of derivatives used as hedges of the net investment in foreign operations as a component of other comprehensive income. The Corporation from time-to-time purchases or issues financial instruments containing embedded derivatives. The embedded deriva- tive is separated from the host contract and carried at fair value if the economic characteristics of the derivative are not clearly and closely related to the economic characteristics of the host contract. To the extent that the Corporation cannot reliably identify and measure the embedded derivative, the entire contract is carried at fair value on the balance sheet with changes in fair value reflected in earnings. BANK OF AMERICA 2002 79 BANK OF AMERICA 2002 79 BANK OF AMERICA 2002 79 Loans and Leases Loans are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans and premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to income over the lives of the related loans. Unearned income, discounts and premiums are amortized to income using methods that approximate the interest method. The Corporation provides equipment financing to its customers through a variety of lease arrangements. Direct financing leases are car- ried at the aggregate of lease payments receivable plus estimated resid- ual value of the leased property, less unearned income. Leveraged leases, which are a form of financing lease, are carried net of non- recourse debt. Unearned income on leveraged and direct financing leases is amortized over the lease terms by methods that approxi- mate the interest method. Allowance for Credit Losses The allowance for losses is management’s estimate of probable losses in the lending portfolios. Additions to the allowance for credit losses are made by charges to the provision for credit losses. Credit exposures, excluding derivatives assets, deemed to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts are credited to the allowance for credit losses. The Corporation performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks and to assess the overall collectibility of those portfolios. The allowance on certain homo- geneous loan portfolios, which generally consist of consumer loans, is based on aggregated portfolio segment evaluations generally by prod- uct type. Loss forecast models are utilized for these segments which consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies and credit scores. The remaining portfolios are reviewed on an individual loan basis. Loans subject to individual reviews are analyzed and segregated by risk according to the Corporation’s internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions and performance trends within specific portfolio segments, and any other pertinent information (including individual valuations on nonperforming loans in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114)) result in the estimation of the allowances for credit losses. If necessary, a specific allowance for credit losses is established for individual impaired commercial loans. A loan is considered impaired when, based on current information and events, it is pro- bable that the Corporation will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the agreement. Once a loan has been identified as individually impaired, management measures impairment in accordance with SFAS 114. Individually impaired loans are measured based on the present value of payments expected to be received, observable mar- ket prices, or for loans that are solely dependent on the collateral for repayment, the estimated fair value of the collateral. If the recorded investment in impaired loans exceeds the measure of estimated fair value, a specific allowance is established as a component of the allowance for credit losses. Portions of the allowance for credit losses are allocated to cover the estimated probable incurred credit losses in each loan and lease category based on the results of the Corporation’s detail review process described above. The allocated portion continues to be weighted toward the commercial loan portfolio, which reflects a higher level of nonperforming loans and the potential for higher indi- vidual losses. The remaining or general portion of the allowance for credit losses, determined separately from the procedures outlined above, addresses certain industry and geographic concentrations, including global economic conditions and binding unfunded commit- ments, as well as, a component for the margins of imprecision in our estimation models. Due to the subjectivity involved in the determi- nation of the general portion of the allowance for credit losses, the relationship of the general component to the total allowance for credit losses may fluctuate from period to period. Management evalu- ates the adequacy of the allowance for credit losses based on the combined total of the allocated and general components. Nonperforming Loans Commercial loans and leases that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely col- lection, including loans that are individually identified as being impaired, are generally classified as nonperforming loans unless well- secured and in the process of collection. Loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties, without compensation on restructured loans, are classified as nonperforming until the loan is per- forming for an adequate period of time under the restructured agree- ment. In situations where the Corporation does not receive adequate compensation, the restructuring is considered a troubled debt restruc- turing. Interest accrued but not collected is reversed when a commer- cial loan is classified as nonperforming. Interest collections on commercial nonperforming loans and leases for which the ultimate col- lectibility of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. 80 BANK OF AMERICA 2002 Credit card loans are charged off at 180 days past due or 60 days from notification of bankruptcy filing and are not classified as nonperforming. Unsecured consumer loans and deficiencies in non real estate secured loans are charged off at 120 days past due and not classified as nonperforming. Real estate secured consumer loans are placed on nonaccrual and classified as nonperforming at 90 days past due. The amount deemed uncollectible on real estate secured loans is charged off at 180 days past due. Loans Held for Sale Loans held for sale include residential mortgage, loan syndications, and to a lesser degree commercial real estate, consumer finance and other loans, and are carried at the lower of aggregate cost or market value. Loans held for sale are included in other assets. Premises and Equipment Premises and equipment are stated at cost less accumulated depreci- ation and amortization. Depreciation and amortization are recognized primarily using the straight-line method over the estimated useful lives of the assets. Estimated lives range up to 40 years for buildings, up to 12 years for furniture and equipment and the shorter of lease term or estimated useful life for leasehold improvements. Mortgage Banking Assets In the first quarter of 2001, the Corporation amended certain of its Mortgage Selling and Servicing Contracts whereby its previously reported mortgage servicing rights were bifurcated into a mortgage servicing right (MSR) and Excess Spread Certificates (the Certificates). The servicing component represents the contractually specified ser- vicing fees net of the fair market value of the cost to service, and the Certificates represent a retained financial interest in certain cash flows of the underlying mortgage loans. The MSR and the Certificates are classified as mortgage banking assets (MBAs). The Certificates are carried at estimated fair value with the corresponding adjustment reported in trading account profits. The Corporation seeks to manage changes in value of the Certificates due to changes in prepayment rates by entering into derivative financial instruments such as pur- chased options and interest rate swaps. The derivative instruments are carried at estimated fair value with the corresponding adjustment reported in trading account profits. The Corporation values the Certificates using an option-adjusted spread model which requires several key components including, but not limited to, proprietary pre- payment models and term structure modeling via Monte Carlo simu- lation. The fair value of MBAs was $2.1 billion and $3.9 billion at December 31, 2002 and 2001, respectively. Total loans serviced approximated $264.5 billion, $320.8 billion and $335.9 billion at December 31, 2002, 2001 and 2000 respectively, including loans serviced on behalf of the Corporation’s banking subsidiaries. The Corporation allocated the total cost of mortgage loans orig- inated for sale or purchased between the cost of the loans, and when applicable, the Certificates and the MSRs based on the relative fair values of the loans, the Certificates and the MSR. MSR acquired separately are capitalized at cost. The Corporation recorded $884 mil- lion, $1.1 billion and $836 million of MBAs during 2002, 2001 and 2000, respectively. The cost of MSR was amortized in proportion to and over the estimated period that servicing revenues were recognized. Amortization was $540 million during 2000. Mortgage banking income includes certificate and servicing fees, gains from selling originated mortgages, ancillary servicing income, mortgage production fees and gains and losses on sales to the secondary market. Goodwill and Other Intangibles Net assets of companies acquired in purchase transactions are recorded at fair value at the date of acquisition, as such, the historical cost basis of individual assets and liabilities are adjusted to reflect their fair value. Identified intangibles are amortized on an accelerated or straight-line basis over the period benefited. Goodwill is not amor- tized but is reviewed for potential impairment on an annual basis at the reporting unit level. The impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional pro- cedure compares the implied fair value of the reporting unit’s goodwill (as defined in SFAS 142) with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. In 2002, goodwill was tested for impairment and no impairment charges were recorded. Other intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow pro- jections. At December 31, 2002, intangible assets included in the Consolidated Balance Sheet consist primarily of core deposit intangi- bles that are amortized using an estimated range of anticipated lives of 6 to 20 years. BANK OF AMERICA 2002 81 Special Purpose Financing Entities In the ordinary course of business, the Corporation supports its customers financing needs by facilitating these customers’ access to different funding sources, assets and risks. In addition, the Corporation utilizes certain financing arrangements to meet its bal- ance sheet management, funding, liquidity, and market or credit risk management needs. These financing entities may be in the form of cor- porations, partnerships or limited liability companies, or trusts and are not consolidated in the Corporation’s balance sheet. The majority of these activities are basic term or revolving securitization vehicles such as credit cards or mortgages. These vehicles are generally funded through term-amortizing debt structures designed to be paid off based on the underlying cash flows of the assets securitized. Securitizations The Corporation securitizes, sells and services interests in residential mortgage, consumer finance, commercial and credit card loans. When the Corporation securitizes assets, it may retain interest-only strips, one or more subordinated tranches and, in some cases, a cash reserve account, all of which are considered retained interests in the securitized assets. Gains upon sale of the assets depend, in part, on the Corporation’s allocation of the previous carrying amount of the assets to the retained interests. Previous carrying amounts are allo- cated in proportion to the relative fair values of the assets sold and interests retained. Quoted market prices, if available, are used to obtain fair values. Generally, quoted market prices for retained interests are not avail- able; therefore, the Corporation estimates fair values based upon the present value of the associated expected future cash flows. This may require management to estimate credit losses, prepayment speeds, forward yield curves, discount rates and other factors that impact the value of retained interests. The excess cash flows expected to be received over the amor- tized cost of the retained interest is recognized as interest income using the effective yield method. If the fair value of the retained inter- est has declined below its carrying amount and there has been an adverse change in estimated contractual cash flows of the underlying assets, then such decline is determined to be other-than-temporary and the retained interest is written down to fair value with a corre- sponding adjustment to earnings. Other Special Purpose Financing Entities Other Special Purpose Financing Entities are generally funded with short-term commercial paper and are similarly paid down through the cash flow or sale of the underlying assets. These financing entities are usually contractually limited to a narrow range of activities that facilitate the transfer of or access to various types of assets or finan- cial instruments and provide the investors in the transaction protec- tion from creditors of the Corporation in the event of bankruptcy or receivership of the Corporation. In certain situations, the Corporation provides liquidity commitments and/or loss protection agreements. See Note 13 for further discussion. The Corporation evaluates whether these entities should be consolidated by applying generally accepted accounting principles and interpretations that generally provide that a financing entity is not consolidated if both the control and risks and rewards of the assets in the financing entity are not retained by the Corporation. In determining whether the financing entity should be consolidated, the Corporation considers whether the entity is a qualifying special-purpose entity (QSPE) as defined in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – a replacement of FASB Statement No. 125,” (SFAS 140). For non-consolidation, SFAS 140 requires that the financing entity be legally isolated, bankruptcy remote and beyond the control of the seller, which generally applies to securitizations. For non-QSPE structures, the Securities and Exchange Commission and the EITF also have issued guidance regarding consolidation of financ- ing entities. Such guidance applies to certain transactions and requires an assessment of whether sufficient risks and rewards of ownership have passed based on assessing the voting rights, control of the entity and the existence of substantive third party equity invest- ment. For additional information on the consolidation of financing entities, see Recently Issued Accounting Pronouncements in Note 1. As part of its normal risk management activities, the Corporation enters into certain transactions that are facilitated through a special purpose entity (SPE). The Corporation consolidates certain of these SPEs when it believes, under the current accounting guidance, that consolidation is appropriate. For further discussion on Special Purpose Financing Entities see Note 8. Income Taxes There are two components of income tax expense: current and deferred. Current income tax expense approximates cash to be paid or refunded for taxes for the applicable period. Deferred tax assets and liabilities are recognized due to differences in the basis of assets and liabilities as measured by tax laws and their basis as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax liabilities or assets between periods. Recognition of deferred tax assets is based on management’s belief that it is more likely than not that the tax benefit associated with certain temporary differences, tax operating loss carryforwards and tax credits will be realized. A valuation allowance is recorded for the amount of the deferred tax items for which it is more likely than not that realization will not occur. Retirement Benefits The Corporation has established qualified retirement plans covering substantially all full-time and certain part-time employees. Pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans. In addition, the Corporation and its subsidiaries have established unfunded supplemental benefit plans and supplemental executive retirement plans for selected officers of the Corporation and its sub- sidiaries that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. These plans 82 BANK OF AMERICA 2002 Co-Branding Credit Card Arrangements The Corporation has co-brand arrangements that entitle a cardholder to earn airline frequent-flyer points based on purchases made with the card. These arrangements have remaining terms not exceeding six years. The Corporation may pay one-time fees which would be deferred ratably over the term of the arrangement. The Corporation makes monthly payments to the co-brand partners based on the vol- ume of cardholders’ purchases and on the number of points awarded to cardholders. Such payments are expensed as incurred and are recorded as contra-revenue. NOTE 2 Exit and Restructuring Charges Exit Charges On August 15, 2001, the Corporation announced that it was exiting its auto leasing and subprime real estate lending businesses. As a result of this strategic decision, the Corporation recorded pre-tax exit charges in the third quarter of 2001 of $1.7 billion ($1.3 billion after- tax) consisting of provision for credit losses of $395 million and non- interest expense of $1.3 billion. Business exit costs within noninterest expense consisted of the write-off of goodwill of $685 million, auto lease residual charges of $400 million, real estate servicing asset charges of $145 million and other transaction costs of $75 million. The subprime real estate loan portfolio was securitized in the fourth quarter of 2001. Approximately $82 million of subprime real estate loans remain in loans held for sale in other assets at December 31, 2002. At the exit date, the auto lease portfolio was approximately 495,000 units with total residual exposure of $6.8 bil- lion. At December 31, 2002, approximately 227,000 units remained with a residual exposure of $3.0 billion. Restructuring Charges As part of its productivity and investment initiatives announced on July 28, 2000, the Corporation recorded a pre-tax charge of $550 million ($346 million after-tax) in the third quarter of 2000. Of the $550 million restructuring charge, approximately $475 million was used to cover severance and related costs and approximately $75 million was used for other costs related to process change and channel consolidation. At December 31, 2002, the restructuring reserve had been utilized. are nonqualified under the Internal Revenue Code and assets used to fund benefit payments are not segregated from other assets of the Corporation; therefore, in general, a participant’s or beneficiary’s claim to benefits under these plans is as a general creditor. In addition, the Corporation and its subsidiaries have established several postretirement healthcare and life insurance benefit plans. Other Comprehensive Income The Corporation records unrealized gains and losses on available-for- sale debt securities and marketable equity securities, foreign currency translation adjustments, related hedges of net investments in foreign operations and gains and losses on cash flow hedges in other com- prehensive income in shareholders’ equity. Gains and losses on avail- able-for-sale securities are reclassified to net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are reclassified to net income at the time of the charge. Translation gains or losses on foreign currency translation adjustments are reclassified to net income upon the sale or liquidation of investments in foreign operations. Gains or losses on derivatives are reclassified to net income as the hedged item affects earnings. Earnings Per Common Share Earnings per common share is computed by dividing net income available to common shareholders by the weighted average common shares issued and outstanding. For diluted earnings per common share, net income available to common shareholders can be affected by the conversion of the registrant’s convertible preferred stock. Where the effect of this conversion would have been dilutive, net income available to common shareholders is adjusted by the associated preferred divi- dends. This adjusted net income is divided by the weighted average number of common shares issued and outstanding for each period plus amounts representing the dilutive effect of stock options outstanding and the dilution resulting from the conversion of the registrant’s con- vertible preferred stock, if applicable. The effects of convertible pre- ferred stock and stock options are excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. Dilutive potential common shares are calculated using the treasury stock method. Foreign Currency Translation Assets, liabilities and operations of foreign branches and subsidiaries are recorded based on the functional currency of each entity. For certain of the foreign operations, the functional currency is the local currency, in which case the assets, liabilities and operations are translated, for con- solidation purposes, at current exchange rates from the local currency to the reporting currency, the U.S. dollar. The resulting gains or losses are reported as a component of accumulated other comprehensive income (loss) within shareholders’ equity on an after-tax basis. When the foreign entity is not a free-standing operation or is in a hyperinflationary economy, the functional currency used to measure the financial statements of a foreign entity is the U.S. dollar. In these instances, the resulting gains and losses are included in income. BANK OF AMERICA 2002 83 NOTE 3 Securities The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale and held-to-maturity debt securities at December 31, 2002, 2001 and 2000 were: Gross Unrealized Gains Gross Unrealized Losses Amortized Cost $ 691 58,813 2,235 2,691 64,430 2,824 $ 20 847 30 25 922 96 $ 67,254 $ 1,018 $ 1,271 73,546 3,213 4,739 82,769 2,324 $ 85,093 $ 17,318 37,745 4,252 4,786 64,101 1,541 $ $ $ 17 381 54 11 463 5 468 12 54 7 6 79 43 $ $ $ $ $ $ 65,642 $ 122 $ $ $ $ $ $ $ 3 788 45 836 190 $ 1,026 $ 5 5 797 26 833 216 $ 1,049 $ 39 66 800 27 932 255 $ 1,187 $ – 10 4 14 10 24 – – 5 1 6 9 15 – – 5 – 5 11 16 $ $ $ $ $ $ – 5 103 38 146 4 150 8 826 123 108 1,065 46 1,111 520 372 108 104 1,104 9 1,113 – 49 – 49 – 49 – – 54 – 54 1 55 – – 69 – 69 1 70 Fair Value $ 711 59,655 2,162 2,678 65,206 2,916 $ 68,122 $ 1,280 73,101 3,144 4,642 82,167 2,283 $ 84,450 $ 16,810 37,427 4,151 4,688 63,076 1,575 $ 64,651 $ 3 749 49 801 200 $ 1,001 $ 5 5 748 27 785 224 $ 1,009 $ 39 66 736 27 868 265 $ 1,133 (Dollars in millions) Available-for-sale debt securities 2002 U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total 2001 U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total 2000 U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total Held-to-maturity debt securities 2002 Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total 2001 U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total 2000 U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities Total 84 BANK OF AMERICA 2002 At December 31, 2002, net unrealized gains on available-for-sale debt securities and marketable equity securities included in shareholders’ equity were $494 million, net of the related income tax expense of $266 million. At December 31, 2001, net unrealized losses on these securities were $480 million, net of the related income tax benefit of $311 million. Excluding securities issued by the U.S. government and its agencies and corporations, there were no investments in securities from one issuer that exceeded 10 percent of consolidated share- holders’ equity at December 31, 2002 or 2001. Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $32.9 billion and $37.4 billion at December 31, 2002 and 2001, respectively. The expected maturity distribution and yields of the Corporation’s securities portfolio at December 31, 2002 are summarized below. Actual maturities may differ from the contractual or expected maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties. (Dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Due in 1 Year or Less Due After 1 Year Through 5 Years Due After 5 Years Through 10 Years Due After 10 Years Total Fair value of available-for-sale debt securities U.S. Treasury securities and agency debentures Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities(1) Total Amortized cost of available- for-sale debt securities Amortized cost of held-to- maturity debt securities Mortgage-backed securities Foreign sovereign securities Other taxable securities Total taxable Tax-exempt securities(1) Total Fair value of held-to- maturity debt securities $ $ 85 4 680 188 957 6 963 2.77% $ 6.41 2.63 3.42 551 27,394 430 803 3.40% $ 5.37 8.57 5.50 53 30,536 – 89 4.61% $ 5.83 – 7.18 2.81 7.32 29,178 20 5.38 6.89 30,678 1,059 5.83 6.31 22 1,721 1,052 1,598 4,393 1,831 5.66% $ 6.12 5.01 5.95 711 59,655 2,162 2,678 5.79 6.85 65,206 2,916 3.49% 5.63 4.97 5.68 5.59 6.66 2.84% $29,198 5.38% $31,737 5.85% $ 6,224 6.10% $68,122 5.63% $ 976 $28,788 $31,340 $ 6,150 $67,254 $ $ $ – 6 – 6 30 36 37 –% $ 2.54 – 2.54 11.13 9.60% $ 3 14 – 17 71 88 1.87% $ 3.47 – 3.19 9.41 8.21% $ – 9 – 9 49 58 –% $ 2.40 – 2.40 8.10 7.18% $ – 759 45 804 40 844 –% $ 7.12 3.68 6.93 6.12 3 788 45 836 190 2.42% 6.96 3.69 6.77 8.66 6.89% $ 1,026 7.12% $ 93 $ 61 $ 810 $ 1,001 (1) Yield of tax-exempt securities calculated on a taxable-equivalent basis. The components of gains and losses on sales of securities for the years ended December 31, 2002, 2001 and 2000 were: NOTE 4 Trading Activities (Dollars in millions) Gross gains Gross losses Net gains on sales of securities 2002 $ 1,035 405 $ 630 2001 $ 1,074 599 $ 475 2000 123 98 25 $ $ The income tax expense attributable to realized net gains on securities sales was $220 million, $166 million and $9 million in 2002, 2001 and 2000, respectively. Trading-Related Revenue Trading account profits represent the net amount earned from the Corporation’s 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, does not include the net interest income recog- nized on trading positions or the related funding charge or benefit. BANK OF AMERICA 2002 85 Trading account profits and trading-related net interest income (“trading-related revenue”) are presented in the following table as they are both considered in evaluating the overall profitability of the Corporation’s trading positions. 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 and commodities. (Dollars in millions) Trading account profits – as reported(1) Trading-related net interest income(2) Total trading-related revenue Trading-related revenue by product Foreign exchange Interest rate Credit(3) Equities Commodities Total trading-related revenue $ 2002 778 1,970 $ 2,748 $ 530 839 893 400 86 2001 $ 1,842 1,609 $ 3,451 $ 541 784 1,054 902 170 2000 $ 1,923 1,023 $ 2,946 $ 536 773 392 1,174 71 $ 2,748 $ 3,451 $ 2,946 (1) Includes $83 transition adjustment net loss in 2001 recorded as a result of adoption of SFAS 133. (2) Presented on a taxable-equivalent basis. (3) Credit includes credit fixed income, credit derivatives, hedges of credit exposure and mortgage banking assets. Trading Account Assets and Liabilities The fair values of the components of trading account assets and liabil- ities at December 31, 2002 and 2001 were: exchanges or directly between parties. The Corporation also provides credit derivatives to customers who wish to hedge existing credit exposures or take on credit exposure to generate revenue. (Dollars in millions) Trading account assets U.S. government & agency securities Foreign sovereign debt Corporate & other debt securities Equity securities Mortgage-backed securities Other Total Trading account liabilities U.S. government & agency securities Foreign sovereign debt Corporate & other debt securities Equity securities Other Total NOTE 5 Derivatives 2002 2001 $ 19,875 8,752 14,280 5,380 5,917 9,792 $ 63,996 $ 8,531 3,465 3,032 4,825 5,721 $ 25,574 $ 15,009 6,809 11,596 2,976 3,070 7,884 $ 47,344 $ 4,121 3,096 1,501 6,151 4,583 $ 19,452 The Corporation designates a derivative as held for trading or hedging purposes when it enters into a derivative contract. Derivatives utilized by the Corporation include swaps, financial futures and forward settle- ment contracts, and option contracts. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Financial futures and forward settlement contracts are agreements to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined future date and rate or price. An option contract is an agreement that conveys to the purchaser the right, but not the obliga- tion, to buy or sell a quantity of a financial instrument, index, currency or commodity at a predetermined rate or price during a period or at a time in the future. Option agreements can be transacted on organized Credit Risk Associated with Derivative Activities Credit risk associated with derivatives is measured as the net replacement cost 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 collat- eral. In managing derivative credit risk, both the current exposure, which is the replacement cost of contracts on the measurement date, as well as an estimate of the potential change in value of contracts over their remaining lives are considered. In managing credit risk associated with its derivative activities, the Corporation deals prima- rily with commercial banks, broker-dealers and corporations. To mini- mize credit risk, the Corporation enters into legally enforceable master netting agreements, which reduce risk by permitting the close- out and netting of transactions with the same counterparty upon occurrence of certain events. In addition, the Corporation reduces credit risk by obtaining collateral based on individual assessment of counterparties. The determination of the need for and the levels of collateral will vary depending on the Corporation’s credit risk rating of the counterparty. Generally, the Corporation accepts collateral in the form of cash, U.S. Treasury securities and other marketable securi- ties. The Corporation held $16.7 billion of collateral on derivative positions, of which $11.4 billion could be applied against credit risk at December 31, 2002. A portion of the derivative activity involves exchange-traded instruments. Exchange-traded instruments conform to standard terms and are subject to policies set by the exchange involved, including counterparty approval, margin requirements and security deposit requirements. Management believes the credit risk associated with these types of instruments is minimal. 86 BANK OF AMERICA 2002 The following table presents the contract/notional and credit risk amounts at December 31, 2002 and 2001 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 considera- tion the effects of legally enforceable master netting agreements. Derivatives(1) (Dollars in millions) Interest rate contracts Swaps Futures and forwards Written options Purchased options Foreign exchange contracts Swaps Spot, futures and forwards Written options Purchased options Equity contracts Swaps Futures and forwards Written options Purchased options Commodity contracts Swaps Futures and forwards Written options Purchased options Credit derivatives Total derivative assets December 31, 2002 December 31, 2001 Contract/ Notional Credit Risk Contract/ Notional Credit Risk $ 6,781,629 2,510,259 973,113 907,999 $ 18,981 283 – 3,318 $ 5,267,608 1,663,109 678,242 704,159 $ 9,550 67 – 2,165 175,680 724,039 81,263 80,395 16,830 48,470 19,794 23,756 11,776 3,478 12,158 19,115 92,098 2,460 2,535 – 452 679 – – 2,885 1,117 – – 347 1,253 140,778 654,026 57,963 55,050 14,504 46,970 21,009 28,902 6,600 2,176 8,231 8,219 57,182 2,274 2,496 – 496 562 44 – 2,511 1,152 – – 199 631 $ 34,310 $ 22,147 (1) Includes both long and short derivative positions. The average fair value of derivative assets for 2002 and 2001 was $25.3 billion and $19.8 billion, respectively. The average fair value of derivative liabilities for 2002 and 2001 was $17.3 billion and $17.4 bil- lion, respectively. Asset and Liability Management (ALM) Activities Interest rate contracts and foreign exchange contracts are utilized in the Corporation’s ALM process. The Corporation maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Corporation’s goal is to man- age interest rate sensitivity so that movements in interest rates do not significantly adversely affect net interest income. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciate or depreciate in market value. Gains or losses on the derivative instruments that are linked to the hedged fixed-rate assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation. Interest income and interest expense on hedged variable-rate assets and liabilities, respectively, increases or decreases as a result of inter- est rate fluctuations. Gains and losses on the derivative instruments that are linked to these hedged assets and liabilities are expected to substantially offset this variability in earnings. Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options and futures, allow the Corporation to effectively manage its interest rate risk position. Non- leveraged generic interest rate swaps involve the exchange of fixed-rate and variable-rate interest payments based on the contractual under- lying notional amount. Basis swaps involve the exchange of interest payments based on the contractual underlying notional amounts, where both the pay rate and the receive rate are floating rates based on different indices. Option products primarily consist of caps, floors, swaptions and options on index futures contracts. Futures contracts used for ALM activities are primarily index futures providing for cash payments based upon the movements of an underlying rate index. The Corporation uses foreign currency contracts to manage the foreign exchange risk associated with certain foreign-denominated assets and liabilities, as well as the Corporation’s equity investments in foreign subsidiaries. Foreign exchange contracts, which include spot, futures and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Foreign exchange option contracts are similar to interest rate option contracts except that they are based on currencies rather than interest rates. Exposure to loss on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate. BANK OF AMERICA 2002 87 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 types of con- tracts to protect against changes in the cash flows of its variable-rate assets and liabilities and anticipated transactions. In 2002, the Corporation recognized in the Consolidated Statement of Income a net loss of $22 million (included in interest income) which represented the ineffective portion of fair value hedges. In 2001, there were no material gains or losses recognized which represented the ineffective portion of fair value hedges. In 2002, the Corporation recognized in the Consolidated Statement of Income a net loss of $28 million (included in interest income and mortgage banking income) which represented the ineffective portion of cash flow hedges. In 2001, there were no signifi- cant gains or losses recognized which represented the ineffective por- tion of cash flow hedges. At December 31, 2002 and 2001, the Corporation has determined that there were no hedging positions where it was probable that certain forecasted transactions may not occur within the originally designated time period. For cash flow hedges, gains and losses on derivative contracts reclassified from accumulated other comprehensive income to current period earnings are included in the line item in the Consolidated Statement of Income in which the hedged item is recorded and in the same period the hedged item affects earnings. Deferred net gains on derivative instruments of approximately $521 million (pre-tax) included in accumulated other comprehensive income at December 31, 2002 are expected to be reclassified into earnings during the next twelve months. These net gains reclassified into earnings are expected to increase income or reduce expense on the hedged items. Hedges of Net Investments in Foreign Operations The Corporation uses forward exchange contracts, currency swaps and nonderivative cash instruments that provide an economic hedge on its net investments in foreign operations against adverse movements in foreign currency exchange rates. In 2002 and 2001, the Corporation experienced net foreign currency pre-tax gains of $103 million and pre- tax losses of $138 million, respectively, related to its net investments in foreign operations. These gains and losses were recorded as a component of the foreign currency translation adjustment in other comprehensive income. These gains and losses were largely offset by net pre-tax losses of $102 million and net pre-tax gains of $132 million related to derivative and non-derivative instruments designated as hedges of this currency exposure during these same periods. NOTE 6 Outstanding Loans and Leases Outstanding loans and leases at December 31, 2002 and 2001 were: (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total 2002 $ 105,053 19,912 19,910 295 145,170 108,197 23,236 31,068 8,384 24,729 1,971 197,585 2001 $ 118,205 23,039 22,271 383 163,898 78,203 22,107 30,317 12,652 19,884 2,092 165,255 $ 342,755 $ 329,153 The following table presents the recorded investment in specific loans that were considered individually impaired in accordance with SFAS 114 at December 31, 2002 and 2001: (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total impaired loans 2002 $ 2,553 1,355 157 2 $ 4,067 2001 $ 3,138 501 240 – $ 3,879 The average recorded investment in certain impaired loans for 2002, 2001, and 2000 was approximately $3.9 billion, $3.7 billion and $3.0 billion, respectively. At December 31, 2002 and 2001, the recorded investment in impaired loans requiring an allowance for credit losses was $4.0 billion and $3.1 billion, and the related allowance for credit losses was $919 million and $763 million, respectively. For 2002, 2001 and 2000, interest income recognized on impaired loans totaled $156 million, $195 million and $174 mil- lion, respectively, all of which was recognized on a cash basis. At December 31, 2002 and 2001, nonperforming loans, including certain loans which were considered impaired, totaled $5.0 billion and $4.5 billion, respectively. In addition, included in other assets was $120 million and $1.0 billion of nonperforming assets at December 31, 2002 and 2001, respectively. Foreclosed properties amounted to $225 million and $402 mil- lion at December 31, 2002 and 2001, respectively. The cost of carrying foreclosed properties amounted to $7 million, $15 million and $12 mil- lion in 2002, 2001, and 2000, respectively. 88 BANK OF AMERICA 2002 NOTE 7 Allowance for Credit Losses The table below summarizes the changes in the allowance for credit losses on loans and leases for 2002, 2001 and 2000: (Dollars in millions) Balance, January 1 Loans and leases charged off Recoveries of loans and leases previously charged off Net charge-offs Provision for credit losses Other, net Balance, December 31 NOTE 8 Special Purpose Financing Entities 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. See Note 1 for a more detailed discussion of securitizations. Mortgage Banking In conjunction with or shortly after closing, the Corporation securitizes the majority of its mortgage loan originations. In 2002 and 2001, the Corporation converted a total of $53.7 billion (including $2.8 billion originated by other entities on behalf of the Corporation) and $52.9 bil- lion, respectively, of residential first mortgages into mortgage-backed securities issued through Fannie Mae, Freddie Mac, Ginnie Mae and Bank of America Mortgage Securities. The Corporation did not retain any of the securities issued in 2002. At December 31, 2002, $1.8 billion of securities issued prior to 2002 had been retained. At December 31, 2001, the Corporation had retained $9.7 billion in securities. These retained interests are valued using quoted market values. For 2002, the Corporation reported $480 million in gains on loans converted into securities and sold, of which $408 million was from loans originated by the Corporation and $72 million was from loans originated by other entities on behalf of the Corporation. For 2001, the Corporation reported $637 million in gains on loans converted into securities and sold. At December 31, 2002, the Corporation had recourse obligations of $5.9 billion with varying terms up to seven years on loans that had been securitized and sold. In addition to the retained interests in the securities, the Corporation has retained the servicing asset and Excess Spread Certificates (the Certificates) from securitized mortgage loans (see the Mortgage Banking Assets section of Note 1). Mortgage Certificate and servicing fee income on all loans serviced, including securitizations, was $944 million and $1.1 billion in 2002 and 2001, respectively. 2002 $ 6,875 (4,460) 763 (3,697) 3,697 (24) 2001 $ 6,838 (4,844) 600 (4,244) 4,287 (6) 2000 $ 6,828 (2,995) 595 (2,400) 2,535 (125) $ 6,851 $ 6,875 $ 6,838 The Certificates of $2.1 billion at December 31, 2002 compared to $3.9 billion at December 31, 2001 are classified as mortgage banking assets and marked to market with the unrealized gains or losses recorded in trading account profits. The fair value of the Certificates decreased primarily due to an increase in mortgage prepayments and expected future prepayments, that resulted primarily from a signifi- cant decrease in mortgage interest rates. At December 31, 2002, key economic assumptions and the sensitivities of the fair value of the Certificates to immediate changes in those assumptions were ana- lyzed. The sensitivity analysis included the impact on fair value of modeled prepayment and discount rate changes under favorable and adverse conditions. A decrease of 10 percent and 20 percent in mod- eled prepayments would result in an increase in value ranging from $188 million to $406 million, and an increase in modeled prepay- ments of 10 percent and 20 percent would result in a decrease in value ranging from $163 million to $305 million. A decrease of 100 and 200 basis points in the discount rate would result in an increase in value ranging from $87 million to $182 million, and an increase in the discount rate of 100 and 200 basis points would result in a decrease in value ranging from $80 million to $153 million. See Note 1 for additional disclosures related to the Certificates. Other Securitizations In December 2001, in conjunction with the strategic decision to exit the subprime real estate lending business, the Corporation securi- tized $17.5 billion of subprime real estate loans in two bond-insured transactions and retained all of the related AAA-rated securities in the available-for-sale portfolio. During 2002, the Corporation re-securi- tized and sold $10.4 billion of those securities to third parties. At December 31, 2002, $3.5 billion of the AAA-rated securities remained in the available-for-sale portfolio. The Corporation has provided protection on a subset of one consumer finance securitization in the form of a guarantee with a maximum payment of $220 million that is only paid out if over-col- lateralization is not sufficient to absorb losses and certain other conditions are met. The Corporation projects no payments will be due over the life of the contract, which is approximately seven years. BANK OF AMERICA 2002 89 Key economic assumptions used in measuring the fair value of certain residual interests (included in other assets) in securitizations and the sensitivity of the current fair value of residual cash flows to changes in those assumptions are as follows: Credit Card Consumer Finance(1) Commercial – Domestic(2) (Dollars in millions) Carrying amount of residual interests (at fair value) Balance of unamortized securitized loans(3) Weighted-average life to call (in years) Revolving structures – annual payment rate Amortizing structures – annual constant prepayment rate: Fixed rate loans Adjustable rate loans Impact on fair value of 100 bps favorable change Impact on fair value of 200 bps favorable change Impact on fair value of 100 bps adverse change Impact on fair value of 200 bps adverse change Expected credit losses(4) Impact on fair value of 10% favorable change Impact on fair value of 25% favorable change Impact on fair value of 10% adverse change Impact on fair value of 25% adverse change Residual cash flows discount rate (annual rate) Impact on fair value of 100 bps favorable change Impact on fair value of 200 bps favorable change Impact on fair value of 100 bps adverse change Impact on fair value of 200 bps adverse change $ $ $ $ $ $ $ $ 2002 123 4,732 1.47 14.2% 3 7 (3) (5) 5.6% 6 15 (7) (16) 6.0% – – – – 2001 146 7,302 1.88 14.4% 2002 $ 395 15,545 3.04 2001 $ 469 22,288 3.25 $ $ 8.1-24.5% 27.0% 15 33 (11) (18) 9.3-29.1% 27.0% – 2 (1) (2) 4.2-10.0% $ 3.9-10.0% $ 4 9 (3) (7) 7.8% 15 40 37 115 (15) (36) (37) (79) 6.0% 15.0-30.0% 15.0-30.0% 14 29 (13) (26) 42 120 (35) (77) 16 33 (15) (29) – 1 – (1) $ $ $ $ $ $ 2001 78 1,954 0.22 30.0% – – – – 1.5% 7 8 (7) (8) 6.0% – – – – (1) Consumer finance includes subprime real estate loan and manufactured housing loan securitizations, which are all serviced by third parties. (2) Commercial-domestic includes the 1997 securitization of commercial loans, which matured during 2002. (3) Balances represent securitized loans at December 31, 2002 and 2001. At December 31, 2002 and 2001, the Corporation retained in the available-for-sale portfolio $3.5 billion and $17.5 billion, respectively, of the AAA-rated bonds created from the December 2001 subprime real estate loan securitizations. (4) Annual rates of expected credit losses are presented for credit card and commercial – domestic securitizations. Cumulative lifetime rates of expected credit losses (incurred plus projected) are presented for consumer finance loans. 2001 cumulative lifetime credit loss rates for consumer finance have been restated to include interest accrued but not collected from the borrower. The sensitivities in the preceding table and related to the Certificates are hypothetical and should be used with caution. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivi- ties. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivi- ties do not reflect any hedge strategies that may be undertaken to mit- igate such risk. Static pool net credit losses are considered in determining the value of retained interests. Static pool net credit losses include actual incurred plus projected credit losses divided by the original balance of each securitization pool. Prior year expected static pool net credit loss disclosures have been restated to include interest accrued but not collected from the borrower. Expected static pool net credit losses at December 31, 2002 were 6.86, 8.28, 6.69, 5.30, 4.87 and 6.27 percent for 2001, 1999, 1998, 1997, 1996 and 1995, respec- tively. Expected static pool net credit losses at December 31, 2001 were 6.86, 6.39, 6.60, 4.95, 4.60 and 6.48 percent for 2001, 1999, 1998, 1997, 1996 and 1995, respectively. Proceeds from collections reinvested in revolving credit card securitizations were $16.1 billion and $19.4 billion in 2002 and 2001, respectively. Other cash flows received from retained interests, which represent amounts received on retained interests by the transferor other than servicing fees such as cash flows from interest-only strips, were $451 million and $605 million in 2002 and 2001, respectively, for credit card securitizations. 90 BANK OF AMERICA 2002 The Corporation reviews its loan and lease portfolio on a managed basis. Managed loans and leases are defined as on-balance sheet loans and leases as well as securitized credit card loans. New advances under these previously securitized balances will be recorded on the Corporation’s balance sheet after the revolving period of the securitization, which has the effect of increasing loans on the Corporation’s balance sheet and increasing net interest income and charge-offs, with a corresponding reduction in noninterest income. Portfolio balances, delinquency and historical loss amounts of the managed loan and lease portfolio for 2002 and 2001 were as follows: Total Principal Amount of Loans and Leases December 31, 2002 Principal Amount of Loans Past Due 90 Days or More(1) Principal Amount of Nonperforming Loans Total Principal Amount of Loans and Leases December 31, 2001 Principal Amount of Loans Past Due 90 Days or More(1) Principal Amount of Nonperforming Loans $ 132 – 91 – 223 – – 56 61 502 – 619 $ 2,781 1,359 161 3 4,304 612 66 30 19 – 6 733 $ 842 $ 5,037 $ 105,053 19,912 19,910 295 145,170 108,197 23,236 31,068 8,384 29,461 1,971 202,317 347,487 (4,732) $ 342,755 $ 120,159 23,039 22,271 383 165,852 78,203 22,107 30,317 12,652 27,186 2,092 172,557 338,409 (9,256) $329,153 $ $ 175 6 40 – 221 14 – 67 46 475 – 602 823 $ 3,123 461 240 3 3,827 556 80 27 9 – 7 679 $ 4,506 Year Ended December 31, 2002 Year Ended December 31, 2001 Average Loans and Leases Outstanding $ 110,073 21,287 21,161 408 152,929 97,204 22,807 30,264 10,533 27,352 – 2,021 190,181 343,110 (6,291) $336,819 Loans and Leases Net Losses $ 1,471 521 37 – 2,029 42 26 210 255 1,443 36 5 2,017 Net Loss Ratio(2) 1.34% 2.45 0.18 – 1.33 0.04 0.11 0.69 2.42 5.28 n/m 0.25 1.06 $ 4,046 1.18% Average Loans and Leases Outstanding $135,750 26,492 24,607 348 187,197 81,472 22,013 30,374 27,709 24,637 – 2,222 188,427 375,624 (10,177) $365,447 Loans and Leases Net Losses $ 1,949 208 39 – 2,196 26 19 250 1,026 1,174 50 5 2,550 Net Loss Ratio(2) 1.44% 0.78 0.16 – 1.17 0.03 0.09 0.82 3.70 4.76 n/m 0.22 1.35 $ 4,746 1.26% (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Foreign consumer Total consumer Total managed loans and leases Loans in revolving securitizations Total held loans and leases (Dollars in millions) Commercial – domestic Commercial – foreign Commercial real estate – domestic Commercial real estate – foreign Total commercial Residential mortgage Home equity lines Direct/Indirect consumer Consumer finance Credit card Other consumer – domestic Foreign consumer Total consumer Total managed loans and leases Loans in revolving securitizations Total held loans and leases n/m = not meaningful (1) Excludes consumer real estate loans (which are placed on nonperforming status at 90 days past due). (2) The net loss ratio is calculated by dividing managed loans and leases net losses by average managed loans and leases outstanding for each loan and lease category. BANK OF AMERICA 2002 91 Variable Interest Entities In January 2003, the FASB issued a new rule that addresses off- balance sheet financing entities. As a result, the Corporation expects that it will have to consolidate its multi-seller asset backed conduits beginning in the third quarter of 2003, as required by the rule. As of December 31, 2002, the assets of these entities were approximately $25.0 billion. The actual amount that will be consolidated is depend- ent on actions taken by the Corporation and its customers between December 31, 2002 and the third quarter of 2003. Management is assessing alternatives with regards to these entities including restruc- turing the entities and/or alternative sources of cost-efficient funding for the Corporation’s customers and expects that the amount of assets consolidated will be less than the $25.0 billion due to these actions and those of its customers. Revenues from administration, liquidity, letters of credit and other services provided to these entities were approximately $121 million in 2002 and $125 million in 2001. The new rule requires that for entities to be consolidated that those assets be initially recorded at their carrying amounts at the date the require- ments of the new rule first apply. If determining carrying amounts as required is impractical, then the assets are to be measured at fair value the first date the new rule applies. Any difference between the net amount added to the Corporation’s balance sheet and the amount of any previously recognized interest in the newly consolidated entity shall be recognized as the cumulative effect of an accounting change. Had the Corporation adopted the rule in 2002, there would have been no material impact to net income. See Note 1 of the consolidated finan- cial statements for a discussion regarding management’s estimated impact of the new rule in 2003. At December 31, 2002, the Corporation’s liquidity and letter of credit exposure associated with the multi-seller conduits administered by the Corporation was approx- imately $21.3 billion. Management does not believe losses resulting from its administration of these conduits will be material. Additionally, the Corporation has significant involvement with other VIEs that it will not likely consolidate because it is not consid- ered the primary beneficiary. In all cases, the Corporation does not absorb the majority of the entities’ losses nor does it receive a major- ity of the entities’ expected residual returns, or both. These entities facilitate client transactions, and the Corporation functions as administrator for all of these and provides either liquidity and letters of credit or derivatives to the VIE. Total assets of these entities at December 31, 2002 were approximately $11.1 billion; revenues associated with administration, liquidity, letters of credit and other services were approximately $341 million in 2002. At December 31, 2002, the Corporation’s loss exposure associated with these VIEs was approximately $5.1 billion. Management does not believe losses resulting from its involvement with these entities will be material. The Corporation consolidates certain SPEs under current account- ing guidance when it believes that consolidation is appropriate. At December 31, 2002, assets of consolidated SPEs were approximately $2.9 billion. See Note 1 for additional discussion of special purpose financ- ing entities. NOTE 9 Goodwill and Other Intangibles In accordance with SFAS 142, no goodwill amortization was recorded in 2002. Goodwill amortization expense in 2001 was $662 million. Net income in 2001 was $6.8 billion or $4.26 per share ($4.18 per share diluted). Net income adjusted to exclude goodwill amortization expense would have been $7.4 billion or $4.64 per share ($4.56 per share diluted) in 2001. The impact of goodwill amortization on net income in 2001 was $616 million or $0.38 per share (basic and diluted). Goodwill amortization expense in 2000 was $635 million. Net income in 2000 was $7.5 billion or $4.56 per share ($4.52 per share diluted). Net income adjusted to exclude goodwill amortization expense would have been $8.1 billion or $4.93 per share ($4.88 per share diluted) in 2000. The impact of goodwill amortization on net income in 2000 was $602 million or $0.37 per share ($0.36 per share diluted). At December 31, 2002 and 2001, goodwill was $7.7 billion in Consumer and Commercial Banking, $2.0 billion in Global Corporate and Investment Banking and $134 million in Equity Investments. Goodwill in Asset Management at December 31, 2002 and 2001 was $1.5 billion and $943 million, respectively, reflecting a $550 million addition representing final contingent consideration in connection with the acquisition of the remaining 50 percent of Marsico Capital Management, LLC in 2001 for $1.1 billion. All conditions related to this contingent consideration have been met. The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at December 31, 2002 and 2001 are presented below: (Dollars in millions) Core deposit intangibles Other intangibles Total December 31, 2002 December 31, 2001 Gross Carrying Value Accumulated Amortization Gross Carrying Value Accumulated Amortization $ 1,495 757 $ 2,252 $ $ 726 431 1,157 $ 1,495 730 $ 2,225 $ $ 566 365 931 Amortization expense on core deposit intangibles and other intangibles was $218 million, $216 million and $229 million in 2002, 2001 and 2000, respectively. The Corporation estimates that aggregate amortization expense will be $212 million for 2003, $209 million for 2004, $208 mil- lion for 2005, $207 million for 2006 and $118 million for 2007. 92 BANK OF AMERICA 2002 NOTE 10 Deposits The Corporation had domestic certificates of deposit of $100 thousand or greater totaling $23.0 billion and $27.1 billion at December 31, 2002 and 2001, respectively. The Corporation had other domestic time deposits of $100 thousand or greater totaling $977 million and $904 mil- lion at December 31, 2002 and 2001, respectively. Foreign office certificates of deposit and other time deposits of $100 thousand or greater totaled $16.4 billion and $28.0 billion at December 31, 2002 and 2001, respectively. The following table presents the maturities of domestic certificates of deposit of $100 thousand or greater and of other domestic time deposits of $100 thousand or greater at December 31, 2002. (Dollars in millions) CDs of $100 thousand or greater Other time deposits of $100 thousand or greater Within 3 months $ 10,393 73 Within 3-6 months $ 4,500 90 Within 6-12 months $ 3,727 84 Thereafter $ 4,367 730 Total $ 22,987 977 At December 31, 2002, the scheduled maturities for total time deposits were as follows: NOTE 11 Short-Term Borrowings and Long-Term Debt (Dollars in millions) Due in 2003 Due in 2004 Due in 2005 Due in 2006 Due in 2007 Thereafter Total $ 82,972 5,514 3,761 1,426 3,391 1,474 $ 98,538 Short-Term Borrowings Bank of America Corporation and certain other subsidiaries issue commercial paper. Commercial paper outstanding at December 31, 2002 was $114 million compared to $1.6 billion at December 31, 2001. Bank of America, N.A. maintains a domestic program to offer up to a maximum of $50.0 billion, at any one time, of bank notes with fixed or floating rates and maturities of at least seven days from the date of issue. Short-term bank notes outstanding under this program totaled $1.0 billion at December 31, 2002 compared to $2.5 billion at December 31, 2001. These short-term bank notes, along with Treasury tax and loan notes, term federal funds purchased and commercial paper, are reflected in commercial paper and other short-term borrow- ings in the Consolidated Balance Sheet. Long-Term Debt The following table presents long-term debt at December 31, 2002 and December 31, 2001: (Dollars in millions) Notes issued by Bank of America Corporation(1,2) Senior notes Fixed, ranging from 0.73% to 9.25%, due 2003 to 2028 Floating, ranging from 1.05% to 4.38%, due 2003 to 2041 Subordinated notes Fixed, ranging from 4.80% to 10.88%, due 2003 to 2032 Floating, ranging from 0.98% to 2.60%, due 2003 to 2037 Total notes issued by Bank of America Corporation Notes issued by Bank of America, N.A. and other subsidiaries(1,2) Senior notes Fixed, ranging from 1.51% to 8.50%, due 2003 to 2014 Floating, ranging from 0.25% to 5.92%, due 2003 to 2027 Subordinated notes Fixed, ranging from 7.88% to 10.78%, due 2003 to 2004 Floating, 1.38%, due 2019 December 31 2002 2001 $ 7,896 19,294 14,158 5,167 $ 46,515 $ 2,223 3,229 401 8 $ 1,029 22,526 9,926 10,795 $ 44,276 $ 893 6,643 400 8 Total notes issued by Bank of America, N.A. and other subsidiaries $ 5,861 $ 7,944 Other debt Advances from the Federal Home Loan Bank – Georgia Advances from the Federal Home Loan Bank – Oregon Floating rate asset backed certificates – Bank of America, N.A. Other Total other debt Total (1) Fixed-rate and floating-rate classifications as well as interest rates include the effect of interest rate swap contracts. (2) Rates and maturity dates reflect outstanding debt as of December 31, 2002. $ 2,749 5,992 – 28 $ 8,769 $ 61,145 $ 2,250 5,996 2,000 30 $ 10,276 $ 62,496 BANK OF AMERICA 2002 93 The majority of the floating rates are based on three- and six-month London InterBank Offered Rates (LIBOR). Bank of America Corporation and Bank of America, N.A. maintain various domestic and international debt programs to offer both senior and sub- ordinated notes. The notes may be denominated in U.S. dollars or foreign currencies. Foreign currency contracts are used to convert certain foreign-denominated debt into U.S. dollars. At December 31, 2002 and 2001, Bank of America Corporation was authorized to issue approximately $65.8 billion and $55.5 billion, respectively, of additional corporate debt and other securities under its existing shelf registration statements. At December 31, 2001, the Corporation had $1.5 billion of mort- gage-backed bonds outstanding that were collateralized by $3.0 bil- lion of mortgage loans and cash. These bonds matured in 2002 and no additional mortgage-backed bonds were issued. Including the effects of interest rate contracts for certain long-term debt issuances, the weighted average effective interest rates for total long-term debt, total fixed-rate debt and total floating-rate debt (based on the rates in effect at December 31, 2002) were 3.56 percent, 6.46 per- cent and 1.49 percent, respectively, at December 31, 2002 and (based on the rates in effect at December 31, 2001) were 3.44 percent, 7.26 per- cent, and 2.40 percent, respectively, at December 31, 2001. These obli- gations were denominated primarily in U.S. dollars. Aggregate annual maturities of long-term debt obligations (based on final maturity dates) are as follows: (Dollars in millions) Bank of America Corporation Bank of America, N.A. Other Total 2003 $ 4,212 4,007 – $ 8,219 2004 $ 6,773 423 3,906 $ 11,102 2005 $ 4,243 160 1,500 $ 5,903 2006 $ 5,512 808 2,700 $ 9,020 2007 $ 3,196 6 501 $ 3,703 Thereafter $ 22,579 457 162 $ 23,198 Total $ 46,515 5,861 8,769 $ 61,145 Subsequent to December 31, 2002 through February 18, 2003, the Corporation had issued $1.1 billion of long-term senior and subordi- nated debt, with maturities ranging from 2009 to 2028. NOTE 12 Trust Preferred Securities Trust preferred securities are issued by the Corporation through wholly owned subsidiary trusts (the Trusts). These securities are mandatorily redeemable preferred security obligations of the Trusts. The sole assets of the Trusts are Junior Subordinated Deferrable Interest Notes of the Corporation (the Notes). At December 31, 2002, the Corporation had 14 wholly-owned Trusts which have issued trust preferred securities to the public. Certain of the trust preferred securities were issued at a discount and may be redeemed prior to maturity at the option of the Corporation. The Trusts have invested the proceeds of such trust preferred securi- ties in the Notes. Each issue of the Notes has an interest rate equal to the corresponding trust preferred securities distribution rate. The Corporation has the right to defer payment of interest on the Notes at any time or from time to time for a period not exceeding five years pro- vided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the trust preferred securities will also be deferred, and the Corporation’s ability to pay dividends on its common and preferred stock will be restricted. The trust preferred securities are subject to mandatory redemp- tion upon repayment of the related Notes at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium, if any, paid by the Corporation upon concurrent repayment of the related Notes. Periodic cash payments and payments upon liquidation or redemption with respect to trust preferred securities are guaranteed by the Corporation to the extent of funds held by the Trusts (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Corporation’s other obligations, including its obligations under the Notes, will constitute a full and unconditional guarantee, on a subordinated basis, by the Corporation of payments due on the trust preferred securities. The Corporation is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative pre- ferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank and financial holding companies. Therefore, trust preferred securities provide the Corporation with another means of obtaining capital for bank regulatory purposes. 94 BANK OF AMERICA 2002 The following table is a summary of the outstanding trust preferred securities and the Notes at December 31, 2002: (Dollars in millions) Issuer NationsBank Capital Trust II Aggregate Principal Amount of Trust Preferred Securities Aggregate Principal Amount of the Notes Issuance Date Stated Maturity of the Notes Per Annum Interest Rate of the Notes Interest Payment Dates Redemption Period December 1996 $0,365 $0,376 December 2026 7.83% 6/15, 12/15 On or after Capital Trust III February 1997 Capital Trust IV April 1997 BankAmerica Institutional Capital A November 1996 Institutional Capital B November 1996 Capital II Capital III Capital IV Barnett Capital I Capital II Capital III Bank of America Capital Trust I Capital Trust II Capital Trust III Total December 1996 January 1997 February 1998 November 1996 December 1996 January 1997 December 2001 January 2002 August 2002 494 498 450 299 450 400 350 300 200 250 575 900 500 516 516 January 2027 April 2027 3-mo. LIBOR +55 bps 8.25 1/15, 4/15, 7/15, 10/15 4/15, 10/15 12/15/06(1,3) On or after 1/15/07(1) On or after 4/15/07(1,4) 464 December 2026 309 December 2026 464 December 2026 8.07 7.70 8.00 6/30, 12/31 On or after 12/31/06(2,5) 6/30, 12/31 On or after 12/31/06(2,6) 6/15, 12/15 On or after 412 361 January 2027 March 2028 3-mo. LIBOR +57 bps 7.00 1/15, 4/15, 7/15, 10/15 3/31, 6/30, 9/30, 12/31 12/15/06(2,7) On or after 1/15/02(2) On or after 2/24/03(2) 309 December 2026 206 December 2026 258 February 2027 593 December 2031 928 516 February 2032 August 2032 8.06 7.95 6/1, 12/1 On or after 12/1/06(1,8) 6/1, 12/1 On or after 3-mo. LIBOR +62.5 bps 2/1, 5/1, 8/1, 11/1 7.00 7.00 7.00 3/15, 6/15, 9/15, 12/15 2/1, 5/1, 8/1, 11/1 2/15, 5/15, 8/15, 11/15 12/1/06(1,9) On or after 2/1/07(1) On or after 12/15/06(10) On or after 2/1/07(10) On or after 8/15/07(10) $6,031 $6,228 (1) The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence of certain events relating to tax treatment of the related trust or the Notes, relating to capital treatment of the trust preferred securities or relating to a change in the treatment of the related trust under the Investment Company Act of 1940, as amended, at a redemption price at least equal to the principal amount of the Notes. (2) The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence of certain events relating to tax treatment of the related trust or the Notes or relating to capital treatment of the trust preferred securities at a redemption price at least equal to the principal amount of the Notes. (3) The Notes may be redeemed on or after December 15, 2006 and prior to December 15, 2007 at 103.915% of the principal amount, and thereafter at prices declining to 100% on December 15, 2016 and thereafter. (4) The Notes may be redeemed on or after April 15, 2007 and prior to April 14, 2008 at 103.85% of the principal amount, and thereafter at prices declining to 100% on April 15, 2017 and thereafter. (5) The Notes may be redeemed on or after December 31, 2006 and prior to December 31, 2007 at 104.035% of the principal amount, and thereafter at prices declining to 100% on December 31, 2016 and thereafter. (6) The Notes may be redeemed on or after December 31, 2006 and prior to December 31, 2007 at 103.779% of the principal amount, and thereafter at prices declining to 100% on December 31, 2016 and thereafter. (7) The Notes may be redeemed on or after December 15, 2006 and prior to December 15, 2007 at 103.969% of the principal amount, and thereafter at prices declining to 100% on December 15, 2016 and thereafter. (8) The Notes may be redeemed on or after December 1, 2006 and prior to December 1, 2007 at 104.03% of the principal amount, and thereafter at prices declining to 100% on December 1, 2016 and thereafter. (9) The Notes may be redeemed on or after December 1, 2006 and prior to December 1, 2007 at 103.975% of the principal amount, and thereafter at prices declining to 100% on December 1, 2016 and thereafter. (10) The Corporation may redeem the Notes prior to the indicated redemption period upon the occurrence and certification of a tax event, an investment company event or a capital treatment event. The Corporation may extend the stated maturity date of the junior subordinated notes to a date no later than December 15, 2050. BANK OF AMERICA 2002 95 NOTE 13 Commitments and Contingencies In the normal course of business, the Corporation enters into a num- ber 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 balance sheet. 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 unfunded commitments shown in the following table have been reduced by amounts participated to other financial institutions of $10.2 billion and $2.2 billion at December 31, 2002 and 2001, respec- tively. The following table summarizes outstanding unfunded commit- ments to extend credit at December 31, 2002 and 2001. (Dollars in millions) Loan commitments Standby letters of credit and financial guarantees Commercial letters of credit Legally binding commitments Credit card lines Total commitments 2002 2001 $ 212,704 $ 221,529 30,837 3,109 246,650 73,779 32,416 3,581 257,526 73,644 $ 320,429 $ 331,170 Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterio- ration in the borrowers’ ability to pay. Loan commitments include equity commitments of approximately $2.2 billion and $2.5 billion at December 31, 2002 and 2001, respectively, which primarily relate to obligations to fund existing venture capital equity investments. The Corporation issues SBLCs and financial guarantees to sup- port the obligations of its customers to beneficiaries. Based on histor- ical trends, the probability that the Corporation would have to make payments under a SBLC is not likely. Additionally, in many cases, the Corporation holds collateral in various forms against these SBLCs. As part of its risk management activities, the Corporation continuously monitors the credit-worthiness of the customer as well as SBLC expo- sure; however, if the customer fails to perform the specified obligation to the beneficiary, the beneficiary may draw upon the SBLC by pre- senting documents that are in compliance with the letter of credit terms. In that event, the Corporation either repays the money bor- rowed or advanced, makes payment on account of the indebtedness of the customer or makes payment on account of the default by the customer in the performance of an obligation, to the beneficiary up to the full notional amount of the SBLC. The customer is obligated to reimburse the Corporation for any such payment. If the customer fails to pay, the Corporation would, as applicable, liquidate collateral and/or set off accounts. Commercial letters of credit, issued primarily to facilitate customer trade finance activities, are usually collateralized by the underlying goods being shipped to the customer and are generally short-term. Credit card lines are unsecured commitments that are not legally bind- ing. Management reviews credit card lines at least annually, and upon evaluation of the customers’ creditworthiness, the Corporation has the right to terminate or change certain terms of the credit card lines. The Corporation uses various techniques to manage risk asso- ciated with these types of instruments including obtaining collateral and/or adjusting commitment amounts based on the borrower’s financial condition; therefore, the total commitment amount does not necessarily represent the actual risk of loss or future cash require- ments. For each of these types of instruments, the Corporation’s exposure to credit loss is represented by the contractual amount of these instruments. 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 December 31, 2002, the Corporation had commit- ments to purchase and sell when-issued securities of $166.1 billion and $164.5 billion, respectively. At December 31, 2001, the Corporation had commitments to purchase and sell when-issued securities of $45.0 bil- lion and $39.6 billion, respectively. The increase was primarily attributa- ble to higher volumes of mortgage refinancings in the current low interest rate environment. At December 31, 2002, the Corporation had forward whole mort- gage loan purchase commitments of $10.8 billion, all of which were settled in January 2003. At December 31, 2002, the Corporation had no forward whole mortgage loan sale commitments. The Corporation has entered into operating leases for certain of its premises and equipment. Commitments under these leases approximate $1.0 billion per year for each of the years 2003 through 2007 and $2.2 billion for all years thereafter. Other Guarantees The Corporation sells products that offer book value protection pri- marily to plan sponsors of ERISA-governed pension plans such as 401(k) plans, 457 plans, etc. The book value protection is provided on portfolios of intermediate/short-term investment grade fixed income securities and is intended to cover any shortfall in the event that plan participants withdraw funds when market value is below book value. The Corporation retains the option to exit the contract at any time. If the Corporation exercises its option, the purchaser can require the Corporation to purchase zero coupon bonds with the proceeds of the liquidated assets to assure the return of principal. To hedge its expo- sure, the Corporation imposes significant restrictions and constraints on the timing of the withdrawals, the manner in which the portfolio is liquidated and the funds are accessed and the investment parameters of the underlying portfolio. These constraints, combined with struc- tural protections, are designed to provide adequate buffers and guard 96 BANK OF AMERICA 2002 against payments even under extreme stress scenarios. These guaran- tees are booked as derivatives and marked to market in the trading port- folio. At December 31, 2002, the notional amount of these guarantees totaled $19.7 billion. As of December 31, 2002, the Corporation has never 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. These guarantees cover a broad range of underlying asset classes and are designed to cover the shortfall between the market value of the underlying portfolio and the principal amount on the preset future date. To manage its exposure, the Corporation requires that these guarantees be backed by structural and investment constraints and certain pre-defined triggers that would require the underlying assets or portfolio to be liquidated and invested in zero-coupon bonds that mature at the preset future date. The Corporation is required to fund any shortfall at the preset future date between the proceeds of the liquidated assets and the purchase price of the zero-coupon bonds. These guarantees are booked as derivatives and marked to market in the trading portfolio. At December 31, 2002, the notional amount of these guarantees totaled $4.1 billion; however, as of December 31, 2002, the Corporation has never made a payment under these products, and management believes that the probability of pay- ments under these guarantees is remote. In the ordinary course of business, the Corporation enters into various agreements that contain indemnifications, such as tax indem- nifications, whereupon payment may become due if certain external events occur, such as a change in tax law. These agreements typically contain an early termination clause that permits the Corporation to exit the agreement upon these events. The maximum potential future payment under indemnification agreements is difficult to assess for several reasons, including the inability to predict future changes in tax and other laws, the difficulty in determining how such laws would apply to parties in contracts, the absence of exposure limits contained in standard contract language and the timing of the early termination clause. Historically, any payments made under these guarantees have been de minimis. Management has assessed the probability of making such payments in the future as remote. The Corporation has entered into additional guarantee agree- ments, including lease end obligation agreements, partial credit guar- antees on certain leases, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements is approximately $575 million at December 31, 2002. For additional information on recourse obligations related to mortgage loans sold and other guarantees related to securitizations, see Note 8 of the consolidated financial statements. Litigation In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries and certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking and other laws. In view of the inherent difficulty of predicting the outcome of such matters, the Corporation cannot state what the eventual out- come of pending matters will be; however, based on current knowl- edge, management does not believe that liabilities, if any, arising from pending litigation, including the litigation described below, will have a material adverse effect on the consolidated financial position, operations or liquidity of the Corporation. D.E. Shaw Litigation Following the merger of NationsBank Corporation and BankAmerica Corporation in September 1998, the Corporation and certain of its offi- cers and directors were named as defendants in class actions brought on behalf of persons who purchased NationsBank or BankAmerica shares between August 4, 1998 and September 30, 1998; persons who purchased shares of the Corporation between October 1 and October 13, 1998, and persons who held NationsBank or BankAmerica shares as of the merger. The claims on behalf of the purchasers and the persons who held NationsBank shares as of the merger principally rested on the allegation that the Corporation or its predecessors failed to disclose material facts concerning a $1.4 billion financial relation- ship between BankAmerica Corporation and D.E. Shaw & Co. that resulted in a $372 million charge to the Corporation’s earnings in the quarter ending September 30, 1998. The claims of the persons who held BankAmerica shares as of the merger principally rested on the allegation that the defendants misrepresented a “takeover” of BankAmerica Corporation as a “merger of equals.” On November 2, 2002, the United States District Court for the Eastern District of Missouri (the “Federal Court”), the Court to which all federal actions had been transferred, entered a final judgment dismissing the actions with prejudice. The Court entered the judgment after approving a settlement providing for payment of $333 million to the classes of purchasers and holders of NationsBank shares and $157 million to the classes of purchasers of BankAmerica and Corporation shares and holders of BankAmerica shares (all amounts to bear interest at the 90-day Treasury Bill Rate from March 6, 2002 to the date of payment). There remain pending several actions in California that have been stayed since April 2000, when the Federal Court enjoined the plaintiffs in those actions from purporting to prosecute their claims on behalf of a class. Several class members, including two lead plaintiffs, are appealing from the Federal Court’s judgment to the United States Court of Appeals for the Eighth Circuit. BANK OF AMERICA 2002 97 Enron Corporation Securities Litigation On April 8, 2002, the Corporation was named as a defendant along with, among others, commercial and investment banks, certain current and former Enron officers and directors, lawyers and accountants in a putative consolidated class action complaint filed in the United States District Court for the Southern District of Texas alleging violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. On May 8, 2002, the Corporation filed a motion to dismiss the complaint and on December 20, 2002, the court granted the motion in part, dismissing the claims asserted under Section 10(b) and Rule 10b-5 of the Exchange Act. A Section 11 claim on a single securi- ties offering remains pending against the Corporation. In addition, other Enron-related individual and class actions have been filed against the Corporation and certain of its affiliates, based upon its role as underwriter of certain Enron debt or equity offerings, along with other investment banks and other parties. The complaints generally assert claims under federal and state securities laws, other state statutes and under common law theories. WorldCom, Inc. Securities Litigation Banc of America Securities LLC (“BAS”) and other underwriters of WorldCom, Inc. bonds issued in 2000 and 2001 have been named as defendants in certain lawsuits alleging that the offering materials were false and misleading. One of the lawsuits is a purported class action, filed July 10, 2002 in the U.S. District Court for the Southern District of New York. On October 11, 2002, the action was superceded by the filing of a consolidated putative class action complaint entitled In re WorldCom, Inc. Securities Litigation. This action alleges vio- lations by the underwriters of the federal securities law, including Sections 11 and 12 of the Securities Act of 1933 in connection with 2000 and 2001 bond offerings and is brought on behalf of purchasers and acquirers of bonds issued in or traceable to these offerings. In addition, the Corporation or BAS, along with other underwrit- ers, certain executives of WorldCom and WorldCom’s auditors, have also been named as defendants in approximately eighteen individual actions that were filed in either federal or state courts beginning in July 2002 arising out of alleged accounting irregularities in the books and records of WorldCom. Plaintiffs in these actions are typically institu- tional investors, including state pension funds, who purchased debt securities issued by WorldCom pursuant to public offerings in 1997, 1998, 2000 or 2001. The complaints generally assert claims under federal and state securities laws, other state statutes and under common law theories. NOTE 14 Shareholders’ Equity and Earnings Per Common Share On December 11, 2001, the Corporation’s Board of Directors (the Board) authorized a stock repurchase program of up to 130 million shares of the Corporation’s common stock at an aggregate cost of up to $10.0 billion. At December 31, 2002, the remaining buyback authority for common stock under this program totaled $2.6 billion, or 24 million shares. On July 26, 2000, the Board authorized a stock repurchase program of up to 100 million shares of the Corporation’s common stock at an aggregate cost of up to $7.5 billion. The 2000 repurchase plan was completed in 2002. During 2002, the Corporation repurchased approximately 109 mil- lion shares of its common stock in open market repurchases and under accelerated repurchase programs at an average per-share price of $68.55, which reduced shareholders’ equity by $7.5 billion and increased earnings per share by approximately $0.22. These repur- chases were partially offset by the issuance of 50 million shares of com- mon stock under employee plans, which increased shareholders’ equity by $2.6 billion and decreased earnings per share by approximately $0.11 in 2002. During 2001, the Corporation repurchased approximately 82 million shares of its common stock in open market repurchases at an average per-share price of $57.58, which reduced shareholders’ equity by $4.7 billion. These repurchases were partially offset by the issuance of 27 million shares of common stock under employee plans, which increased shareholders’ equity by $1.1 billion. The Corporation antici- pates it will continue to repurchase shares at least equal to shares issued under its various stock option plans. On January 22, 2003, the Board authorized a stock repurchase program of up to 130 million shares of the Corporation’s common stock at an aggregate cost of $12.5 billion. At December 31, 2002, the Corporation had 1.3 million shares issued and outstanding of ESOP Convertible Preferred Stock, Series C (ESOP Preferred Stock). The ESOP Preferred Stock has a stated and liquidation value of $42.50 per share, provides for an annual cumu- lative dividend of $3.30 per share and each share is convertible into 1.68 shares of the Corporation’s common stock. ESOP Preferred Stock in the amounts of $7 million for both 2002 and 2001 and $5 million in 2000 was converted into the Corporation’s common stock. Pre-tax net gains recorded in other comprehensive income related to available-for-sale and marketable equity securities, foreign currency translation adjustments, derivatives and other were $2.7 bil- lion, $1.9 billion and $2.8 billion in 2002, 2001 and 2000, respectively. Pre-tax reclassification adjustments to net income of $780 million, $715 million and $105 million were recorded in 2002, 2001 and 2000, respectively. The related income tax expense was $1.1 billion, $30 mil- lion and $800 million in 2002, 2001 and 2000, respectively. Included in shareholders’ equity at December 31, 2002 and 2001 were premiums written on put options of $47 million and $14 million, respectively, and restricted stock award plan deferred compensation of $31 million and $52 million, respectively. The Corporation sells put options on its common stock to inde- pendent third parties. The put option program was designed to par- tially offset the cost of share repurchases. The put options give the holders the right to sell shares of the Corporation’s common stock to the Corporation on certain dates at specified prices. The put option contracts allow the Corporation to determine the method of settle- ment, and the premiums received are reflected as a component of other shareholders’ equity. The put options are accounted for as per- manent equity, and accordingly, there is no impact on the income statement. No other derivative contracts are used in the Corporation’s repurchase programs. 98 BANK OF AMERICA 2002 The calculation of earnings per common share and diluted earnings per common share for 2002, 2001 and 2000 is presented below. See Note 1 for a discussion on the calculation of earnings per share. (Dollars in millions, except per share information; shares in thousands) 2002 2001 2000 Earnings per common share Net income Preferred stock dividends Net income available to common shareholders Average common shares issued and outstanding Earnings per common share Diluted earnings per common share Net income available to common shareholders Preferred stock dividends Net income available to common shareholders and assumed conversions Average common shares issued and outstanding Dilutive potential common shares(1,2) Total diluted average common shares issued and outstanding Diluted earnings per common share $ 9,249 (5) $ 9,244 1,520,042 $ 6.08 $ 9,244 5 $ 9,249 1,520,042 45,425 1,565,467 $ 5.91 $ 6,792 (5) $ 6,787 1,594,957 $ 4.26 $ 6,787 5 $ 6,792 1,594,957 30,697 1,625,654 $ 4.18 $ 7,517 (6) $ 7,511 1,646,398 $ 4.56 $ 7,511 6 $ 7,517 1,646,398 18,531 1,664,929 $ 4.52 (1) For 2002, 2001 and 2000, average options to purchase 22 million, 85 million and 108 million shares, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive. (2) Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units and stock options. NOTE 15 Regulatory Requirements and Restrictions The Federal Reserve Board requires the Corporation’s banking sub- sidiaries to maintain reserve balances based on a percentage of cer- tain deposits. Average daily reserve balances required by the Federal Reserve Board were $3.7 billion and $4.0 billion for 2002 and 2001, respectively. Currency and coin residing in branches and cash vaults (vault cash) are used to partially satisfy the reserve requirement. The average daily reserve balances, in excess of vault cash, held with the Federal Reserve Bank amounted to $95 million and $128 million for 2002 and 2001, respectively. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its banking subsidiaries. The subsidiary national banks can initiate aggregate dividend payments in 2003, without prior regulatory approval, of $4.6 billion plus an additional amount equal to their net profits for 2003, as defined by statute, up to the date of any such dividend dec- laration. The amount of dividends that each subsidiary bank may declare in a calendar year without approval by the Office of the Comptroller of the Currency (OCC) is the subsidiary bank’s net profits for that year combined with its net retained profits, as defined, for the preceding two years. The Federal Reserve Board, the OCC and the Federal Deposit Insurance Corporation (collectively, the Agencies) have issued regula- tory capital guidelines for U.S. banking organizations. Failure to meet the capital requirements can initiate certain mandatory and discre- tionary actions by regulators that could have a material effect on the Corporation’s financial statements. At December 31, 2002 and 2001, the Corporation and Bank of America, N.A. were classified as well- capitalized under this regulatory framework. There have been no conditions or events since December 31, 2002 that management believes have changed either the Corporation’s or Bank of America, N.A.’s capital classifications. The regulatory capital guidelines measure capital in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. Under the regulatory capital guidelines, Total Capital consists of three tiers of capital. Tier 1 Capital includes common shareholders’ equity, trust preferred securities, minority interests and qualifying preferred stock, less goodwill and other adjustments. Tier 2 Capital consists of preferred stock not qualifying as Tier 1 Capital, mandatory convertible debt, limited amounts of sub- ordinated debt, other qualifying term debt, the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjust- ments. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval by the Federal Reserve Board and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. Tier 3 capital can only be used to satisfy the Corporation’s market risk capital requirement and may not be used to support its credit risk requirement. At December 31, 2002 and 2001, the Corporation had no subordinated debt that qualified as Tier 3 capital. To meet minimum, adequately capitalized regulatory require- ments, an institution must maintain a Tier 1 Capital ratio of four per- cent and a Total Capital ratio of eight percent. A well-capitalized institution must generally maintain capital ratios 100 to 200 basis points higher than the minimum guidelines. The risk-based capital rules have been further supplemented by a leverage ratio, defined as Tier 1 capital divided by average total assets, after certain adjust- ments. The leverage ratio guidelines establish a minimum of 100 to 200 basis points above three percent. Banking organizations must maintain a leverage capital ratio of at least five percent to be clas- sified as well-capitalized. Unrealized gains on available-for-sale securities and marketable equity securities and the net gains (losses) on derivatives included in shareholders’ equity at December 31, 2002 and 2001 are excluded from the calculations of Tier 1 Capital, Total Capital and leverage ratios. BANK OF AMERICA 2002 99 The following table presents the regulatory risk-based capital ratios, actual capital amounts and minimum required capital amounts for the Corporation, Bank of America, N.A. and Bank of America, N.A. (USA) at December 31, 2002 and 2001: nnnnnnnnnnnnnnnnnnnnnnnnnnnnnn(cid:1) (Dollars in millions) Tier 1 Capital Bank of America Corporation Bank of America, N.A. Bank of America, N.A. (USA) Total Capital Bank of America Corporation Bank of America, N.A. Bank of America, N.A. (USA) Leverage Bank of America Corporation Bank of America, N.A. Bank of America, N.A. (USA) 2002 2001 Actual Minimum Actual Minimum Ratio Amount Required(1) Ratio Amount Required(1) 8.22% 8.61 8.95 $ 43,012 40,072 2,346 $ 20,930 18,622 1,049 8.30% 9.25 7.66 $ 41,972 42,161 1,688 $ 20,243 18,225 882 12.43 11.40 11.97 6.29 7.02 9.58 65,064 53,091 3,137 43,012 40,072 2,346 41,860 37,244 2,098 27,335 22,846 980 12.67 12.55 10.98 6.56 7.59 8.35 64,118 57,192 2,420 41,972 42,161 1,688 40,487 36,450 1,763 25,604 22,233 809 (1) Dollar amount required to meet the Agencies’ guidelines for adequately capitalized institutions. NOTE 16 Employee Benefit Plans Pension and Postretirement Plans The Corporation sponsors noncontributory trusteed qualified pension plans that cover substantially all officers and employees. The plans provide defined benefits based on an employee’s compensation, age and years of service. The Bank of America Pension Plan (the Pension Plan) provides participants with compensation credits, based on age and years of service. The Pension Plan allows participants to select from various earnings measures, which are based on the returns of certain funds managed by subsidiaries of the Corporation or common stock of the Corporation. The participant-selected earnings measures determine the earnings rate on the individual participant account balances in the Pension Plan. Participants may elect to modify earnings measure alloca- tions on a daily basis. The benefits become vested upon completion of five years of service. It is the policy of the Corporation to fund not less than the minimum funding amount required by ERISA. The Corporation made a voluntary contribution to the Pension Plan of $700 million and $500 million in 2002 and 2001, respectively. The Pension Plan has a balance guarantee feature, applied at the time a benefit payment is made from the plan, that protects participant balances transferred and certain compensation credits from future market downturns. The Corporation is responsible for funding any shortfall on the guarantee feature. In 2002, a one-time curtailment charge resulted from freezing benefits for supplemental executive retirement agreements. In 2000, a curtailment resulted from employee terminations in connection with the Corporation’s reduction in number of associates. The Corporation sponsors a number of noncontributory, non- qualified pension plans. These plans, which are unfunded, provide defined pension benefits to certain employees. In addition to retirement pension benefits, full-time, salaried employees and certain part-time employees may become eligible to continue participation as retirees in health care and/or life insurance plans sponsored by the Corporation. Based on the other provisions of the individual plans, certain retirees may also have the cost of these benefits partially paid by the Corporation. 100 BANK OF AMERICA 2002 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) The following table summarizes the changes in fair value of plan assets, changes in projected benefit obligations (PBO), the funded status of the PBO and the weighted average assumptions for the pension plans and postretirement plans for the years ended December 31, 2002 and 2001. Prepaid and accrued benefit costs are reflected in other assets and other liabilities, respectively, in the Consolidated Balance Sheet. For the Pension Plan, the asset valua- tion method recognizes 60 percent of the market gains or losses in the first year, with the remaining 40 percent spread equally over the next four years. For both the Pension Plan and the Postretirement Health and Life Plans, the expected long-term return on plan assets will be 8.50% for 2003. (Dollars in millions) Change in fair value of plan assets (Primarily listed stocks, fixed income and real estate) Fair value at January 1 Actual return on plan assets Company contributions Plan participant contributions Acquisition/transfer Benefits paid Fair value at December 31 Change in projected benefit obligation Projected benefit obligation at January 1 Service cost Interest cost Plan participant contributions Plan amendments Actuarial loss (gain) Acquisition/transfer Effect of curtailments Effect of special termination benefits Benefits paid Projected benefit obligation at December 31 Funded status at December 31 Accumulated Benefit Obligation (ABO) Overfunded (unfunded) status of ABO Provision for future salaries Projected Benefit Obligation (PBO) Overfunded (unfunded) status of PBO Unrecognized net actuarial loss Unrecognized transition obligation Unrecognized prior service cost Prepaid (accrued) benefit cost Weighted average assumptions at December 31 Discount rate Expected return on plan assets Rate of compensation increase Qualified Pension Plan Nonqualified Pension Plans Postretirement Health and Life Plans 2002 2001 2002 2001 2002 2001 $ 8,264 (722) 700 – – (724) $ 7,518 $ 7,606 199 540 – 6 – – – – (724) $ 7,627 $ 7,264 254 363 7,627 $ (109) 2,422 – 419 $ 2,732 $8,652 (154) 500 – 16 (750) $8,264 $ 8,011 202 560 – – (434) 17 – – (750) $7,606 $7,263 1,001 343 7,606 $ 658 954 – 468 $2,080 $ – – 39 – – (39) $ – – 98 – – (98) $ – $ – $ 529 27 44 – (4) 108 – (15) 2 (39) $ 652 $ 573 (573) 79 652 $ (652) 168 1 21 $ (462) $ 534 22 40 – 2 9 20 – – (98) $ 529 $ 459 (459) 70 529 $ (529) 86 1 61 $ (381) $ 194 (13) 84 49 – (133) $ 181 $ 944 11 67 49 8 112 – – – (133) $1,058 $ N/A N/A N/A 1,058 $ (877) 147 323 46 $ (361) $ 208 (14) 69 41 – (110) $ 194 $ 840 11 64 41 29 69 – – – (110) $ 944 $ N/A N/A N/A 944 $ (750) 45 355 44 $ (306) 6.75% 8.50 4.00 7.25% 10.00 4.00 6.75% N/A 4.00 7.25% N/A 4.00 6.75% 8.50 N/A 7.25% 10.00 N/A Net periodic pension benefit cost for the years ended December 31, 2002, 2001 and 2000, included the following components: (Dollars in millions) Components of net periodic pension benefit cost (income) Service cost Interest cost Expected return on plan assets Amortization of transition obligation (asset) Amortization of prior service cost Recognized net actuarial loss Recognized loss (gain) due to settlements and curtailments Net periodic pension benefit cost (income) Qualified Pension Plan Nonqualified Pension Plans 2002 2001 2000 2002 2001 2000 $ 199 540 (746) – 55 – – $ 48 $ 202 560 (876) (2) 54 – – $ (62) $ 153 519 (813) (4) 38 – (11) $ (118) $ $ 27 44 – – 10 11 26 $ 118 $ 22 40 – – 11 7 6 86 $ $ 10 39 – 1 10 9 – 69 BANK OF AMERICA 2002 101 For the years ended December 31, 2002, 2001 and 2000, net periodic postretirement benefit cost included the following components: (Dollars in millions) Components of net periodic postretirement benefit cost (income) Service cost Interest cost Expected return on plan assets Amortization of transition obligation Amortization of prior service cost (credit) Recognized net actuarial loss (gain) Recognized loss due to settlements and curtailments Net periodic postretirement benefit cost Net periodic postretirement health and life expense was determined using the “projected unit credit” actuarial method. Gains and losses for all benefits except postretirement health care are recognized in accordance with the minimum amortization provisions of the applica- ble accounting standards. For the postretirement health care plans, 50 percent of the unrecognized gain or loss at the beginning of the fiscal year (or at subsequent remeasurement) is recognized on a level basis during the year. Assumed health care cost trend rates affect the postretirement benefit obligation and benefit cost reported for the health care plan. The assumed health care cost trend rates used to measure the expected cost of benefits covered by the postretirement health care plans was 10.0 percent for 2003, reducing in steps to 5.0 percent in 2006 and later years. A one-percentage-point increase in assumed health care cost trend rates would have increased the service and interest costs and the benefit obligation by $5 million and $61 million, respectively, in 2002, $6 million and $52 million, respectively, in 2001 and $9 million and $49 million, respectively, in 2000. A one-percent- age-point decrease in assumed health care cost trend rates would have lowered the service and interest costs and the benefit obligation by $4 million and $52 million, respectively, in 2002, $4 million and $45 million, respectively, in 2001 and $7 million and $40 million, respectively, in 2000. Defined Contribution Plans The Corporation maintains a qualified defined contribution retirement plan and a nonqualified defined contribution retirement plan. There are two components of the qualified defined contribution plan, the Bank of America 401(k) Plan (the “401(k) Plan”): an employee stock ownership plan (ESOP) and a profit-sharing plan. Prior to 2001, the ESOP component of the 401(k) Plan featured leveraged ESOP provisions. See Note 14 of the consolidated financial statements for additional information on the ESOP provisions. 2002 $ 11 67 (17) 32 6 40 – $ 139 2001 $ 11 65 (21) 32 4 20 – $ 111 2000 $ 11 58 (20) 37 (3) (45) 20 $ 58 The Corporation contributed approximately $200 million, $196 mil- lion, and $163 million for 2002, 2001 and 2000, respectively, in cash and stock which was utilized primarily to purchase the Corporation’s com- mon stock under the terms of the 401(k) Plan. At December 31, 2002 and 2001, an aggregate of 44 million shares and 45 million shares, respectively, of the Corporation’s common stock and 1 million shares and 2 million shares, respectively, of ESOP preferred stock were held by the Corporation’s 401(k) Plan. Under the terms of the ESOP Preferred Stock provision, payments to the plan for dividends on the ESOP Preferred Stock were $5 million for both 2002 and 2001 and $6 million for 2000. Payments to the plan for dividends on the ESOP Common Stock were $34 million, $27 mil- lion, and $22 million during the same periods. Interest incurred to service the debt of the ESOP Preferred Stock and ESOP Common Stock amounted to $0.3 million and $3 million for 2001 and 2000, respec- tively. As of December 31, 2001, all principal and interest associated with the debt of the ESOP Preferred Stock and ESOP Common Stock have been repaid. In addition, certain non-U.S. employees within the Corporation are covered under defined contribution pension plans that are sepa- rately administered in accordance with local laws. NOTE 17 Stock Incentive Plans At December 31, 2002, the Corporation had certain stock-based compensation plans which are described below. For all stock-based compensation awards issued prior to January 1, 2003, the Corporation applies the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock option and award plans. Stock-based compensation plans enacted after December 31, 2002 will be accounted for under the provisions of SFAS 123. For additional information on the accounting for stock-based compensation plans and pro forma disclosures, see Note 1 of the consolidated financial statements. 102 BANK OF AMERICA 2002 The following table presents information on equity compensation plans at December 31, 2002: Plans approved by shareholders Plans not approved by shareholders Total (1) Includes 7,068,322 unvested Restricted Stock Units. (2) Excludes shares to be issued upon exercise of outstanding options. Key Employee Stock Plan The Key Employee Stock Plan, as amended and restated, provided for different types of awards. These include stock options, restricted stock shares and restricted stock units. No further awards may be granted under this plan. Under the plan, ten-year options to purchase approximately 129.8 million shares of common stock were granted through December 31, 2002 to certain employees at the closing market price on the respective grant dates. Options granted under the plan generally vest in three or four equal annual installments. At December 31, 2002, approximately 93.8 million options were outstanding under this plan. Approximately 4.8 million shares of restricted stock and restricted stock units were granted during 2002. These shares of restricted stock generally vest in three equal annual installments beginning one year from the grant date. The Corporation incurred restricted stock expense of $263 million, $182 million and $273 million in 2002, 2001 and 2000, respectively. Key Associate Stock Plan On April 24, 2002, the shareholders approved the Key Associate Stock Plan to be effective January 1, 2003. This approval authorized and reserved 100 million shares for grant in addition to the remaining amount under the Key Employee Stock Plan as of December 31, 2002, which was approximately 16.9 million shares plus any shares covered by awards under the Key Employee Stock Plan that terminate, expire, lapse or are cancelled after December 31, 2002. The Corporation has certain stock-based compensation plans that were not approved by its shareholders. These broad-based plans are the 2002 Associates Stock Option Plan, Take Ownership!, the Barnett Employee Stock Option Plan and the BankAmerica Global Stock Option Program (BankAmerica Take Ownership!). Descriptions of the material features of these plans follow. Number of Shares To Be Issued Upon Exercise of Outstanding Options 117,978,240 87,745,410 205,723,650 Weighted-Average Exercise Price of Outstanding Options $58.22 58.16 $58.19 Number of Shares Remaining for Future Issuance Under Equity Compensation Plans(1,2) 24,394,707 – 24,394,707 2002 Associates Stock Option Plan On September 26, 2001, the Board approved the Bank of America Corporation 2002 Associates Stock Option Plan which covers all employees below a specified executive grade level. Under the plan, eligible employees received a one-time award of a predetermined number of options entitling them to purchase shares of the Corporation’s common stock. All options are non-qualified and have an exercise price equal to the fair market value on the date of grant. Approximately 54 million options were granted on February 1, 2002 at $61.36, the closing price for that day. The options vest as follows: 50 percent of the options become exercisable after the Corporation’s common stock closes at or above $76.36 per share for ten consecu- tive trading days; the remaining 50 percent of the options become exercisable after the Corporation’s common stock closes at or above $91.36 for ten consecutive trading days. Regardless of the stock price, all options will be fully exercisable beginning February 1, 2006. In addition, the options continue to be exercisable following termi- nation of employment under certain circumstances. At December 31, 2002, approximately 45.9 million options were outstanding under this plan. The options expire on January 31, 2007. Take Ownership! The Bank of America Global Associate Stock Option Program (Take Ownership!) covered all employees below a specified executive grade level. Under the plan, eligible employees received an award of a prede- termined number of stock options entitling them to purchase shares of the Corporation’s common stock at the fair market value on the grant date. All options are non-qualified. The options, which were granted on the first business day of 1999, 2000 and 2001, vest 25 percent on the first anniversary of the grant date, 25 percent on the second anniver- sary of the grant date and 50 percent on the third anniversary of the grant date. These options expire five years after the grant date. In addi- tion, the options continue to be exercisable following termination of employment under certain circumstances. At December 31, 2002, approximately 36.8 million options were outstanding under this plan. No further awards may be granted under this plan. BANK OF AMERICA 2002 103 Other Plans Under the BankAmerica 1992 Management Stock Plan, ten-year options to purchase shares of the Corporation’s common stock were granted to certain key employees in 1997 and 1998. At December 31, 2002, all options were fully vested and approximately 12.0 million options were outstanding under this plan. Additionally, 2.9 million shares of restricted stock were granted to certain key employees in 1997 and 1998. These shares generally vest in four equal annual installments beginning the second year from the date of grant. No fur- ther awards may be granted under this plan. Under the BankAmerica Performance Equity Program, ten-year options to purchase shares of the Corporation’s common stock were granted to certain key employees in 1997 and 1998 in the form of market price options and premium price options. All options issued under this plan to certain persons who were employees as of the merger date vested. At December 31, 2002, approximately 11.4 million options were outstanding under this plan. No further awards may be granted under this plan. Under the Barnett Employee Stock Option Plan, ten-year options to purchase a predetermined number of shares of the Corporation’s common stock were granted to all associates below a specified executive grade level in 1997. All options are non-qualified and have an exercise price equal to the fair market value on the grant date. At December 31, 2002, all options were fully vested. In addition, the options continue to be exercisable following termination of employment under certain circumstances. At December 31, 2002, approximately 161,000 options were outstanding under this plan. On October 1, 1996, BankAmerica adopted the BankAmerica Take Ownership!, which covered substantially all associates. Options awarded under this plan expire five years after the grant date. At December 31, 2002, all options were fully vested and approximately 4.9 million options were outstanding under this plan. No further awards may be granted under this plan. Additional stock option plans assumed in connection with vari- ous acquisitions remain outstanding and are included in the following tables. No further awards may be granted under these plans. The following tables present the status of all plans at December 31, 2002, 2001 and 2000, and changes during the years then ended: Employee Stock Options Outstanding at January 1 Granted Exercised Forfeited Outstanding at December 31 Options exercisable at December 31 Weighted-average fair value of options granted during the year Restricted Stock/Unit Awards Outstanding unvested grants at January 1 Granted Vested Canceled Outstanding unvested grants at December 31 2002 2001 2000 Shares 184,550,016 85,835,715 (49,058,178) (15,603,903) 205,723,650 89,575,970 Weighted- Average Exercise Price $55.19 61.45 52.40 58.74 58.19 59.02 $12.41 Shares 178,572,021 53,067,079 (28,198,630) (18,890,454) 184,550,016 94,753,943 Weighted- Average Exercise Price $54.45 50.45 40.86 56.32 55.19 57.94 $10.36 Shares 156,205,635 49,318,536 (5,144,778) (21,807,372) 178,572,021 98,092,637 2002 2001 2000 Weighted- Average Grant Price $58.42 61.13 56.87 58.95 $60.73 Shares 6,591,746 4,766,377 (3,381,873) (136,277) 7,839,973 Weighted- Average Grant Price $63.37 51.21 60.32 57.16 $58.42 Shares 7,172,546 3,844,384 (4,223,770) (201,414) 6,591,746 Shares 13,027,337 652,724 (6,111,163) (396,352) 7,172,546 Weighted- Average Exercise Price $56.03 48.44 30.68 57.73 54.45 53.56 $11.00 Weighted- Average Grant Price $62.39 48.50 59.51 66.18 $63.37 104 BANK OF AMERICA 2002 The following table summarizes information about stock options outstanding at December 31, 2002: Range of Exercise Prices $10.00 - $30.00 $30.01 - $46.50 $46.51 - $65.50 $65.51 - $99.00 Total NOTE 18 Income Taxes Number Outstanding at December 31 5,503,368 4,349,303 173,277,283 22,593,696 205,723,650 Outstanding Options Weighted- Average Remaining Term 2.2 years 3.5 years 5.4 years 4.2 years 5.1 years Weighted- Average Exercise Price $24.21 36.20 57.10 79.09 $58.19 Options Exercisable Number Exercisable at December 31 5,503,368 4,292,885 58,890,204 20,889,513 89,575,970 Weighted- Average Exercise Price $24.21 36.10 56.63 79.67 $59.02 The components of income tax expense for the years ended December 31, 2002, 2001 and 2000 were as follows: (Dollars in millions) Current expense: Federal State Foreign Total current expense Deferred (benefit) expense: Federal State Foreign Total deferred (benefit) expense Total income tax expense(1) 2002 2001 2000 $ 3,361 427 331 4,119 (338) (37) (2) (377) $ 3,154 218 338 3,710 (411) 29 (3) (385) $ 3,109 161 354 3,624 526 120 1 647 $ 3,742 $ 3,325 $ 4,271 (1) Does not reflect the tax effects of unrealized gains and losses on available-for-sale and marketable equity securities, foreign currency translation adjustments and derivatives that are included in shareholders’ equity and certain tax benefits associated with the Corporation’s employee stock plans. As a result of these tax effects, shareholders’ equity decreased by $839 in 2002, increased by $21 in 2001 and decreased by $684 in 2000. The Corporation’s current income tax expense approximates the amounts payable for those years. Deferred income tax expense rep- resents the change in the deferred tax asset or liability and is dis- cussed further below. A reconciliation of the expected federal income tax expense using the federal statutory tax rate of 35 percent to the actual income tax expense for the years ended December 31, 2002, 2001 and 2000 follows: (Dollars in millions) Expected federal income tax expense Increase (decrease) in taxes resulting from: Tax-exempt income State tax expense, net of federal benefit Goodwill amortization(1) IRS tax settlement Basis difference in subsidiary stock Low income housing credits Foreign tax differential Other Total income tax expense (1) Goodwill amortization included in business exit costs was $164 in 2001. 2002 $ 4,547 2001 $ 3,541 2000 $ 4,126 (270) 253 – (488) – (197) (57) (46) (107) 161 361 – (418) (146) (63) (4) (116) 183 202 – – (108) (72) 56 $ 3,742 $ 3,325 $ 4,271 BANK OF AMERICA 2002 105 During 2002, the Corporation reached a tax settlement agree- ment with the Internal Revenue Service. This agreement resolved issues for numerous tax returns of the Corporation and various prede- cessor companies and finalized all federal income tax liabilities through 1999. As a result of the settlement, a $488 million reduction in income tax expense was recorded resulting from a reduction in pre- viously accrued taxes. Significant components of the Corporation’s deferred tax (liabili- ties) assets at December 31, 2002 and 2001 were as follows: (Dollars in millions) Deferred tax liabilities: Equipment lease financing Investments Securities valuation Intangibles State taxes Available-for-sale securities Depreciation Employee retirement benefits Deferred gains and losses Employee benefits Other Gross deferred tax liabilities Deferred tax assets: Allowance for credit losses Accrued expenses Net operating loss carryforwards Loan fees and expenses Basis difference in subsidiary stock Available-for-sale securities Employee retirement benefits Other Gross deferred tax assets Valuation allowance Gross deferred tax assets, net of valuation allowance 2002 2001 $ (5,817) (902) (531) (457) (326) (266) (190) (121) (101) (69) (223) (9,003) 2,742 428 347 91 – – – 37 3,645 (114) $(6,907) (559) (369) (818) (457) – (166) – (92) (112) (104) (9,584) 2,991 482 143 93 418 311 56 438 4,932 (107) 3,531 4,825 Net deferred tax liabilities $ (5,472) $(4,759) The valuation allowance included in the Corporation’s deferred tax assets at December 31, 2002 and 2001 represented net operating loss carryforwards for which it is more likely than not that realization will not occur and expire in 2004 to 2009. The net change in the valuation allowance for deferred tax assets resulted from net operating losses being generated by foreign subsidiaries in 2002 where realization is not expected to occur. At December 31, 2002 and 2001, federal income taxes had not been provided on $899 million and $859 million, respectively, of undistributed earnings of foreign subsidiaries, earned prior to 1987 and after 1997, that have been reinvested for an indefinite period of time. If the earnings were distributed, an additional $198 million and $188 million of tax expense, net of credits for foreign taxes paid on such earnings and for the related foreign withholding taxes, would result in 2002 and 2001, respectively. NOTE 19 Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, “Disclosures About Fair Value of Financial Instruments” (SFAS 107), requires the dis- closure of the estimated fair value of financial instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if avail- able, are utilized as estimates of the fair values of financial instruments. Since no quoted market prices exist for certain of the Corporation’s financial instruments, the fair values of such instru- ments have been derived based on management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. The estimation methods for individual classifications of financial instruments are described more fully below. Different assumptions could significantly affect these estimates. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the combined Corporation. The provisions of SFAS 107 do not require the disclosure of the fair value of lease financing arrangements and nonfinancial instru- ments, including intangible assets such as goodwill, franchise, and credit card and trust relationships. Short-Term Financial Instruments The carrying value of short-term financial instruments, including cash and cash equivalents, time deposits placed, federal funds sold and purchased, resale and repurchase agreements, commercial paper and other short-term investments and borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities or have an average maturity of less than 30 days and carry interest rates which approximate market. Financial Instruments Traded in the Secondary Market Held-to-maturity securities, available-for-sale securities, trading account instruments, long-term debt and trust preferred securities traded actively in the secondary market have been valued using quoted market prices. The fair values of securities and trading account instruments are reported in Notes 3 and 4. Derivative Financial Instruments All derivatives are recognized on the balance sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements which allow the Corporation to settle positive and negative positions with the same counterparty on a net basis. For exchange traded contracts, fair value is based on quoted market prices. For non-exchange traded contracts, fair value is based on dealer quotes, pricing models or quoted prices for instruments with similar characteristics. The fair value of the Corporation’s derivative assets and liabilities is presented in Note 5. 106 BANK OF AMERICA 2002 Loans Fair values were estimated for groups of similar loans based upon type of loan and maturity. The fair value of loans was determined by dis- counting estimated cash flows using interest rates approximating the Corporation’s current origination rates for similar loans and adjusted to reflect the inherent credit risk. Where quoted market prices were avail- able, primarily for certain residential mortgage loans and commercial loans, such market prices were utilized as estimates for fair values. Substantially all of the foreign loans reprice within relatively short timeframes. Accordingly, for foreign loans, the net carrying values were assumed to approximate their fair values. Mortgage Banking Assets The Certificates are carried at estimated fair value which is based on an option-adjusted spread model which requires several key components including, but not limited to, proprietary prepayment models and term structure modeling via Monte Carlo simulation. Deposits The fair value for deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. The carrying value of foreign time deposits approximates fair value. For deposits with no stated matu- rities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Corporation’s long-term relationships with depositors. The book and fair values of certain financial instruments at December 31, 2002 and 2001 were as follows: (Dollars in millions) Financial assets Loans Financial liabilities Deposits Long-term debt Trust preferred securities 2002 Book Value Fair Value 2001 Book Value Fair Value $ 321,572 $ 329,813 $ 303,552 $ 309,348 386,458 61,145 6,031 387,166 64,935 6,263 373,495 62,496 5,530 374,231 64,531 5,612 NOTE 20 Business Segment Information The Corporation reports the results of its operations through four busi- ness 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. Consumer and Commercial Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels and commercial lending and treasury man- agement 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 indi- viduals. Global Corporate and Investment Banking provides capital raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading 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 certain amounts associated with managing the balance sheet of the Corporation, certain consumer finance and commercial lending businesses being liquidated and certain residential mortgages originated by the mortgage group or otherwise acquired and held for asset/liability management purposes. BANK OF AMERICA 2002 107 The following table includes total revenue and net income for 2002, 2001 and 2000, and total assets at December 31, 2002 and 2001 for each business segment. Certain prior period amounts have been reclassified between segments to conform to the current period presentation. Business Segments (Dollars in millions) Net interest income(2) Noninterest income(3) Total revenue Provision for credit losses Gains (losses) on sales of securities Amortization of intangibles(4) Other noninterest expense Income before income taxes Income tax expense Net income Period-end total assets (Dollars in millions) Net interest income(2) Noninterest income(3) Total revenue Provision for credit losses Gains (losses) on sales of securities Amortization of intangibles(4) Other noninterest expense Income before income taxes Income tax expense Net income Period-end total assets (Dollars in millions) Net interest income(2) Noninterest income(3) Total revenue Provision for credit losses(5) Gains (losses) on sales of securities Amortization of intangibles(4) Other noninterest expense(5) Income before income taxes Income tax expense Net income Period-end total assets For the Year Ended December 31 Total Corporation Consumer and Commercial Banking(1) 2002 $ 21,511 13,571 35,082 3,697 630 218 18,218 13,579 4,330 2001 2000 2002 2001 2000 $ 20,633 14,348 $ 18,671 14,582 $ 14,538 8,451 $ 13,243 7,815 $ 12,387 7,079 34,981 4,287 475 878 19,831 10,460 3,668 33,253 2,535 25 864 17,769 12,110 4,593 22,989 1,805 45 175 11,383 9,671 3,583 21,058 1,582 3 633 10,777 8,069 3,116 19,466 1,031 – 642 10,385 7,408 2,933 $ 9,249 $660,458 $ 6,792 $ 621,764 $ 7,517 $ 6,088 $ 339,959 $ 4,953 $ 304,558 $ 4,475 For the Year Ended December 31 2002 774 1,625 2,399 318 – 6 1,467 608 204 404 $ $ Asset Management(1) 2001 742 1,733 2,475 121 – 57 1,480 817 295 522 $ $ 2000 664 1,801 2,465 47 – 30 1,432 956 368 588 $ $ Global Corporate and Investment Banking(1) 2002 $ 4,992 3,841 $ 8,833 1,209 (97) 32 4,945 2,550 827 1,723 $ 2001 4,727 4,859 9,586 1,292 (45) 143 5,226 2,880 924 $ 1,956 $ 195,817 $ 24,891 $ 26,811 $ 219,938 For the Year Ended December 31 Equity Investments(1) Corporate Other 2002 (152) (281) (433) 7 – 3 91 (534) (205) (329) $ $ $ 6,064 2001 (150) 179 29 8 – 10 204 (193) (78) (115) 6,315 $ $ $ $ $ 2000 (138) 1,008 $ 870 4 – 11 103 752 291 461 2002 1,359 (65) 1,294 358 682 2 332 1,284 (79) $ 2001 2,071 (238) 1,833 1,284 517 35 2,144 (1,113) (589) $ 1,363 $ 69,606 $ (524) $ $ 88,263 $ $ $ 2000 3,815 4,629 8,444 752 (15) 138 4,858 2,681 858 1,823 2000 1,943 65 2,008 701 40 43 991 313 143 170 (1) There were no material intersegment revenues among the segments. (2) Net interest income is presented on a taxable-equivalent basis. (3) Noninterest income in 2001 included the $83 SFAS 133 transition adjustment net loss which was recorded in trading account profits. The components of the transition adjustment by segment were a gain of $4 for Consumer and Commercial Banking, a gain of $19 for Global Corporate and Investment Banking and a loss of $106 for Corporate Other. (4) The Corporation adopted SFAS 142 on January 1, 2002. Accordingly, no goodwill amortization was recorded in 2002. (5) Corporate Other includes exit charges consisting of provision for credit losses of $395 and noninterest expense of $1,305 related to the exit of certain consumer finance businesses in 2001 and restructuring charges of $550 in noninterest expense in 2000. 108 BANK OF AMERICA 2002 Reconciliations of the four business segments’ revenue, net income and assets to consolidated totals follow: (Dollars in millions) Segments’ revenue Adjustments: Earnings associated with unassigned capital Asset/liability management mortgage portfolio Whole mortgage loan sale gains Liquidating businesses SFAS 133 transition adjustment net loss Gain on sale of a business Other Consolidated revenue Segments’ net income Adjustments, net of taxes: Earnings associated with unassigned capital Asset/liability management mortgage portfolio Liquidating businesses SFAS 133 transition adjustment net loss Whole mortgage loan sale gains Gain on sale of a business Provision for credit losses in excess of net charge-offs Gains on sales of securities Severance charge Litigation expense Exit charges Restructuring charges Tax benefit associated with basis difference in subsidiary stock Tax settlement Other Consolidated net income Segments’ total assets Adjustments: Securities portfolio Asset/liability management mortgage portfolio Liquidating businesses Elimination of excess earning asset allocations Other, net Consolidated total assets 2002 $ 33,788 2001 $ 33,148 2000 $ 31,245 597 122 500 475 – – (400) 228 454 20 1,363 (106) – (126) 307 480 13 1,042 – 187 (21) $ 35,082 $ 7,886 $ 34,981 $ 7,316 $ 33,253 $ 7,347 196 305 63 – 8 117 (86) 25 – – – (346) – – (112) $ 7,517 402 59 18 – 337 – – 460 (86) – – – – 488 (315) $ 9,249 $ 590,852 65,979 65,447 9,294 (106,672) 35,558 146 281 204 (68) 13 – (182) 332 (96) (214) (1,250) – 267 – 43 $ 6,792 $ 533,501 71,563 39,658 15,679 (68,991) 30,354 $ 660,458 $ 621,764 The adjustments presented in the table above include consolidated income, expense and asset amounts not specifically allocated to individual business segments. BANK OF AMERICA 2002 109 NOTE 21 Bank of America Corporation (Parent Company Only) The following tables present the Parent Company Only financial information: (Dollars in millions) Condensed Statement of Income Income Dividends from subsidiaries: Bank subsidiaries Other subsidiaries Interest from subsidiaries Other income Total income Expense Interest on borrowed funds Noninterest expense Total expense Income greater than dividends from subsidiaries Income tax benefit Income before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries: Bank subsidiaries Other subsidiaries Total equity in undistributed earnings of subsidiaries Net income Net income available to common shareholders (Dollars in millions) Condensed Balance Sheet Assets Cash held at bank subsidiaries Temporary investments Receivables from subsidiaries: Bank subsidiaries Other subsidiaries Investments in subsidiaries: Bank subsidiaries Other subsidiaries Other assets Total assets Liabilities and shareholders’ equity Commercial paper and other notes payable Accrued expenses and other liabilities Payables to subsidiaries: Bank subsidiaries Other subsidiaries Long-term debt Shareholders’ equity Year Ended December 31 2002 2001 2000 $ 6,902 18 2,756 1,053 10,729 3,359 1,238 4,597 6,132 456 6,588 583 346 929 7,517 7,511 $ $ $ $ $ 11,100 10 775 1,138 13,023 1,700 1,361 3,061 9,962 1,154 11,116 (1,607) (260) (1,867) 9,249 9,244 $ $ $ 5,000 32 1,746 1,772 8,550 2,564 2,083 4,647 3,903 385 4,288 2,653 (149) 2,504 6,792 6,787 December 31 2002 2001 $ 12,844 989 7,802 16,682 58,662 654 8,420 $ 106,053 $ 453 3,095 193 5,479 46,514 50,319 $ 15,973 663 9,813 13,076 58,968 794 3,675 $ 102,962 $ 1,593 3,328 297 4,948 44,276 48,520 Total liabilities and shareholders’ equity $ 106,053 $ 102,962 (Dollars in millions) Condensed Statement of Cash Flows Operating activities Net income Reconciliation of net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries Other operating activities Net cash provided by operating activities Investing activities Net (increase) decrease in temporary investments Net payments from (to) subsidiaries Other investing activities Net cash provided by (used in) investing activities Financing activities Net decrease in commercial paper and other notes payable Proceeds from issuance of long-term debt Retirement of long-term debt Proceeds from issuance of common stock Common stock repurchased Cash dividends paid Other financing activities Net cash used in financing activities Net increase (decrease) in cash held at bank subsidiaries Cash held at bank subsidiaries at January 1 Cash held at bank subsidiaries at December 31 110 BANK OF AMERICA 2002 Year Ended December 31 2002 2001 2000 $ 9,249 $ 6,792 $ 7,517 1,867 (2,537) 8,579 (428) (2,025) (158) (2,611) (7,505) 8,753 (1,464) 2,632 (7,466) (3,709) (338) (9,097) (3,129) 15,973 $ 12,844 (2,504) 1,768 6,056 (24) (3,330) – (3,354) (5,154) 10,762 (6,106) 1,121 (4,716) (3,632) 763 (6,962) (4,260) 20,233 $ 15,973 (929) 798 7,386 87 237 – 324 (399) 6,335 (2,993) 294 (3,256) (3,388) (2) (3,409) 4,301 15,932 $ 20,233 NOTE 22 Performance by Geographic Area Since the Corporation’s operations are highly integrated, certain asset, liability, income and expense amounts must be allocated to arrive at total assets, total revenue, income (loss) before income taxes and net income (loss) by geographic area. The Corporation identifies its geographic performance based upon the business unit structure used to manage the capital or expense deployed in the region as applicable. This requires certain judgments related to the allocation of revenue so that revenue can be appropriately matched with the related expense or capital deployed in the region. (Dollars in millions) Domestic(3) Asia Europe, Middle East and Africa Latin America and the Caribbean Total foreign Total consolidated At December 31 For the Year Ended December 31 Total Assets(1) $ 611,100 570,179 587,281 Total Revenue(2) Income (Loss) before Income Taxes $ 32,267 32,168 30,623 $ 12,874 9,433 10,574 Net Income (Loss) $ 9,127 6,319 6,686 18,566 17,230 22,094 26,716 27,680 25,803 4,076 6,675 7,013 49,358 51,585 54,910 839 920 952 1,163 1,243 1,005 225 307 351 2,227 2,470 2,308 410 407 506 28 435 544 (321) (158) 164 117 684 1,214 278 272 354 42 295 370 (198) (94) 107 122 473 831 $ 660,458 621,764 642,191 $ 34,494 34,638 32,931 $ 12,991 10,117 11,788 $ 9,249 6,792 7,517 Year 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 (1) Total assets includes long-lived assets, which are primarily located in the U.S. (2) There were no material intercompany revenues between geographic regions for any of the periods presented. (3) Includes the Corporation’s Canadian operations, which had total assets of $2,666, $2,849 and $3,938; total revenues of $96, $121 and $118; income before income taxes of $111, $4 and $34; and net income of $83, $0.3 and $22 at and for the years ended December 31, 2002, 2001 and 2000, respectively. BANK OF AMERICA 2002 111 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Board of Directors Bank of America Corporation and Subsidiaries John R. Belk President – Finance, Systems and Operations Belk, Inc. Charlotte, NC Charles W. Coker Chairman Sonoco Products Company Hartsville, SC Frank Dowd, IV Chairman and CEO Charlotte Pipe and Foundry Company Charlotte, NC Kathleen F. Feldstein President Economics Studies, Inc. Belmont, MA Paul Fulton Chairman Bassett Furniture Industries, Inc. Winston-Salem, NC Walter E. Massey President Morehouse College Atlanta, GA Donald E. Guinn Chairman Emeritus Pacific Telesis Group San Francisco, CA James H. Hance, Jr. Vice Chairman and Chief Financial Officer Bank of America Corporation Charlotte, NC Kenneth D. Lewis Chairman, CEO and President Bank of America Corporation Charlotte, NC C. Steven McMillan Chairman, President and CEO Sara Lee Corporation Chicago, IL Patricia E. Mitchell President and CEO Public Broadcasting Service Alexandria, VA O. Temple Sloan, Jr. Chairman and CEO General Parts, Inc. Raleigh, NC Meredith R. Spangler Trustee and Board Member Charlotte, NC Ronald Townsend Communications Consultant Jacksonville, FL Jackie M. Ward Outside Managing Director Intec Telecom Systems PLC Atlanta, GA Virgil R. Williams Chairman and CEO Williams Group International, Inc. Stone Mountain, GA Corporate Information Shareholders Bank of America Corporation (the Corporation) common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol BAC. The Corporation’s common stock is also listed on the London Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. The stock is typically listed as BankAm in newspapers. As of February 3, 2003, there were 234,138 record holders of the Corporation’s common stock. The Corporation’s annual meeting of shareholders will be held at 10 a.m. on Wednesday, April 30, 2003 at the North Carolina Blumenthal Performing Arts Center, 130 North Tryon Street, Charlotte, North Carolina. For general shareholder information, call Jane Smith, shareholder rela- tions manager, at 1.800.521.3984. For inquiries concerning dividend checks, the SharesDirect dividend reinvestment plan, electronic deposit of dividends, tax information, transferring ownership, address changes or lost or stolen stock certificates, contact Mellon Investor Services LLC, PO Box 3315, South Hackensack, NJ 07606-1915; call Bank of America Shareholder Services at 1.800.642.9855; or use online access at www.bankofamerica.com/shareholder. Analysts, portfolio managers and other investors seeking additional information should contact Kevin Stitt, investor relations executive, at 1.704.386.5667 or Lee McEntire, investor communications manager, at 1.704.388.6780. Visit the Investor Relations area of the Bank of America Web site at www.bankofamerica.com by selecting the About Bank of America tab. Under the Shareholders section are stock and dividend information, financial news releases, links to Bank of America SEC filings and other material of interest to the Corporation’s shareholders. Annual Report on Form 10-K The Corporation’s 2002 Annual Report on Form 10-K, when filed with the Securities and Exchange Commission, will be available at www.bankofamerica.com. The Corporation also will provide a copy of the 2002 Annual Report on Form 10-K (without exhibits) free of charge upon written request addressed to: Bank of America Corporation Shareholder Relations Department NC1-007-23-02 100 North Tryon Street Charlotte, NC 28255 Customers For assistance with Bank of America products and services, call 1.800.900.9000 or visit the Bank of America Web site at www.bankofamerica.com. News Media News media seeking information should visit the Newsroom area of the Bank of America Web site for news releases, speeches and other material relating to the company, including a complete list of the company’s media relations specialists grouped by business specialty or geography. To do so, go to www.bankofamerica.com and choose the About Bank of America tab. Under the Bank of America News section, select Newsroom. 112 BANK OF AMERICA 2002 Senior Managers Bank of America Corporation and Subsidiaries from left: Kenneth D. Lewis Chairman, Chief Executive Officer and President James H. Hance, Jr. Vice Chairman and Chief Financial Officer J. Steele Alphin Corporate Personnel Executive J. Tim Arnoult Technology & Operations Executive Catherine P. Bessant Chief Marketing Officer Amy Woods Brinkley Chief Risk Officer Edward J. Brown, III President, Global Corporate and Investment Banking Richard M. DeMartini President, Asset Management Barbara J. Desoer President, Consumer Products Charles P. Goslee Quality & Productivity Executive R. Eugene Taylor President, Consumer and Commercial Banking Portraits and group photography: Timothy Greenfield-Sanders Feature photography: Brad Harris, Blaise Hayward ©2003 Bank of America Corporation 00-04-1226B 3/2003