B a n k o f A m e r i c a S u m m a r y A n n u a l R e p o r t 2 0 0 5 How We Grow © 2006 Bank of America Corporation 00-04-1354B 3/2006 s Recycled Paper A key part of how we grow at Bank of America is our associates’ commitment to customer satisfaction and sales at our more than 5,800 banking centers nationwide, including the Clark & Madison Banking Center in the heart of Chicago’s fi nancial district, managed by Sandy Pierce and her team. 1 Bank of America 2005 2005 Summary Annual Report A key part of how we grow at Bank of America is our associates’ commitment to customer satisfaction and sales at our more than 5,800 banking centers nationwide, including the Clark & Madison Banking Center in the heart of Chicago’s fi nancial district, managed by Sandy Pierce and her team. 1 Bank of America 2005 62058ba_1-7 1 62058ba_1-7 1 3/15/06 5:49:08 PM 3/15/06 5:49:08 PM Contents Letter to Shareholders ..........................................3 Working Together ..................................................23 2005 Financial Overview .....................................8 Investing in Our Communities ....................26 How We Grow ...............................................................9 Our Businesses ........................................................30 Operating Excellence ...........................................10 Executive Officers and Directors ................31 Innovation ....................................................................16 Corporate Information .......................................32 Recognizing Opportunities ............................20 Bank of America Corporation Bank of America Corporation is a publicly traded (NYSE: BAC) company headquartered in Charlotte, NC, that operates in 29 states, the District of Columbia and 43 foreign countries. The corporation provides a diversified range of banking and nonbanking financial services and products domestically and internationally through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management. 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) Year Ended Dec. 31 2005 2004 $56,923 $49,682 16,465 13,947 6,594 5,718 4.10 3.71 4.04 3.64 1.90 1.70 1.30% 1.34% 16.51% 16.47% 50.38% 54.37% 4,009 3,759 At year end Total assets Total loans and leases Total deposits Total shareholders’ equity Book value per common share Market price per share of common stock Common shares issued and outstanding (in millions) 2005 2004 $ 1,291,803 $1,110,432 573,791 521,813 634,670 618,570 101,533 100,235 25.32 24.70 46.15 46.99 4,000 4,047 2005 Revenue* (in millions) Global Business and Financial Services $11,160 19% Global Capital Markets and Investment Banking $9,009 16% 2005 Net Income (in millions) Global Business and Financial Services $4,562 28% Global Capital Markets and Investment Banking $1,736 11% Global Wealth and Investment Management $7,393 13% All Other** $485 1% Global Consumer and Small Business Banking $28,876 51% Global Wealth and Investment Management $2,388 14% All Other** $623 4% Global Consumer and Small Business Banking $7,156 43% *Fully taxable-equivalent basis **All Other consists primarily of Equity Investments, the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with the Asset and Liability Management process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, and Gains on Sales of Debt Securities. 2 Bank of America 2005 KENNETH D. LEWIS CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT To our shareholders: n 2005, your company demonstrated its ability to grow in a number of ways. We accelerated growth by attracting, retaining and deepening more customer relationships in the markets we serve. We launched a number of initiatives that will create value by integrating our capabilities across the company. We completed our I FleetBoston Financial merger transition in the Northeast, exceeding what we promised in almost every category. We became the fi rst U.S. bank to invest directly in a major Chinese bank. And, our acquisition of MBNA Corp. closed on Jan. 1, 2006, making Bank of America the top provider of debit and credit cards in the United States. Our view is that there are many paths to growth, and the best companies pursue multiple strategies as market conditions change and opportunities arise. I will discuss our most important paths to growth in this letter. I invite you to read more about the work we’re doing Bank of America 2005 3 62058ba_1-7 3 62058ba_1-7 3 3/15/06 5:49:22 PM 3/15/06 5:49:22 PM From left, Brian T. Moynihan, president, Global Wealth and Investment Management; Liam E. McGee, president, Global Consumer and Small Business Banking; and R. Eugene Taylor, president, Global Corporate and Investment Banking, at the Bank of America Corporate Center in Charlotte. for customers and shareholders in the articles that follow. which include our dividend, were in line with our peers, First, a review of our key 2005 fi nancial accomplishments. our stock price fell slightly this year as other stocks in our Strong fi nancial performance. In 2005, we again set industry remained fl at. I believe the two factors that weighed new records for revenue on a fully taxable-equivalent basis, most heavily on our stock were the impact of the yield curve, $56.9 billion, and net income, $16.5 billion, representing which affects all banks, and our acquisition strategy, which growth of 15 percent and 18 percent, respectively, over last has created uncertainty for some investors. year. Diluted earnings per share increased to $4.04, an On the fi rst point, the yield curve is cyclical. It will steepen 11 percent rise over 2004. Return on average common share- again, and net interest yields will rise accordingly. In the holders’ equity rose to 16.51 percent from 16.47 percent. meantime, we have one of the best teams in the business at Our greatest fi nancial challenge in 2005 was the con- managing interest rate risk, and I believe we will continue tinuing fl attening of the yield curve, which is the difference to perform well relative to our peers regardless of the interest between long- and short-term interest rates. As that differ- rate environment. ence shrank, banks, which tend to price deposits based on The second point raises questions about acquisition short-term rates, were adversely affected. In essence, profi t selection, price and risk. We look at companies that can margins were compressed. We expect the yield curve to strengthen our position in a given market, which can be remain relatively fl at in 2006, providing an opportunity for defi ned by customers, geography or product. We look to well-managed banks to differentiate themselves. acquire products, technologies, skills or capabilities that Our strong performance has enabled us to continue our will enhance our value proposition with both customers and record of returning capital to shareholders. 2005 was our 28th shareholders. Of the many opportunities we have evaluated consecutive year of raising our quarterly dividend, which in- over the past several years, we believe that both Fleet and creased by 11 percent to $0.50. Over that time, our dividend has MBNA met our standards. increased at a compound annual growth rate of 13 percent. Regarding price, we start with a sound financial As I have always said, the bottom line on our performance analysis, requiring that identifi able cost savings and is our stock price. While our total shareholder returns, projected revenue gains will offset the proposed premium. 4 Bank of America 2005 62058ba_1-7 4 62058ba_1-7 4 3/15/06 5:49:34 PM 3/15/06 5:49:34 PM $56.9 $16.5 $4.04 $49.7 $13.9 $3.64 $3.55 34.03% 32.59% 29.20% $38.5 $10.8 ’03 ’04 ’05 ’03 ’04 ’05 ’03 ’04 ’05 ’03 ’04 ’05 Revenue (Fully taxable-equivalent basis) Net Income (in billions) (in billions) Earnings per Common Share (Diluted) Return on Average Tangible Common Shareholders’ Equity (Fully taxable-equivalent basis) We also consider our long-term view of the changing I have not. marketplace; the competitive landscape; whether the Bank of America has the vision, the skills and the company represents a good fit with our business model, financial wherewithal to pursue growth opportunities when brand and culture; and the benefits that we believe will and where we find them. That fact does not lessen our accrue to our customers and shareholders over time. commitment to attracting, retaining and deepening our It is in the context of all these criteria that we make an customer relationships. In fact, I believe there are three acquisition decision, and our track record over the past five characteristics that give us a particular advantage with years demonstrates both selectiveness and discipline in our customers and prospects: operational excellence, scale and decision-making process. scope, and innovation. While all acquisitions include elements of risk, our Achieving operational excellence has been a top priority company has demonstrated our ability to execute effective, for years, and it is most evident in our pursuit of process efficient and profitable merger transitions. We proved this excellence through our use of Six Sigma tools. Since we point in the Fleet transition, which we executed on time adopted Six Sigma as a core operating discipline four years and with greater expense savings and revenue gains than ago, we have achieved billions of dollars in savings and rev- we originally forecast. I expect nothing less in the MBNA enue growth, shortened cycle times, reduced error rates and transition. And I am confident that we will take advantage improved associate performance throughout the company. of the growth potential our new teammates and customers Scale and scope, in addition to creating efficiencies for from MBNA bring to our company. investors, create a huge advantage with customers. Our Growing with our customers. In December 2000 I told nationwide franchise and unmatched distribution platform investors, “We are changing the basic thrust of our company enable individuals and companies to do business with us from acquisition- and expense-driven to a more customer- when, where and how they choose. It also means that more focused, revenue-driven organization.” It would be easy to customers and clients can keep their relationship with us assume after our acquisitions of Fleet and MBNA that I intact even when they move their home or business. have changed my position. It is a truism in business that real growth requires new Bank of America 2005 5 ideas. Our record of in- novation lets customers know we are constantly working to create value for them. In our retail busi- ness last year, we had success with a number of innovative offerings. We enhanced our SafeSend® product, making it a free r el at ion sh ip -bu i l d i n g service that enables cus- tomers with a checking account to send money directly to individuals in Mexico. We launched our Keep the Change™ fea- Amy Woods Brinkley, Global Risk executive, and Alvaro G. de Molina, chief fi nancial offi cer, above the Bank of America trading fl oor. ability to take advantage of growth opportuni- ties by other means. In 2005 we again demon- strated our ability to act decisively and to maximize the value of the assets we acquire. Our top priority from the beginning of the year was to complete our transition work in the Northeast related to our acquisition of Fleet. Through the spring and summer of ’05, we execut- ed major systems conver- sions across all our lines ture, which helps customers save by rounding up debit card of business, affecting thousands of associates and millions purchase amounts and moving the change to a linked sav- of customers and accounts, all without a signifi cant hitch. ings account. And we launched our SiteKey™ online security Then, in June, we agreed to acquire MBNA. The oppor- feature, which has won several awards. tunities for growth in this acquisition are signifi cant, from Our wealth management business introduced a new product and distribution benefi ts for customers, to revenue trust product for the mass affl uent market last year. opportunities resulting from our combined strengths, And our investment banking group introduced a new to cost savings derived from consolidating our operations. electronic trading service platform that provides institu- For example, the combination of our distribution platform tional investors with automated access to diverse liquidity and customer base with MBNA’s products, affi nity relation- systems and venues. ships and marketing expertise creates huge opportunities While innovation often relates directly to new products for our company. and services, we also are taking advantage of innovative As the largest issuer of credit and debit cards in the thinking as we work in teams that span the company to country, we will have the opportunity to lead in the ongo- create more value for customers and shareholders. Referred ing evolution of the payments system in the United States. to generally as “Universal Bank Initiatives,” these projects This leadership role will result in many benefi ts, including require integrated planning and enterprise thinking to greater negotiating leverage with partners in the process maximize the value of the company. and the ability to develop and deploy new capabilities and For example, the “Mortgage Business System” is technologies in the payments system. designed to enable us to originate a variety of asset Also in the early summer, we agreed to buy 9 percent of classes and then move those assets into the hands of the stock of China Construction Bank (CCB) for $3 billion, investors through our securities distribution capabilities. with an option to increase our stake to 19.9 percent in the Our goal is to expand our ability to meet customers’ needs future. Just as important, we have launched a consultative across all market segments and create more value for effort with CCB through which we will assist in their efforts our shareholders by exploiting business opportunities to improve their operational effi ciency and effectiveness that span the enterprise. and bring their fi nancial management and governance Seizing new opportunities. As I wrote above, our processes in line with international standards. commitment to growth by one means does not preclude our Communities and leadership. As we pursue growth, we 6 Bank of America 2005 62058ba_1-7 6 62058ba_1-7 6 3/15/06 5:49:54 PM 3/15/06 5:49:54 PM take our responsibility to our shareholders very seriously. And in consider- ing how we grow, we take our responsibility to our communities just as seri- ously. I’d like to highlight the work we’re doing to strengthen our communi- ties in two key areas: com- munity development and philanthropic investment. The year 2005 was the fi rst full year of our nationwide, 10-year goal to lend and invest $750 billion in community development. Our invest- ments in low- to moder- Barbara J. Desoer, Global Technology, Service and Fulfi llment executive, and Milton H. Jones, Jr., Global Quality and Productivity executive, at the Bank of America Command Center. 17-year executive who most recently led our corporate and investment banking team in 2004–2005. Al’s sharp fi nancial mind, communication skills and leadership ability will serve us well as he takes on his new role. We also welcome two new directors to our company. Joining us is Frank Bramble, former executive offi cer, MBNA, and the former chairman and CEO of Maryland National Corp. And, re- cently retired from the United States Army, ate-income neighbor hoods across the country spur economic General Tommy Franks joined our board in January. Frank development and refl ect our commitment to neighborhood and Tommy bring rich and diverse leadership experience to excellence. This initiative took on new meaning in the wake our team, and I look forward to their contributions. of Hurricanes Katrina and Rita, when we committed up to Retiring from our board are Charles Coker, former $100 million to rebuild neighborhoods along the Gulf Coast. chairman and CEO of Sonoco Products of Hartsville, SC, Philanthropic investment comes in two forms: money and Edward Romero, former ambassador to Spain. Charlie and time. Our charitable donations in 2005 exceeded joined the board in 1969, the same year I joined the company. $130 million, making us one of the most generous corpo- His leadership, guidance and service have been a great rations in America. And our associates, all of whom are benefi t to the company for 37 years, and to me personally encouraged to volunteer up to two hours a week in their during my time as chairman. Ed also has made important communities on company time, spent hundreds of thou- contributions to our board in his two years of service. sands of hours strengthening the communities in which I appreciate all that Charlie and Ed have done for us, and I they live. Most important, we are deploying these resources wish them the best in their future endeavors. in conjunction with our foundation’s Neighborhood Excellence In a year marked by challenge, opportunity and growth, Initiative, which relies on the knowledge of local leaders to I would like to thank our customers for their business, our direct volunteer time and money to the organizations most investors for their trust and all our associates and direc- critical to the success of individual communities. tors for the work they do for our company. I look forward to It is through the leadership of our associates that we even greater achievements in the year ahead and, as always, are able to achieve higher standards of performance for our I welcome your thoughts and suggestions. customers, shareholders and communities. One of our key leaders retired from the company in 2005—Marc Oken, who served as our chief fi nancial offi cer. Marc’s contributions to our company’s success over the past 17 years have been great. I personally appreciate his commitment and leader- KENNETH D. LEWIS ship and wish him all the best. CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT Stepping into the role of CFO is Alvaro de Molina, a MARCH 16, 2006 Bank of America 2005 7 62058ba_1-7 7 62058ba_1-7 7 3/15/06 5:50:08 PM 3/15/06 5:50:08 PM How We Grow: 2005 Financial Overview Earning a record $16.5 billion Double-digit year-over-year growth in net income, earnings per share and revenue In 2005 Bank of America earned a record $16.5 billion, as revenue growth accompanied by strong operating leverage drove an 1 percent increase in profit over 2004. Diluted earnings per share rose 11 percent to $4.04. Return on average common equity for the year was 17 percent. Revenue: Fully taxable-equivalent revenue grew 15 percent to $56.9 billion from $49.7 billion in 2004. Revenue growth was driven by a 21 percent increase in noninterest income to $25.4 billion, including higher equity investment gains, card income and trading account profits and the addition of Fleet, which was acquired on April 1, 2004. Net interest income on a fully taxable-equivalent basis increased 10 percent to $31.6 billion from $2.7 billion in 2004. The increase was driven by the addition of Fleet, consumer and middle market business loan growth, higher domestic deposit levels and a larger securities portfolio partially offset by the effects of a flattening yield curve and a lower trading-related contribution. Gains on sales of debt securities were $1.1 billion in 2005, compared to $1.7 billion in 2004. Efficiency: Noninterest expense increased 6 percent to $2.7 billion from $27.0 billion a year ago, primarily due to the addition of Fleet and an investment in the capital markets business. Included in 2005 expenses were $412 million in pre-tax merger and restructuring charges related to the Fleet merger. Full-year 2005 cost savings from the merger with Fleet were $1.5 billion. The efficiency ratio for 2005 was 50.4 per- cent, reaching the company’s long-term target of 50 percent. Credit Quality: Credit costs increased. Provision expense was $4.0 billion in 2005, a 45 percent increase from 2004. Net charge-offs totaled $4.6 billion, or 0.5 percent of loans and leases, compared to $3.1 billion, or 0.66 percent of loans and leases in 2004. The increase in credit costs was primar- ily driven by the credit card portfolio, including increased bankruptcy filings, and a lower provision benefit from the commercial portfolio as the rate of improvement in credit quality slowed. Capital Management: For 2005, Bank of America paid $7.7 billion in cash dividends to common shareholders. The company also issued 79.6 million common shares, primarily related to associate stock options and ownership plans, and repurchased 126.4 million common shares for $5. billion, re- sulting in a net decrease of 46.9 million common shares. Business Segment Results: Global Consumer and Small Business Banking earned $7.2 billion in 2005, a 20 percent increase from 2004. Revenue grew 15 percent to $2.9 billion, primarily due to continued strong growth in the card busi- ness, ongoing deposit account growth, balance growth and increased activity, which generated increased service charge income. Also contributing were significantly higher corporate mortgage banking income, primarily due to a writedown of mortgage servicing rights in 2004, and the addition of Fleet. Global Business and Financial Services earned $4.6 bil- lion, a 19 percent increase from 2004. Results were driven by strong loan growth across all business lines, which included the purchase of loans from General Motors Acceptance Corp. as well as the addition of Fleet. Loan growth was especially robust in the Northeast. Revenue grew 21 percent to $11.2 billion. Average loans and leases grew by $2. billion, countering the effects of continued spread compression. Strong deposit growth was fueled by increases in Commercial Real Estate and Business Banking. Global Capital Markets and Investment Banking net income declined 10 percent to $1.7 billion in 2005, primarily due to a decline in the provision benefit as a result of slowing improvement in credit quality. Revenue was essentially unchanged at $9.0 billion in 2005 and 2004. Noninterest income increased 14 percent, led by trading profits and equity commissions that more than offset the decline in trading- related net interest income. Investment banking revenue was down slightly, as were service charges. Global Wealth and Investment Management increased its net income by 49 percent, driven by the addition of Fleet, higher asset management fees, higher loan volume and higher deposit-related revenue due in part to the migration of Premier Banking relationships from Global Consumer and Small Business Banking. Asset management fees increased 21 percent from 2004 due to the addition of Fleet and the growth of $30.9 billion, or 7 percent, in assets under manage- ment from Dec. 31, 2004. Revenue increased 25 percent to $7.4 billion due in part to the migration of relationships from Global Consumer and Small Business Banking. Bank of America 2005 How we grow A s we build on our long history of growth, Bank of America is positioned to continue growing. Growing through operating excellence—the relentless pursuit of flawless execution to serve our customers better. Growing through innovation—with new products and technology. Growing through recognizing opportunities—in new markets and deeper customer relationships. Growing by working together to create value across divisions and businesses. Growing through serving our communities—investing and giving to build stronger neighborhoods. This annual report contains stories of how we grow. And of how we plan to keep growing. Bank of America 2005 9 How We Grow: Operating Excellence Developing world-class leaders Recruiting and training best-in-class talent keeps our competitive advantage strong A t Bank of America, developing current leaders and planning for future talent needs are essential components of how we grow. Strengthening our emerging talent with solid leadership and management skills is critical to the execution of our profitable growth strategies in the rapidly evolving global economy. Talent planning drives executive development at Bank of America, and that focus keeps a steady influx of exceptional candidates flowing to our leadership team. On a daily basis, senior executives manage assignments, deliver candid feedback and coaching, and arrange opportunities such as member- ship on cross-organizational teams focused on critical business issues. Five principles guide our talent planning and leadership development: • Attract, develop, retain and reward the best talent • Regularly recruit top talent from all industries • Ensure that leaders give all associates candid feedback • Monitor leadership performance to ensure that top performers are in business-critical roles • Execute processes and programs that encourage diversity in leadership More than 1,000 of our top performers annually partici- pate in Leadership Forums designed to address some of our most critical business issues. Bank of America chairman, CEO and president Ken Lewis and his senior management team lead these important development opportunities and use them to identify and assess emerging talent. What does it take to be a leader at Bank of America? We look for and develop leaders who have the ability to be cata- lysts of change. We expect all leaders to grow our businesses, lead our associates to perform, drive consistent execution and sustain intensity and optimism. When top performers possess these core skills, it creates an essential consistency among our leadership team while also providing the flexibility in leadership styles that is required for different businesses. We also respect and value diversity not only in race, gen- der, ethnicity, age, disability and sexual orientation, but also in viewpoints, experiences, talents and ideas. We strive to empower all associates to excel on the job and reach their full potential. We reward and recognize associates based on performance and the results they achieve for customers, shareholders and the communities where we do business. Strategy alone doesn’t win in the marketplace. Top leaders executing sound strategy with outstanding man- agement skills do. It’s a competitive advantage we have— and intend to keep. How we grow through operating excellence Operating excellence is at the core of our stable and profitable long-term growth in in response to customer feedback, both of strengths and is a key part of our growth. an increasingly competitive global market- which have proven to be clear successes. At Bank of America, operating excellence place. This is key to our ability to rapidly Our operating excellence also allows means continuously striving to flawlessly develop and market new products to meet full, efficient use of our unique national and efficiently execute our business plans our customers’ changing needs and mea- footprint and gives us the ability to in order to create shareholder value. sure their satisfaction with our offerings— integrate new enterprises seamlessly, as Setting and reaching new standards like the online collections Web site and the evidenced by our near flawless execution for excellence helps us deliver consistent, Keep the Change™ program we developed of the Fleet merger. 10 Bank of America 2005 J. Steele Alphin, Global Human Resources executive (second from left), discusses leadership at the company’s Knowledge Channel broadcast facilities. Joining him are, from left, Fung Der, chair of the bank’s Asian American Leadership Network for Southern California; Freda C. Brazle, co-chair, the bank’s Black Professionals Group; and Jose L. Garcia, national committee member of the bank’s Hispanic/Latino Organization for Leadership and Advancement. Bank of America values a diversity of ideas and talent as part of its training and leadership development processes. 62058ba_10-19 11 62058ba_10-19 11 3/15/06 6:07:59 PM 3/15/06 6:07:59 PM How We Grow: Operating Excellence Helping customers fi nd repayment solutions Groundbreaking service offers convenience to consumers N ew Web-based technology in combination with special cus- tomer-service training for our associates has transformed Bank of America’s collections and fraud protection activities into a loyalty-building program that helps customers manage troublesome debt and protect their accounts by identifying and prevent- ing credit card fraud. This innovative focus on operating excellence has improved collections while increasing customer satisfaction and retention, resulting in stronger relationships overall. Listening to our customers is the best way we know to create the solutions they need. Customers with past-due accounts told us that they wanted to use the Internet to arrange their debt payment programs. Our Consumer Risk Operations group responded by creating the industry’s fi rst self-service collections Web site, myeasypayment.com. Customers can conveniently arrange payments on the bank’s new self-service collections Web site, myeasypayment.com. The site has increased customer satisfaction and retention while processing $335 million in delinquent collections payments in 2005. 12 Bank of America 2005 Customers are also able to use Bank of America’s innova- tive voice-response technology to conveniently arrange payments over the phone 24 hours a day. These self-service approaches provide customers managing past-due debt with exactly what they want: convenience and a degree of anonymity. Providing both, myeasypayment.com processed approximately $335 million in online delinquent collections payments in 2005. The rapid implementation of myeasypayment.com demon- strates how the bank applies a broad range of core operating strengths to leverage growth and provide customers with the service they want and need. In this case, excellence in customer service, technology, process control and the ability to manage scale were combined to turn delinquent collections, often a negative for both customers and the bank, into a tool that instead increases customer satisfaction and retention as well as the bank’s profi ts. To boost customer satisfaction even further, the collections staff is motivated to provide help, not necessarily to maximize immediate collections. Customers managing debt respond better to associates who are focused on helping and who derive job satisfaction by assisting customers with meeting their payments. With an innovative, relationship-focused collections philosophy, Bank of America helps customers deal with and fi nd solutions to manage their debt issues. When we stand by customers in diffi cult times, those customers are more likely to remain loyal to us when times get better. Bank of America has applied its success in col- lections to its fraud protection business by launching myfraudprotection.com. When customers log on to the service, they can review recent credit card activity on their accounts to monitor for any unauthorized usage. In addition, the site provides tips to help customers identify fraudulent activity and provides suggestions for them to protect themselves. In 2005, use of myfraudprotection.com generated more than 49,000 Web hits; conversely, overall fraud calls dropped, enabling Bank of America associates to concentrate on more complex fraud issues. 62058ba_10-19 12 62058ba_10-19 12 3/15/06 6:08:13 PM 3/15/06 6:08:13 PM How We Grow: Operating Excellence Doing business around the clock Customer-focused enhancements drive growth for bankofamerica.com C ustomer convenience and ease of use established Bank of America’s leadership in online banking. In 2005, we focused on expanding our online offerings and relationships. With the largest active online subscriber base in the world—nearly 15 million customers—the bank has more than 34 percent of all online banking customers in the country. Our 7.3 million online bill payers represent more than 58 percent of all U.S. online banking bill payers. Associates from marketing, technology, product groups, sales and e-commerce worked together to generate a 161 percent increase in online sales over 2004. Successes included checking, savings and debit cards from the Keep the Change™ program (see “Helping People Grow Their Savings” on page 18). Bank of America has a history of online innovation, having pioneered free bill pay in 2002. Online customers have higher balances, higher retention rates and a lower cost to serve. Today, we’ve created more advances like text chat so customers can learn about buying products during real- time, online discussions with our associates. Ultimately, we want customers to be just as comfortable purchasing online as they are in a banking center. One example of the bank’s success in expanding products and services to online customers is the experience of Dr. Andrew Bertagnolli, a psychologist for a health-care provider in Northern California. Soon after signing up to pay bills online in 2005 to save time, Bertagnolli joined the Keep the Change program and also opened a savings account online. Each online customer is a candidate for buying a new product. With 1.6 billion site visits annually and a ranking among the top 50 U.S.-based sites for unique visitors—more than Dell, Capital One or Citigroup— bankofamerica.com is a prime source for sales leads. From left, Sanjay Gupta, e-Commerce and ATM executive; Diane E. Morais, Deposits and Debit Products executive; and James C. Jackson, East Division executive, Global Consumer and Small Business Banking, work closely to constantly improve customers’ online experience and increase sales. Buying products online is faster and easier for customers because of the bank’s innovative solutions: • Streamlined applications and faster processing for personal and small business accounts, reducing deposit account decisions from two days or more to less than a minute • New page designs with a retail approach and testimonial-style layouts to direct customers to the fi nancial solutions they’re looking for • Guided selling to offer customers the products and services that are the best fi t • Preapproved products for online banking customers With all these efforts—developing, diversifying and offering more products; cross-selling; and Internet adver- tising, along with quick and easy-to-use applications and fast fulfi llment—bankofamerica.com is adding shareholder value with every transaction. The result is higher sales through a convenient, cost-effi cient channel. Bank of America 2005 13 62058ba_10-19 13 62058ba_10-19 13 3/15/06 6:08:17 PM 3/15/06 6:08:17 PM How We Grow: Operating Excellence From left, in Boston, Anne M. Finucane, president, Northeast; Mark J. Hogan, Northeast Consumer Division executive; and William R. Lorenz, Middle Market Banking executive, Northeast Commercial Banking, are part of the Bank of America team that is growing sales and customer satisfaction in the Northeast. Effectively integrating Fleet Merger creates new opportunities, boosts customer satisfaction and improves sales B ank of America in 2005 effi ciently executed the integration of Fleet, exceeding the goals set when the merger was announced in 2003. We delivered on the pre-merger promise to expand into desirable Northeast markets and improve customer satisfaction and sales in the new markets, all while capturing greater cost savings than were projected at the merger’s outset. Bank of America associates smoothly converted the accounts of approximately 5 million Fleet customers to its retail platform in 2005. During the fi rst seven months of the year, as business 14 Bank of America 2005 62058ba_10-19 14 62058ba_10-19 14 3/15/06 6:08:32 PM 3/15/06 6:08:32 PM For the Bank of America–Fleet merger, the company: East Providence, RI. • Converted 21 million retail customer records • Reissued 11.2 million credit cards and 2.4 million debit cards • Consolidated 455 deposit products into a simpler offering of 55 products • Converted more than 800,000 small business accounts • Installed 20,866 signs in nearly 2,200 locations and recycled 140 tons of removed sign material • Logged more than 750,000 associate training hours • Devoted more than 5,600 associates to its systems-conversion efforts, which included 5 million programming hours • Completed one of the largest personal trust conversions in U.S. banking history • Converted more than 900,000 brokerage When we announced this merger in 2003, we said our combined company would deliver more financial ser- to more vice capabilities Americans than any bank in our nation’s history. Making good on that promise ranks as one of our company’s great accomplishments. Our cus- tomers in the Northeast have access to the broadest bank- ing franchise in the nation with a wide range of prod- ucts and services under the same roof. Our coast-to-coast presence provides them with access to more than 5,800 retail banking offices, more than 16,700 ATMs and award- winning online banking with nearly 15 million active users. In all, our associates accomplished one of the largest business integrations and systems conversions in his- tory. The bank’s operational excellence—the ability to execute operations flawlessly—made this dramatic growth possible. systems at former Fleet op- erations were being converted to Bank of America systems, the bank added 181,000 net new checking accounts in the new markets, increased middle market loans by 8 percent and deposits by 5 percent, and tallied more than 2.5 million product sales in banking centers. In addition, our customer delight scores in the former Fleet markets had risen approximately 13 percent as of December 2005 from the baseline established at the out- set of the merger. “Delighted customers” are those who rank us at 9 or 10 on a 10-point scale when asked, “Overall, how satisfied are you with Bank of America?” accounts Bank of America boosted customer satisfaction and sales while reducing annual costs by $1.85 billion pre-tax. This significantly surpassed the estimated annual cost savings of $1.6 billion pre-tax that we projected when the Fleet merger was announced in October 2003. The success of the Fleet merger was due to many factors, including thorough market research that identified customer expecta- tions, constant monitoring of customer delight, a judicious systems-conversion strategy that minimized impacts to our customers and our Six Sigma discipline focused on product and service excellence and the elimination of errors. As part of our commitment to the Northeast, we located the headquarters of our Global Wealth and Investment in Boston, MA, and opened Management division in a new, state-of-the-art customer contact center We are proud that every associate contributed to this success—whether it was by working on one of the many merger teams or in other areas of the company, continu- ing their focus on serving and delighting our customers and clients. From the announcement of the merger, to our exciting brand introduction in new Northeast markets, to our unprecedented product and systems conversions in 2004 and 2005, Bank of America associates throughout the company worked together to build a shared future as the world’s premier financial services company. Bank of America 2005 15 How We Grow: Innovation Building relationships with SafeSend® Service helps Mexican-American customers assist family and loved ones E very year, Hispanic residents in the United States transmit billions of dollars to family and loved ones in their native countries—an estimated $20 billion to Mexico alone. According to the Pew Hispanic Center, in 2005 nearly half of all adult Mexican immigrants living in the United States sent money to relatives in Mexico, often paying fees of up to 10 percent. In September 2005, Bank of America changed the game completely by offering a free, secure and easy alternative. Because we simplified and relaunched the SafeSend® service, any Bank of America customer with a checking account can send cash to anyone in Mexico— immediately and free of charge. The SafeSend service provides cash in Mexican pesos, at competitive exchange rates, to recipients in Mexico through more than 3,600 locations. In 2006, the bank will add 900 more locations. No fees, cards or unfamiliar procedures are required, only proper identification. A patent is pending on this new remittance process. This innovation allows Bank of America to attract many new customers who have never dealt with a bank. An estimated 50 percent of Hispanics have no banking experience or relationship with a financial institution. The SafeSend service provides these customers with a compelling reason to do business with Bank of America. With more than 40 million Hispanics in the United States, the SafeSend service plays an important part in growing our business in a segment that will account for 60 percent of the population growth in the bank’s markets over the next decade. Hispanic purchasing power alone would rank among the top 10 economies of the world and is growing faster than that of the population as a whole, according to research cited by the Hispanic Association on Corporate Responsibility. The SafeSend service is a strategic investment that attracts and grows customer relationships, and therefore it is not a stand-alone product but rather a feature of the bank’s basic checking accounts. Checking accounts with these added features are free with direct deposit, and they are proven relationship starters. How we grow through innovation An essential part of Bank of America’s needs and desires and building on our customers. Whether the bank is long-term growth strategy is the spirit core strengths, such as product diversity, leading the way in making online of innovation in everything we do. At the risk management and technology. banking more secure and worry-free heart of our inventiveness are two criti- In this section are examples of how or creating programs to attract and cal strands that are consistently woven Bank of America is using innovation retain diverse customers, innovation together: listening carefully to customers’ to build value for the bank and our is key to our efforts. 16 Bank of America 2005 Business owners Juan and Maria Cuarenta, pictured here with some of their children and grandchildren, use SafeSend regularly to transfer funds to relatives in Mexico. 62058ba_10-19 17 62058ba_10-19 17 3/15/06 6:08:39 PM 3/15/06 6:08:39 PM How We Grow: Innovation Bank of America associates celebrate helping customers grow their savings at New York’s Grand Central station. Helping people grow their savings Keep the Change™ program allows consumers to save while they spend E arly in 2005, Bank of America researchers went into the fi eld looking for a fresh idea, something with a “you’ve got to be kidding” quality that would inspire consumers to put a little money into savings on a regular basis. The result was the Keep the Change™ program, an innovative save-while-you-spend program that was chronicled nationally both on television and in many publications in the fourth quarter of 2005. And within three months of its October 2005 media launch, the program had attracted more than 1 million customers—more than 20 percent of them new to the bank. The program was developed after conversations with con- sumers who candidly acknowledged being short on both time and money. They raided the change jar in desperation when they were short on funds—and were always happy to fi nd more accumulated cash than they had imagined was there. When customers enroll, every debit card purchase they make is automatically rounded up to the next dollar and the difference—“the change”—is transferred from checking to savings. Bank of America matches 100 percent of the Keep the Change program deposits for the fi rst three months and then matches 5 percent of transfers thereafter, up to $250 per year, paid annually. The Keep the Change program succeeds in not only attracting new customers, but also in providing them with a strong incentive to stay. And customers who stay also tend to deepen their relationships with the bank by purchasing other products and services and are more likely to recom- mend the bank to others. 18 Bank of America 2005 62058ba_10-19 18 62058ba_10-19 18 3/15/06 6:08:59 PM 3/15/06 6:08:59 PM How We Grow: Innovation Protecting online customers SiteKey™ security feature minimizes fraud and raises consumer confi dence B ank of America’s online banking customers are breathing easier thanks to an industry-leading security feature called SiteKey.™ The New York Times, The Washington Post and dozens of other media outlets reported on SiteKey as a leading solution in the fi ght against online fraud, with BusinessWeek naming it one of the best products of 2005—a year in which phishing, pharming and other forms of online fi nancial fraud hit record numbers. Javelin Strategy and Research ranked Bank of America best overall in its Online Banking Safety Scorecard as well as No. 1 for prevention and resolution of identity theft. The SiteKey security feature is the latest benefi t of what has been widely recognized as the top online banking service. It is just one example of our discipline and effective- ness in managing risk for customers and shareholders. Maintaining customer confi dence in e-commerce is a top priority. Online customers generally keep higher balances and are more likely to stay with Bank of America. In 2005, the number of online banking subscribers grew from 12.4 million to 14.7 million, making it one of our fastest-growing sales and service channels and a critical element of our broader growth strategy. We pulled together a cross-functional team of our best minds to combat online fi nancial fraud. The team fi rst focused on phishing, in which consumers are duped into revealing personal fi nancial information through spam e-mail that directs them to fake Web sites. The second area of focus was pharming, in which consumers’ attempts to reach legitimate Web sites are redirected without their knowledge to look-alike sites, where they may unwittingly provide fraudsters with personal information. The free SiteKey feature defeats these types of fraud by providing an additional layer of authentication that is personal and convenient. At most Web sites, customers prove their identity only by providing a username and password and often can’t confi rm that the site is legitimate. The SiteKey security feature, however, provides two-way Named one of the best products in 2005 by BusinessWeek, SiteKey provides customers with peace of mind when banking online. confi rmation. Customers sign up by picking an image, writing a unique phrase and answering three chal- lenge questions. From then on, signing in takes only a few easy steps: the customer types the username, Bank of America shows the customer’s specifi ed image and phrase to confi rm the customer reached bankofamerica.com, and then the customer knows it’s safe to enter his or her secret code. If our system identifi es something unusual, for example that the customer is using a different computer, we ask a challenge question for further confi rmation. After the SiteKey feature debuted in 2005, ahead of the Federal Financial Institutions Examination Council’s announcement of recommendations for online authentica- tion, industry watchers such as the Tower Group praised us for our proactive steps in enhancing security, calling the advancement a “watershed” and “unique.” In addition to SiteKey confi rmation, we’ve launched an online toolbar with EarthLink Inc. that alerts consumers to potentially dangerous Web sites, including those used by phishers. We’ve also enhanced our privacy and security Web site to inform customers about our initiatives to protect them and let them know what they can do to protect themselves. Our online fraud detection and resolution teams avoided millions of dollars in losses during the year, and we continue to look for ways to enhance security and share proven solutions across our businesses. Bank of America 2005 19 62058ba_10-19 19 62058ba_10-19 19 3/15/06 6:09:02 PM 3/15/06 6:09:02 PM How We Grow: Recognizing Opportunities Investing in China’s growth China Construction Bank investment opens doors in one of the world’s fastest-growing economies A s part of a long-term strategic investment in one of the world’s fastest-growing economies, Bank of America finalized an innovative partnership with China Construction Bank in 2005. Under the agreement, Bank of America became a significant shareholder in, and long-term strategic partner of, China Construction Bank. Bank of America associates will work with China Construction Bank to provide advice and assistance to the Beijing-based bank. China Construction Bank has built a leading fran- chise in China, the world’s fourth-largest economy. Both partners see significant added value in combining China Construction Bank’s local knowledge and distribution with Bank of America’s product expertise, technology and experi- ence in managing growth and scale. The partnership with China Construction Bank will enable Bank of America to better serve our multinational clients who do business in China. We also expect to find opportunities in China’s consumer market, which currently includes a growing population of more than 1.3 billion people. In 2006, we hope to establish a joint venture between China Construction Bank and Bank of America to provide credit cards in China. China Construction Bank is the third-largest com- mercial bank in China, with $522 billion in assets and $467 billion in deposits. It has 146 million active retail deposit account relationships, a national network of 14,250 branches concentrated in the more economically developed areas of the country, and relationships with 97 of the top 100 enter- prises in China. It is China’s largest mortgage lender and has leading positions in credit cards and infrastructure loans. Bank of America bought approximately 9 percent of China Construction Bank stock for $3 billion. Under the terms of the seven-year agreement, it has the option of increasing that stake to 19.9 percent in the future. This is just one example of how we are recognizing opportunities to expand our business. How we grow by recognizing opportunities One part of Bank of America’s growth purchasing, Bank of America’s MBNA cards and other diverse consumer strategy is to identify, invest in and acquisition positions us as a dominant products in one of the world’s fastest- acquire businesses that combine with player in payments. The value of such growing economies. the bank’s core strengths to create positioning becomes even clearer as we These investments demonstrate greater organic growth opportunities. help our new partner, China Construc- the power of growing by recognizing With credit cards becoming increas- tion Bank, leverage its strong market important strategic opportunities. ingly important, partly due to online position to become a leader in credit 20 Bank of America 2005 Bank of America Global Corporate Planning and Strategy executive Gregory L. Curl, left, with China Construction Bank chairman Guo Shuqing in Hangzhou, China. The two leaders are exploring new joint venture opportunities that support the companies’ mutual business interests. 21 Bank of America 2005 62058ba_20-29 21 62058ba_20-29 21 3/15/06 6:00:28 PM 3/15/06 6:00:28 PM How We Grow: Recognizing Opportunities Bruce L. Hammonds, president, Bank of America Card Services (far right) with John A. Mitas III, M.D., chief operating offi cer of the American College of Physicians (ACP). With the acquisition of MBNA, Bank of America now has more than 5,000 affi nity relationships with organizations such as the ACP. Becoming the leader in payments MBNA acquisition brings new expertise, products and value n a move that makes Bank of America the industry leader in credit cards by adding 20 million customer accounts, we acquired MBNA in 2006. The acquisition brings us expertise in affi nity marketing and electronic transaction processing and provides new opportunities to cross-sell Bank of America products and services to MBNA customers I as well as to sell MBNA products in our banking centers. MBNA, formed in 1982, has an attractive customer base built on affi nity programs and through multichannel direct marketing. MBNA has a history of customer focus, having been the fi rst credit card issuer to offer 24-hour service. To this we add our leading online banking capabilities, dominant distribution channels and effi cient lending processes. Bank of America can deliver innovative deposit, lending and investment products and services to MBNA customers and offer MBNA products to our customers. We also have access to a broader selection of loan portfolios that can be bundled for sale to our investment banking clients. The MBNA acquisition makes Bank of America the largest credit card issuer in the United States as mea- sured by balances—offering the bank unique competitive advantages. Along with the ability to drive revenue growth through the new customer accounts, we now have affi nity relationships with more than 5,000 partner organizations, including such famous sports organizations as the National Football League and NASCAR. The combined business will have in excess of 40 million active credit card accounts in the United States and nearly $143 billion in managed balances—more than 20 percent of the market. We are also the leader in debit card transactions, with a 16 percent market share. In addition, the acquisition provides us with a credit card offering in Canada, the United Kingdom, Spain and Ireland, representing an established international business with more than $27 billion in loans. 22 Bank of America 2005 62058ba_20-29 22 62058ba_20-29 22 3/15/06 6:00:31 PM 3/15/06 6:00:31 PM How We Grow: Working Together Increasing client referrals Meeting customers’ needs across divisions with customized end-to-end service ank of America delivered more products and services to more cus- tomers than ever before through collaborative efforts among its busi- B ness segments in 2005. Client referrals to and from the bank’s Global Wealth and Investment Management division alone generated more than $25 billion in loans, deposits and investments last year, and Global Wealth and Investment Management associates helped close more than 200,000 referrals of clients from one part of the bank to another. Whether in wealth and investment management or small business or corporate investment banking, our strategy is the same: intensify internal teamwork to raise awareness of our capabilities and serve clients in more holistic ways to develop comprehensive banking relationships. Most referrals originate from Global Consumer and Small Business Banking, which had relationships with more than 38 million U.S. consumers and small businesses as of Dec. 31, 2005. When new customers visit any one of 5,873 banking centers in the United States to open a new account, affluent clients are referred to Premier Banking and Investments, which serves clients with investable assets between $100,000 and $3 million, or The Private Bank, for those with assets above $3 million. Once these clients obtain access to integrated banking and investment services—in- cluding financial and retirement planning and wealth trans- fer and estate planning—they generally do more business How we grow by working together In 2005, Bank of America began to extend its wealth transfer and estate planning services to clients of Premier Banking and Investments, such as Dr. Arthur and Carla Silver, of Atlanta. with us as their account balances tend to rise. One example of how the initiative is working involves a commercial banking client who was about to sell his busi- ness for more than $50 million. To provide this client with an end-to-end solution, his banker brought in mergers and acquisition specialists from the Global Capital Markets and Investment Banking division, who helped facilitate the sale. He then tapped the expertise of The Private Bank for presale tax planning and wealth management strategies. Upon selling his business, the client deposited assets from the sale into his Private Bank account. We offer clients a compelling value proposition: Give us the opportunity and we will provide unmatched convenience and expertise, high-quality service, and a full set of financial products and services delivered as a single relationship. In 2005, by collaborating across lines of Collaborating across separate lines of investment and capital markets, among business, our associates created new growth business to deliver more financial services others. Deployed efficiently, our vast opportunities beyond those available to not only increases revenue opportunities, product offering, combined with the conve- our individual units. Working together, we it also increases customer convenience nience, efficiency and competitive pricing presented customers integrated financial and satisfaction. We have a large and provided by our coast-to-coast franchise, services solutions composed of products diversified portfolio of products for the allows customers to turn to us as a single from across the entire bank. consumer, small business, commercial, source for diversified financial services. Bank of America 2005 23 How We Grow: Working Together Collaborating to create more value Working together, business units close high-profile transactions I n 2005, several transactions completed with the collaboration of formerly siloed business units proved that Bank of America’s new focus on working together produces results— for customers and shareholders. These deals are merely the most visible examples of how Bank of America is leveraging its expertise across divisions to say “yes” to more customers more often. Work- ing together, the bank’s units will soon be able to match consumers who need higher-risk financing with institutional clients who want to invest in that level of risk. As a result, we will reap increased profits and shareholder value while serving the needs of many customers, both consumers and investors. In one example, Banc of America Securities provided MetLife with an integrated solution for the acquisition of Citigroup’s Travelers Life and Annuity and essentially all of Citigroup’s international insurance business. As a financial advisor to MetLife, we also served as joint global book-running coordinator on multiple securities offerings totaling $6.9 billion to finance the $11.8 billion deal. This acquisition financing was one of the largest ever when it was announced in June. Launched and concluded in a three-week period, it accessed multiple markets to optimize the financing sources—the perpetual preferred market, mandatory convertible market, U.S. high-grade market and sterling market. Various teams worked together to develop this highly complex financing plan to minimize the cost for the client and maximize both earnings per share and return on equity. The success of the MetLife deal highlights the effectiveness of the bank’s ability to provide clients with cost-effective, multiproduct solutions. Another example of how strong teamwork differentiates Bank of America was the leveraged buyout (LBO) of Toys “R” Us by Bain Capital, Vornado Realty Trust and KKR. In serving as both debt provider and financial advisor to the financial sponsors, the bank was instrumental in the completion of the LBO. When announced in March, this deal ($6.6 billion plus the assumption of debt) was the largest retail LBO in U.S. history and the third-largest LBO of any kind. The transaction was named Euromoney magazine’s 2005 “Financing Package of the Year” and Investment Dealers’ Digest’s “Real Estate Deal of the Year.” Closing the transaction required partnerships from around the globe, including several U.S. and European industry groups from the Investment Banking team; the Leveraged Finance and High-Yield Capital Markets teams; Commercial Mortgage- Backed Securities; Commercial Banking; the Derivatives product group; and Real Estate Syndications. These transactions show how our diverse capabilities, when combined with our innovation, hard work and cooperation, accelerate our growth. 24 Bank of America 2005 When it was announced, the Toys “R” Us deal was the largest retail leveraged buyout in U.S. history and the third-largest of any kind. From left, dealmakers Karim Assef, managing director, Banc of America Securities; Matthew Levin, managing director, Bain Capital Partners, LLC; and Michael Fascitelli, president, Vornado Realty Trust, at Toys “R” Us at Times Square in New York. 25 Bank of America 2005 62058ba_20-29 25 62058ba_20-29 25 3/15/06 6:00:37 PM 3/15/06 6:00:37 PM How We Grow: Investing in Our Communities Restoring a community landmark Bank provides much-needed affordable housing for seniors in Tampa R ising from a once-abandoned hospital site in East Tampa, FL, the newly completed Centro Place Apartments illustrate the strengths of Bank of America’s Community Development Banking group. This restoration opened in 2005 to provide much- needed affordable housing for low- to moderate-income seniors. Banc of America Community Development Corp. renovated the remains of the historic Centro Asturiano Hospital, originally built in 1928 to serve the Ybor City section of East Tampa. Founded in 1886, Ybor City once flourished with world-famous cigar factories and other trades employ- ing Cuban, Italian, Spanish and other immigrants. The 144-bed Centro Asturiano Hospital—where generations of neighborhood residents were born—eventually closed in 1990, becoming a vacant eyesore. Bank of America served as developer, investor and lender in the redevelopment project, providing more than $14 million through direct capital investment and guarantees. Today, Centro Place stands as a faithful restoration of the historic hospital site. Four new residential buildings reflecting the design of the original landmark provide 160 units of multifam- ily apartments. The original hospital building that serves as a clubhouse features a theater, multimedia room, computer cen- ter, meeting space, exercise facility and library. Bank of America partnered with The Home Association of Tampa, which guides the center’s programming with their decades-long experience in helping neighborhood seniors. The development is located near public transit, as well as medical and consumer services. To make Centro Place financially feasible and self- supporting, a team of associates led a public-private partner- ship that includes the City of Tampa, Florida Housing Finance Corp., federal agencies and local nonprofit groups. Since the early 1900s, Bank of America has been a leader and community partner in the development of decent, affordable housing and strong local business economies. The cornerstone of our leadership is a 10-year lending and investment goal of $750 billion that provides more than $205 million every day for community development activi- ties. This goal and similar Bank of America initiatives are the inspiration for an industry-leading array of traditional and innovative financial products, along with the expertise to find answers to the most complex priorities facing our communities. We recognize that creating neighborhood excellence and economic opportunity in low- and moderate- income communities is simply good business. How we grow by investing in our communities Bank of America is the nation’s leading is also an important part of the bank’s a 10-year goal of loaning and investing provider of grants and loans in support overall growth strategy. That is why the $750 billion to support community of neighborhood development. Investing bank is committed to philanthropic gifts development. in the health and growth of our commu- totaling $1.5 billion over the coming Bank of America grows in partnership nities is not only the right thing to do, it decade. That is why the bank is pursuing with the communities we serve. 26 Bank of America 2005 Centro Place Apartments residents Myrtle Mitchell, left, and Joyce Primus tend geraniums as behind them, from left, Oscar Morales, Richard Yaderia and Bernard Silver look on. The Centro Place Apartments in Tampa, FL, were restored in partnership with Banc of America Community Development Corp. Bank of America 2005 27 How We Grow: Investing in Our Communities Marc Center trainee Sara Rose Calvert, left, who is hearing impaired and has cerebral palsy, works with Bank of America associate Amy Kries, Associate Operations representative, to collate statements for the monthly mailing. Helping others grow as we grow Marc Center trainees learn new skills and inspire others B ank of America’s transaction processing center in Tempe, AZ, regularly hires temporary employees from the Marc Center, a nonprofi t organization that helps people with disabilities fi nd meaningful work. Trainees from the Marc Center assist with the monthly preparation of more than 1.7 million statements, gaining practical experience. These individuals inspire our Tempe- based check processing associates every day by proving that anyone can overcome a challenge and be successful in a company that values merit. 28 Bank of America 2005 62058ba_20-29 28 62058ba_20-29 28 3/15/06 6:01:22 PM 3/15/06 6:01:22 PM How We Grow: Investing in Our Communities Making a difference in our neighborhoods The Neighborhood Excellence Initiative provides opportunity and sustains vibrant communities B ank of America in 2005 embarked on a mission to fulfi ll an unprec- edented decade-long, $1.5 billion philanthropic goal, making the bank one of the most generous corporations in the country based on cash donations. As part of this 10-year goal, the company will donate $200 million in 2006. The bank will meet this goal through a national strategy called “neighborhood excellence,” under which the bank works with local community leaders to iden- tify and meet the most pressing needs in each neighborhood. Our emphasis on community building is the catalyst for the Neighborhood Excellence Initiative—the bank’s signature philanthropic program. In 2005 the bank committed more than $30 million to the program in 38 markets nationwide. The Neighborhood Excellence Initiative consists of three components: Student Leaders, Local Heroes and Neighborhood Builders. Student Leaders are exemplary high school students with an interest in improving their neighborhoods. Bank of America provides funding for each student to participate in a paid, eight-week summer intern- ship with a community-based organization as well as a customized mentoring relationship with a Bank of America associate. Kayla Drozd, an exceptional high school student from Portland, OR, recently completed her internship with Mount Hood Habitat for Humanity. “Working closely with my Bank of America mentor, I gained hands-on experience—not only benefi ting my community, but bettering myself through valuable professional experience,” says Ms. Drozd. The bank also recognizes Local Heroes for their achieve- ments and leadership on issues that contribute signifi cantly to neighborhood vitality. The bank funds a $5,000 contri- bution to an eligible nonprofi t of the Local Hero’s choice. Michael Lesparre of Washington, DC, is one such hero. Known as Maitre d’Lesparre, the 82-year-old World War II veteran arrives at Miriam’s Kitchen before 6 a.m. to help serve breakfast to more than 200 homeless guests. “Volunteering is a wonderful, eye-opening experience, and I truly can’t think of anything more rewarding than Jesus Garcia, executive director of the Little Village Community Development Corp. in Chicago, watches neighborhood children participate in a martial arts class sponsored by Little Village. giving back to the people who come here looking for a sec- ond chance at life,” says Lesparre. Lesparre directed his $5,000 grant from Bank of America to Miriam’s Kitchen. The program also provides grants to Neighborhood Builders—nonprofi ts working to promote vibrant neighbor- hoods. Each organization receives a $200,000 grant over two years, which can be used for operating expenses and capacity building. Leaders from each organization also participate in an innovative leadership training program. leaders from our This year, nonprofi t inaugural Neighborhood Excellence Initiative participated in sessions in San Francisco, Chicago, Boston and Washington, DC. Among the participants was Jesus Garcia, executive director of Little Village Community Development Corp., an organi- zation dedicated to violence prevention, education and eco- nomic development on Chicago’s Southwest Side. “The Bank of America Neighborhood Excellence Initiative is open-minded, takes chances with newer organizations and invests capital and other resources at critical points during development using nonconventional criteria,” says Garcia. 62058ba_20-29 29 62058ba_20-29 29 3/15/06 6:01:34 PM 3/15/06 6:01:34 PM Bank of America 2005 29 How We Grow: Our Businesses Global Consumer and Small Business Banking Global Wealth and Investment Management Bank of America serves more than 38 million consumer and small business relationships in the nation’s fastest-growing and most diverse com- munities. Sales, service and fulfillment are provided through more than 5,800 banking centers and nearly 17,000 ATMs in 29 states and the District of Colum- bia. We also offer our customers the leading online banking service in the United States, with more active online bill payers than all competing banks combined, as well as a 24-hour telephone banking service that earns high ratings for speedy and easy self-service. With product and sales teams coordinating closely within these various distribution channels, Bank of America has grown to become the nation’s largest provider of checking and savings services, the No. 1 credit and debit card provider (effective with completion of the MBNA merger on Jan. 1, 2006), the No. 1 small business lender, the leading home equity lender and the fifth-largest originator of consumer mortgages. $28.9 $7.4 $25.2 $19.6 $5.9 $4.0 ’03 ’04 ’05 ’03 ’04 ’05 Revenue* Revenue* $7.2 $2.4 $6.0 $5.3 $1.6 $1.2 ’03 ’04 ’05 ’03 ’04 ’05 Net Income (in billions) Net Income (in billions) Global Wealth and Investment Manage- ment delivers comprehensive financial solutions to more than 2 million individ- ual and institutional clients worldwide. It includes Premier Banking and Invest- ments, which delivers financial solutions through full-service banking and invest- ment products to affluent clients; The Private Bank of Bank of America, which provides investment, trust and integrated banking, and lending services to wealthy clients; and Family Wealth Advisors at The Private Bank, which serves the com- plex financial needs of the very wealthy. It also includes Columbia Management, one of the world’s largest asset managers and the provider of proprietary asset manage- ment products to retail and institutional investors. It is among the 10 largest U.S. wealth managers (ranked by private banking assets under management in accounts of $1 million or more as of June 30, 2005), the 10 largest U.S. mutual fund managers, and the five largest global money market fund managers by assets under management as of Dec. 31, 2005. Global Business and Financial Services Global Capital Markets and Investment Banking Global Business and Financial Services serves midsize domestic and interna- tional business clients of Bank of America. The unit, combined in 2006 with Global Capital Markets and Investment Bank- ing to form the new Global Corporate and Investment Banking unit, provides in- novative financial services, specialized industry expertise and local delivery through a global team of client manag- ers and a diverse mix of market-leading including Global Treasury businesses, Services, Middle Market Banking, Com- mercial Real Estate Banking, Dealer Fi- nancial Services, Business Banking, Leas- ing and Business Capital. It also includes our businesses in Latin America. Bank of America is the predominant middle mar- ket bank in the United States, providing financial solutions such as capital mar- kets, investment banking and traditional banking services. We also are the No. 1 global treasury services provider, the lead- ing bank-owned asset-based lender and the leading provider of financial services to commercial real estate businesses. $11.2 $9.0 $9.0 $9.3 $8.4 $5.9 ’03 ’04 ’05 ’03 ’04 ’05 Revenue* Revenue* $4.6 $3.8 $1.9 $1.8 $1.7 $2.1 ’03 ’04 ’05 ’03 ’04 ’05 Net Income (in billions) Net Income (in billions) Global Capital Markets and Invest- ment Banking is an integrated cor- porate and investment bank that provides issuer clients with innovative, comprehen- sive capital-raising solutions and advi- sory services, as well as traditional bank deposit and loan products, cash man- agement and payment services. Inves- tor clients are served through equity and debt research, secondary trading capabilities and financing activities in fixed income and equity markets. Clients benefit from extensive derivative and other risk-management products. Through offices in more than 27 countries, it serves domestic and international corpora- tions, including most of the Fortune 500, institutional clients, financial institutions and government entities. Many of our services are provided through our U.S. and UK subsidiaries, Banc of America Securities LLC and Banc of America Securities Limited. 30 Bank of America 2005 *Fully taxable-equivalent basis Executive Officers and Directors Bank of America Corporation and Subsidiaries Executive Officers Kenneth D. Lewis Chairman, Chief Executive Officer and President Amy Woods Brinkley Global Risk Executive Alvaro G. de Molina Chief Financial Officer Barbara J. Desoer Global Technology, Service and Fulfillment Executive Liam E. McGee President, Global Consumer and Small Business Banking Brian T. Moynihan President, Global Wealth and Investment Management R. Eugene Taylor Vice Chairman and President, Global Corporate and Investment Banking Board of Directors William Barnet, III Chairman, President and Chief Executive Officer The Barnet Company Spartanburg, SC Frank P. Bramble, Sr. Former Executive Officer MBNA Corporation Wilmington, DE Charles W. Coker Former Chairman Sonoco Products Company Hartsville, SC John T. Collins Chief Executive Officer The Collins Group, Inc. Boston, MA Gary L. Countryman Chairman Emeritus Liberty Mutual Group Boston, MA Tommy R. Franks Retired General United States Army Tampa, FL Paul Fulton Chairman Bassett Furniture Industries, Inc. Winston-Salem, NC Charles K. Gifford Former Chairman Bank of America Corporation Boston, MA W. Steven Jones Dean Kenan-Flagler Business School University of North Carolina at Chapel Hill Chapel Hill, NC Kenneth D. Lewis Chairman, Chief Executive Officer and President Bank of America Corporation Charlotte, NC Walter E. Massey President Morehouse College Atlanta, GA Thomas J. May Chairman, President and Chief Executive Officer NSTAR Boston, MA Patricia E. Mitchell President and Chief Executive Officer The Museum of Television & Radio New York, NY Edward L. Romero Former Ambassador to Spain Albuquerque, NM Thomas M. Ryan Chairman, President and Chief Executive Officer CVS Corporation Woonsocket, RI O. Temple Sloan, Jr. Chairman The International Group, Inc. Raleigh, NC Meredith R. Spangler Trustee and Board Member C.D. Spangler Construction Company Charlotte, NC Robert L. Tillman Chairman and CEO Emeritus Lowe’s Companies, Inc. Mooresville, NC Jackie M. Ward Outside Managing Director Intec Telecom Systems PLC Atlanta, GA Bank of America 2005 31 Corporate Information Bank of America Corporation and Subsidiaries Headquarters The principal executive offices of Bank of America Corporation (the Corporation) are located in the Bank of America Corporate Center, Charlotte, NC 28255. Shareholders The Corporation’s 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 March 3, 2006, there were 279,724 record holders of the Corporation’s common stock. The Corporation’s annual meeting of shareholders will be held at 10 a.m. local time on April 26, 2006, in the Belk Theater of the North Carolina Blumenthal Performing Arts Center, 130 North Tryon Street, Charlotte, NC. For general shareholder information, call Jane Smith, shareholder relations manager, at 1.800.521.3984. For inquiries concerning dividend checks, dividend reinvestment plan, electronic deposit of dividends, tax information, transferring ownership, address changes or lost or stolen stock certificates, contact Bank of America Shareholder Services at Computershare Trust Company, N.A., via our Internet access at www.computershare.com/ bankofamerica; or call 1.800.642.9855; or write to P.O. Box 43095, Providence, RI 02940-3095. Analysts, portfolio managers and other investors seeking additional information should contact Kevin Stitt, Investor Relations executive, at 1.704.386.5667 or Lee McEntire, senior manager, Investor Relations, at 1.704.388.6780. Visit the Investor Relations area of the Bank of America Web site, http://investor.bankofamerica.com, for stock and dividend information, financial news releases, links to Bank of America SEC filings, electronic versions of our annual reports and other material of interest to the Corporation’s shareholders. Annual Report on Form 10-K The Corporation’s 2005 Annual Report on Form 10-K is available at http://investor.bankofamerica.com. The Corporation also will provide a copy of the 2005 Annual Report on Form 10-K (without exhibits) upon written request addressed to: 32 Bank of America 2005 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 Corporation, including a complete list of the Corporation’s media relations specialists grouped by business specialty or geography. To do so, go to www.bankofamerica.com/newsroom. NYSE and SEC Certifications The Corporation filed with the New York Stock Exchange (“NYSE”) on May 16, 2005, the Annual CEO Certification as required by the NYSE corporate governance listing standards. The Corporation has also filed as exhibits to its 2005 Annual Report on Form 10-K the CEO and CFO certifications as required by Section 302 of the Sarbanes-Oxley Act. 5-Year Stock Performance $50 $40 $30 $20 High Low Close 2001 32.50 23.38 31.48 2002 38.45 27.08 34.79 2003 41.77 32.82 40.22 2004 47.44 38.96 46.99 2005 47.08 41.57 46.15 B a n k o f A m e r i c a S u m m a r y A n n u a l R e p o r t 2 0 0 5 How We Grow © 2006 Bank of America Corporation 00-04-1354B 3/2006 s Recycled Paper A key part of how we grow at Bank of America is our associates’ commitment to customer satisfaction and sales at our more than 5,800 banking centers nationwide, including the Clark & Madison Banking Center in the heart of Chicago’s fi nancial district, managed by Sandy Pierce and her team. 1 Bank of America 2005 2005 Summary Annual Report UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6523 Bank of America Corporation (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) Bank of America Corporate Center 100 N. Tryon Street Charlotte, North Carolina (Address of Principal Executive Offices) 56-0906609 (IRS Employer Identification No.) 28255 (Zip Code) Registrant’s telephone number, including area code (704) 386-5681 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock Title of each class Depositary Shares each representing a one-fifth interest in a share of: Name of each exchange on which registered New York Stock Exchange London Stock Exchange Pacific Stock Exchange Tokyo Stock Exchange 6.75% Perpetual Preferred Stock Fixed/Adjustable Cumulative Preferred Stock S&P 500® Index Return Linked Notes, due July 2, 2007 Minimum Return Index EAGLESSM, due June 1, 2010, Linked to the Minimum Return Index EAGLES®, due June 28, 2010, Linked to the Nasdaq-100 Index® S&P 500® Index Minimum Return—Return Linked Notes, due June 24, 2010, Linked to the Nikkei 225 Index Minimum Return Basket EAGLESSM, due August 2, 2010, Linked to a Minimum Return Index EAGLES®, due August 28, 2009, Linked to the Basket of Energy Stocks Russell 2000® Index Minimum Return Index EAGLES®, due September 25, 2009, Linked to the Dow Jones Industrial AverageSM Minimum Return Index EAGLES®, due October 29, 2010, Linked to the Nasdaq-100 Index® 1.50% Index CYCLESTM, due November 26, 2010, Linked to the S&P 500® Index 1.00% Index CYCLESTM, due December 28, 2010, Linked to the S&P MidCap 400 Index Return Linked Notes due June 28, 2010, Linked to the Nikkei 225 Index 1.00% Index CYCLESTM, due January 28, 2011, Linked to a Basket of Minimum Return Index EAGLES®, due January 28, 2011, Linked to the Health Care Stocks Russell 2000® Index 0.25% Cash-Settled Exchangeable Notes, due January 26, 2010, Linked to the Nasdaq-100 Index® 1.25% Index CYCLESTM, due February 24, 2010, Linked to the S&P 500® Minimum Return Index EAGLES®, due March 27, 2009, Linked to the Index Nasdaq-100 Index® 1.75% Basket CYCLESTM, due April 30, 2009, Linked to a Basket of Three Indices New York Stock Exchange New York Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange Title of each class Name of each exchange on which registered 1.00% Basket CYCLESTM, due May 27, 2010, Linked to a "70/30" Basket of Four Indices and an Exchange Traded Fund Minimum Return Index EAGLES®, due June 25, 2010, Linked to the Dow Jones Industrial AverageSM 1.50% Basket CYCLESTM, due July 29, 2011, Linked to an "80/20" Basket of Four Indices and an Exchange Traded Fund Minimum Return Index EAGLES®, due August 28, 2009, Linked to the AMEX Biotechnology IndexSM 1.25% Index CYCLESTM, due August 25, 2010, Linked to the Dow Jones Industrial AverageSM 1.25% Basket CYCLESTM, due September 27, 2011, Linked to a Basket of Four Indices Minimum Return Basket EAGLESSM, due September 29, 2010, Linked to Minimum Return Index EAGLES®, due October 29, 2010, Linked to the a Basket of Energy Stocks S&P 500® Index the Nasdaq-100 Index® Minimum Return Index EAGLES®, due November 23, 2010, Linked to Minimum Return Index EAGLES®, due November 24, 2010, Linked to the CBOE China Index 1.25% Basket CYCLESTM, due December 27, 2010, Linked to a "70/30" Basket of Four Indices and an Exchange Traded Fund 1.50% Index CYCLESTM, due December 28, 2011, Linked to a Basket of Health Care Stocks 6 1⁄2% Subordinated InterNotesSM, due 2032 5 1⁄2% Subordinated InterNotesSM, due 2033 5 7⁄8% Subordinated InterNotesSM, due 2033 6% Subordinated InterNotesSM, due 2034 8 1⁄2% Subordinated Notes, due 2007 NASDAQ® 100 EAGLESSM, due 2010 S&P 500® EAGLESSM, due 2010 Nikkei 225 Return Linked Note, due 2010 Basket of Energy Stocks EAGLESSM, due 2010 Russell 2000® EAGLES®, due 2009 DJIA® EAGLES®, due 2009 Nasdaq 100® EAGLES®, due 2010 S&P 500® Index CYCLES™, due 2010 S&P 400 MidCap Index CYCLES™, due 2010 Nikkei 225 Return Linked Note, due 2010 American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. È Large accelerated filer ‘ Accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates is approximately $210,310,308,584 (based on the June 30, 2005 closing price of Common Stock of $45.61 per share as reported on the New York Stock Exchange). As of March 13, 2006, there were 4,648,802,068 shares of Common Stock outstanding. ‘ Non-accelerated filer Document of the Registrant Portions of the 2006 Proxy Statement Form 10-K Reference Locations PART III DOCUMENTS INCORPORATED BY REFERENCE Restatement Overview Bank of America Corporation (the “Corporation”) is restating its historical financial statements for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005, the year ended December 31, 2004, including the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, the year ended December 31, 2003, and other selected financial data for the years ended December 31, 2002 and 2001. These restatements and revisions relate to the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133). The Corporation is presenting this restatement in its 2005 Annual Report on Form 10-K. The restatement has the following impact on Net Income and Diluted Earnings Per Common Share (EPS) by period: Impact by Periods(1) (Dollars in millions, except per share information) Beginning Balance Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 1Q04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Q04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Q04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Q04 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 1Q05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Q05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Q05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Q05 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income Adjustment Diluted EPS Adjustment $1,011 (49) Not Applicable (0.02) (33) (508) 339 7 (196) (302) 361 (285) (194) (421) (0.01) (0.12) 0.08 — (0.05) (0.07) 0.09 (0.07) (0.05) (0.11) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 345 (1) For presentation purposes, certain numbers have been rounded. For additional information relating to the effect of the restatement, see the following items: Part II: Item 6 – Selected Financial Data Item 7 – Management’s Discussion and Analysis of Results of Operations and Financial Condition Item 7A – Quantitative and Qualitative Disclosure about Market Risk Item 8 – Financial Statements and Supplementary Data Item 9A – Controls and Procedures Part IV: Item 15 – Exhibits and Financial Statements Schedule 1 Item 1. BUSINESS General PART I Bank of America Corporation (the “Corporation”) is a Delaware corporation, a bank holding company and a financial holding company under the Gramm-Leach-Bliley Act. The Corporation was incorporated in 1998 as part of the merger of BankAmerica Corporation with NationsBank Corporation. The principal executive offices of the Corporation are located in the Bank of America Corporate Center, Charlotte, North Carolina 28255. Additional information relating to our businesses and our subsidiaries is included in the information set forth in pages 26 through 42 of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 20 of the Notes to the Consolidated Financial Statements in Item 8 of this report. Primary Market Areas Through its banking subsidiaries (the “Banks”) and various nonbanking subsidiaries, the Corporation provides a diversified range of banking and nonbanking financial services and products, primarily throughout the Northeast (Connecticut, Maine, Massachusetts, New Hampshire and Rhode Island), the Mid-Atlantic (Maryland, New Jersey, New York, Pennsylvania, Virginia and the District of Columbia), the Midwest (Illinois, Iowa, Kansas and Missouri), the Southeast (Florida, Georgia, North Carolina, South Carolina and Tennessee), the Southwest (Arizona, Arkansas, New Mexico, Oklahoma and Texas), the Northwest (Oregon, Idaho and Washington) and the West (California, Idaho and Nevada) regions of the United States and in selected international markets. Management believes that these are desirable regions in which to be located. Based on the most recent available data, personal income in the states in these regions as a whole rose 6.6 percent year-to-year through the third quarter of 2005, compared to growth of 3.3 percent in the rest of the United States. In addition, the population in these states as a whole rose an estimated 1.3 percent between 2004 and 2005, compared to growth of 0.4 percent in the rest of the United States. Through December 2005, the average rate of unemployment in these states was 4.8 percent, ranging from 3.3 percent in Florida and Virginia to 7.0 percent in South Carolina, compared to a rate of unemployment of 5.1 percent in the rest of the United States. The number of housing permits authorized in 2005 was nearly 9 percent higher than in 2004 in these states as a whole. The Corporation has the leading bank deposit market share position in California, Connecticut, Florida, Maryland, Massachusetts, Nevada, New Jersey and Washington. In addition, the Corporation ranks second in terms of bank deposit market share in Arizona, Delaware, Kansas, Missouri, New Mexico, North Carolina, Rhode Island, South Carolina and Texas; third in Arkansas, District of Columbia, Georgia and Maine; fourth in Idaho, New Hampshire, Oklahoma, Oregon and Virginia; fifth in Tennessee; sixth in New York; eighth in Iowa; tenth in Pennsylvania; and fourteenth in Illinois. Acquisition and Disposition Activity As part of its operations, the Corporation regularly evaluates the potential acquisition of, and holds discussions with, various financial institutions and other businesses of a type eligible for financial holding company ownership or control. In addition, the Corporation regularly analyzes the values of, and submits bids for, the acquisition of customer- based funds and other liabilities and assets of such financial institutions and other businesses. The Corporation also regularly considers the potential disposition of certain of its assets, branches, subsidiaries or lines of businesses. As a general rule, the Corporation publicly announces any material acquisitions or dispositions when a definitive agreement has been reached. On April 1, 2004, the Corporation completed its merger with FleetBoston Financial Corporation, and, on June 13, 2005, Bank of America, N.A. completed its merger with Fleet National Bank. On January 1, 2006, the Corporation completed its merger with MBNA Corporation. Additional information on these mergers and the Corporation’s other acquisition activity is included under Notes 2 and 3 of the Notes to the Consolidated Financial Statements in Item 8 which are incorporated herein by reference. Government Supervision and Regulation The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and banks and specific information about the Corporation and its subsidiaries. Federal regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Bank Insurance Fund rather than for the protection of stockholders and creditors. General As a registered bank holding company and financial holding company, the Corporation is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The 2 Banks are organized as national banking associations, which are subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “Comptroller” or “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Federal Reserve Board and other federal and state regulatory agencies. In addition to banking laws, regulations and regulatory agencies, the Corporation and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of the Corporation and its ability to make distributions to stockholders. A financial holding company, and the companies under its control, are permitted to engage in activities considered “financial in nature” as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations (including, without limitation, insurance and securities activities), and therefore may engage in a broader range of activities than permitted for bank holding companies and their subsidiaries. A financial holding company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, provided the financial holding company gives the Federal Reserve Board after-the-fact notice of the new activities. The Gramm-Leach-Bliley Act also permits national banks, such as the Banks, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the Comptroller. Bank holding companies (including bank holding companies that also are financial holding companies) also are required to obtain the prior approval of the Federal Reserve Board before acquiring more than five percent of any class of voting stock of any non-affiliated bank. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks located in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state. Subject to certain restrictions, the Interstate Banking and Branching Act also authorizes banks to merge across state lines to create interstate banks. The Interstate Banking and Branching Act also permits a bank to open new branches in a state in which it does not already have banking operations if such state enacts a law permitting de novo branching. Changes in Regulations Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any proposals or legislation and the impact they might have on the Corporation and its subsidiaries cannot be determined at this time. Capital and Operational Requirements The Federal Reserve Board, the Comptroller and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. 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 subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjustments. 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. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represents the Corporation’s qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk- weights, based primarily on relative credit risk. The minimum Tier 1 capital ratio is four percent and the minimum total capital ratio is eight percent. The Corporation’s Tier 1 and total risk-based capital ratios under these guidelines at December 31, 2005 were 8.25 percent and 11.08 percent, respectively. At December 31, 2005, the Corporation had no subordinated debt that qualified as Tier 3 capital. The leverage ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 100 to 200 basis points above three percent, banking organizations are required to maintain a ratio of at least five percent to be classified as well capitalized. The Corporation’s leverage ratio at December 31, 2005 was 5.91 percent. The Corporation meets its leverage ratio requirement. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, 3 significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of five percent of the bank’s assets at the time it became “undercapitalized” or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 risk- based capital ratio of at least six percent, a total risk-based capital ratio of at least ten percent and a leverage ratio of at least five percent and not be subject to a capital directive order. Under these guidelines, each of the Banks was considered well capitalized as of December 31, 2005. Regulators also must take into consideration: (a) concentrations of credit risk; (b) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position); and (c) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. In addition, the Corporation, and any Bank with significant trading activity, must incorporate a measure for market risk in their regulatory capital calculations. Distributions The Corporation’s funds for cash distributions to its stockholders are derived from a variety of sources, including cash and temporary investments. The primary source of such funds, and funds used to pay principal and interest on its indebtedness, is dividends received from the Banks. Each of the Banks is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In addition, the ability of the Corporation and the Banks to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. The right of the Corporation, its stockholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. Source of Strength According to Federal Reserve Board policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC – either as a result of default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default – the other Banks may be assessed for the FDIC’s loss, subject to certain exceptions. Competition In 2005, the Corporation had four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management. The activities in which the Corporation and its business segments engage are highly competitive. Generally, the lines of activity and markets served involve competition with other banks, thrifts, credit unions and other nonbank financial investment advisory firms, brokerage firms, investment companies and insurance companies. The Corporation also competes against banks and thrifts owned by nonregulated diversified corporations and other entities which offer financial services, located both domestically and internationally and through alternative delivery channels such as the Internet. The methods of competition center around various factors, such as customer services, interest rates on loans and deposits, lending limits and customer convenience, such as location of offices. institutions, such as investment banking firms, 4 The commercial banking business in the various local markets served by the Corporation’s business segments is highly competitive. The four business segments compete with other banks, thrifts, finance companies and other businesses which provide similar services. The business segments actively compete in commercial lending activities with local, regional and international banks and nonbank financial organizations, some of which are larger than certain of the Corporation’s nonbanking subsidiaries and the Banks. In its consumer lending operations, the competitors of the business segments include other banks, thrifts, credit unions, finance companies and other nonbank organizations offering financial services. In the investment banking, investment advisory and brokerage business, the Corporation’s nonbanking subsidiaries compete with other banking and investment banking firms, investment advisory firms, brokerage firms, investment companies, other organizations offering similar services and other investment alternatives available to investors. The Corporation’s mortgage banking units compete with banks, thrifts, government agencies, mortgage brokers and other nonbank organizations offering mortgage banking services. The Corporation’s card business competes with other banks, as well as monoline and retail card product companies. In the trust business, the Banks compete with other banks, investment counselors and insurance companies in national markets for institutional funds and insurance agents, thrifts, financial counselors and other fiduciaries for personal trust business. The Corporation and its four business segments also actively compete for funds. A primary source of funds for the Banks is deposits, and competition for deposits includes other deposit-taking organizations, such as banks, thrifts, and credit unions, as well as money market mutual funds. The Corporation’s ability to expand into additional states remains subject to various federal and state laws. See “Government Supervision and Regulation – General” for a more detailed discussion of interstate banking and branching legislation and certain state legislation. Employees As of December 31, 2005, there were 176,638 full-time equivalent employees within the Corporation and its subsidiaries. Of the foregoing employees, 75,202 were employed within Global Consumer and Small Business Banking, 22,957 were employed within Global Business and Financial Services, 7,765 were employed within Global Capital Markets and Investment Banking and 12,338 were employed within Global Wealth and Investment Management. The remainder were employed elsewhere within the Corporation and its subsidiaries. None of the domestic employees within the Corporation is subject to a collective bargaining agreement. Management considers its employee relations to be good. Additional Information of the Statistical Financial See also the following additional information which is incorporated herein by reference: Business Segment Operations (under the caption “Business Segment Operations” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) and in Note 20 of the Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data (the “Notes”)); Net Interest Income (under the captions “Financial Highlights—Net Interest Income” and “Supplemental Financial Data” in the MD&A and Tables I caption “Interest Rate Risk and II Management—Securities” in the MD&A and Notes 1 and 6 of the Notes); Outstanding Loans and Leases (under the caption “Credit Risk Management” in the MD&A, Table III of the Statistical Financial Information, and Notes 1 and 7 of the Notes); Deposits (under the caption “Liquidity Risk Management—Deposits and Other Funding Sources” in the MD&A and Note 11 of the Notes); Short-Term Borrowings (under the caption “Liquidity Risk and Capital Management” in the MD&A and Note 12 of the Notes); Trading Account Liabilities (in Note 4 of the Notes); Market Risk Management (under the caption “Market Risk Management” in the MD&A); Liquidity Risk Management (under the caption “Liquidity Risk and Capital Management” in the MD&A); Operational Risk Management (under the caption “Operational Risk Management” in the MD&A); and Performance by Geographic Area (under Note 22 of the Notes). Information); Securities (under the The Corporation’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on the Corporation’s website at http://investor.bankofamerica.com under the heading Complete SEC Filings as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes it to the Securities and Exchange Commission (the “SEC”). In addition, the Corporation makes available on its website at http://investor.bankofamerica.com under the heading Corporate Governance its: (i) Code of Ethics and Insider Trading Policy; (ii) Corporate Governance Guidelines; and (iii) the charters of each of Bank of America’s Board committees, and also intends to disclose any amendments to its Code of Ethics, or waivers of the Code of Ethics on behalf of its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, on its website. These corporate governance materials are also available free of charge in print to stockholders who request them in writing to: Bank of America Corporation, Attention: Shareholder Relations Department, 101 South Tryon Street, NC1-002-29-01, Charlotte, North Carolina 28255. 5 The Corporation’s Annual Report on Form 10-K is being distributed to stockholders in lieu of a separate annual report containing financial statements of the Corporation and its consolidated subsidiaries. Item 1A. RISK FACTORS 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” and 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 this annual report of the Corporation (also referred to as we, us or our) should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made, and we undertake no obligation to update any forward-looking statement. All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. As a large, international financial services company, we face risks that are inherent in the businesses and the market places in which we operate. Factors that might cause our future financial performance to vary from that described in our forward-looking statements include the market, credit, operational, regulatory, strategic, liquidity, capital, economic and sovereign risks, among others, as discussed in the MD&A and in other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that we believe could cause actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in our reports to the SEC also could adversely affect our results, and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. General business, economic and political conditions. Our businesses and earnings are affected by general business, economic and political conditions in the United States and abroad. Given the concentration of our business activities in the United States, we are particularly exposed to downturns in the United States economy. For example, in a poor economic environment there is a greater likelihood that more of our customers or counterparties could become delinquent on their loans or other obligations to us, which, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which would adversely affect our earnings. General business and economic conditions that could affect us include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, and the strength of the Unites States economy and the local economies in which we operate. Geopolitical conditions can also affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, could affect business and economic conditions in the United States and abroad. Access to funds from subsidiaries. The Corporation is a separate and distinct legal entity from our banking and nonbanking subsidiaries. We therefore depend on dividends, distributions and other payments from our banking and nonbanking subsidiaries to fund dividend payments on the common stock and to fund all payments on our other obligations, including debt obligations. Many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the Corporation. Regulatory action of that kind could impede access to funds we need to make payments on our obligations or dividend payments. In addition, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Changes in accounting standards. Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. Competition. We operate in a highly competitive environment that could experience intensified competition as continued merger activity in the financial services industry produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services, and at more competitive prices. In addition, technological advances and the growth of e-commerce have made it possible for non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and Internet-based financial solutions. Many of our competitors have fewer regulatory constraints and some have lower cost structures. Credit Risk. When we loan money, commit to loan money or enter into a contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contract. A number of our products expose us to credit risk, including loans, leases and lending 6 commitments, derivatives, trading account assets and assets held-for-sale. As one of the nation’s largest lenders, the credit quality of our portfolio can have a significant impact on our earnings. We allow for and reserve against credit risks based on our assessment of credit losses inherent in our loan portfolio (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify. For a further discussion of credit risk and our credit risk management policies and procedures, see “Credit Risk Management” in the MD&A. Federal and state regulation. The Corporation, the Banks and many of our nonbank subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. The Corporation and its nonbanking subsidiaries are also heavily regulated by securities regulators, domestically and internationally. This regulation is designed to protect investors in securities we sell or underwrite. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and increasing the ability of nonbanks to offer competing financial services and products. Governmental fiscal and monetary policy. Our businesses and earnings are affected by domestic and international monetary policy. For example, the Board of Governors of the Federal Reserve System regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for lending and investing and the return we earn on those loans and investments, both of which affect our net interest margin. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities and mortgage servicing rights and its policies also can affect our borrowers, potentially increasing the risk that they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States, non-U.S. governments and international agencies. Changes in domestic and international monetary policy are beyond our control and hard to predict. Liquidity. Liquidity is essential to our businesses. Our liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations. For a further discussion of our liquidity picture and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk and Capital Management” in the MD&A. Litigation risks. We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against the Corporation could have material adverse financial effects or cause significant reputational harm to the Corporation, which in turn could seriously harm our business prospects. For a further discussion of litigation risks, see “Litigation and Regulatory Matters” in Note 13 of the Notes. Market risk. We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest margin—the difference between the yield we earn on our assets and the interest rate we pay for deposits and other sources of funding—which could in turn affect our net interest income and earnings. Market risk is inherent in the financial instruments associated with many of our operations and activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rates, foreign exchange rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of either the issuer or its country of origin. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse affects on our results from operations and our overall financial condition. For a further discussion of market risk and our market risk management policies and procedures, see “Market Risk Management” in the MD&A. Merger risks. There are significant risks and uncertainties associated with mergers, such as our merger with MBNA. For example, we may fail to realize the growth opportunities and cost savings anticipated to be derived from the merger. In addition, it is possible that the integration process could result in the loss of key employees, or that the disruption of ongoing business from the merger could adversely affect our ability to maintain relationships with clients 7 or suppliers. We have an active acquisition program and there is a risk that integration difficulties may cause us not to realize expected benefits from the transactions We will be subject to similar risks and difficulties in connection with future acquisitions, as well as decisions to downsize, sell or close units or otherwise change the business mix of the Corporation. Non-U.S. operations; trading in non-U.S. securities. We do business throughout the world, including in developing regions of the world commonly known as emerging markets. Our businesses and revenues derived from non- U.S. operations are subject to risk of loss from currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, unfavorable political and diplomatic developments and changes in legislation relating to non-U.S. ownership. We also invest in the securities of corporations located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated, because generally, non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets. Operational risks. The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the vast array of associates and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, ineffectiveness or exposure due to interruption in third party support as expected, as well as, the loss of key individuals or failure on the part of the key individuals to perform properly. For further discussion of operating risks, see “Operational Risk Management” in the MD&A. Our reputation is important. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our failure to address, or to appear to fail to address various issues that could give rise to reputational risk could cause harm to the Corporation and its business prospects. These issues legal and regulatory include, but are not limited to, appropriately addressing potential conflicts of requirements; ethical issues; money-laundering; privacy; properly maintaining customer and associate personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to address appropriately these issues could also give rise to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. interest; Products and services. Our business model is based on a diversified mix of businesses that provide a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce our net interest margin and revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to make substantial expenditures to modify or adapt our existing products and services. We might not be successful in introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or developing and maintaining loyal customers. Risk management processes and strategies. We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. For a further discussion of our risk management policies and procedures, see “Managing Risk” in the MD&A. We operate many different businesses. We are a diversified financial services company. In addition to banking, we provide investment, mortgage, investment banking, credit card and consumer finance services. Although we believe our diversity helps lessen the effect when downturns affect any one segment of our industry, it also means our earnings could be subject to different risks and uncertainties than the ones discussed in herein. If any of the risks that we face actually occur, irrespective of whether those risks are described in this section or elsewhere in this report, our business, financial condition and operating results could be materially adversely affected. Item 1B. UNRESOLVED STAFF COMMENTS There are no material unresolved written comments that were received from the Securities and Exchange Commission’s staff 180 days or more before the end of the Corporation’s fiscal year relating to the Corporation’s periodic or current reports filed under the Securities Exchange Act of 1934. 8 Item 2. PROPERTIES As of December 31, 2005, the principal offices of the Corporation and primarily all of its business segments were located in the 60-story Bank of America Corporate Center in Charlotte, North Carolina, which is owned by a subsidiary of the Corporation. The Corporation occupies approximately 612,000 square feet and leases approximately 588,000 square feet to third parties at market rates, which represents substantially all of the space in this facility. The Corporation occupies approximately 822,000 square feet of space at 100 Federal Street in Boston, which is the headquarters for one of the Corporation’s primary business segments, the Global Wealth and Investment Management Group. The 37-story building is owned by a subsidiary of the Corporation which also leases approximately 388,000 square feet to third parties. The Corporation also leases or owns a significant amount of space worldwide. As of December 31, 2005, the Corporation and its subsidiaries owned or leased approximately 24,000 locations in all 50 states, the District of Columbia and 34 foreign countries. Item 3. LEGAL PROCEEDINGS See “Litigation and Regulatory Matters” in Note 13 of the Consolidated Financial Statements beginning on page 127 for the Corporation’s litigation disclosure which is incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during the quarter ended December 31, 2005. Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to the Instructions to Form 10-K and Item 401(b) of Regulation S-K, the name, age and position of each current executive officer of the Corporation are listed below along with such officer’s business experience during the past five years. Officers are appointed annually by the Board of Directors at the meeting of directors immediately following the annual meeting of stockholders. Amy Woods Brinkley, age 50, Global Risk Executive. Ms. Brinkley was named to her present position in April 2002. From July 2001 to April 2002, she served as Chairman, Credit Policy and Deputy Corporate Risk Management Executive; and from August 1999 to July 2001, she served as President, Consumer Products. She first became an officer in 1979. She also serves as Global Risk Executive and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). Alvaro G. de Molina, age 48, Chief Financial Officer. Mr. de Molina was named to his present position in September 2005. From April 2004 to September 2005, he served as President, Global Capital Markets and Investment Banking; from 2000 to April 2004, he served as Treasurer; and from 1998 to 2000, he served as Deputy Treasurer. He first became an officer in 1989. He also serves as Chief Financial Officer and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). Barbara J. Desoer, age 53, Global Technology, Service and Fulfillment Executive. Ms Desoer was named to her present position in August 2004. From July 2001 to August 2004, she served as President, Consumer Products; and from September 1999 to July 2001, she served as Director of Marketing. She first became an officer in 1977. She also serves as Global Technology, Service and Fulfillment Executive and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). Kenneth D. Lewis, age 58, Chairman, Chief Executive Officer and President. Mr. Lewis was named Chief Executive Officer in April 2001, President in July 2004 and Chairman in February 2005. From April 2001 to April 2004, he served as Chairman; from January 1999 to April 2004, he served as President; and from October 1999 to April 2001, he served as Chief Operating Officer. He first became an officer in 1971. Mr. Lewis also serves as a director of the Corporation and as Chairman, Chief Executive Officer, President and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). Liam E. McGee, age 51, President, Global Consumer and Small Business Banking. Mr. McGee was named to his present position in August 2004. From August 2001 to August 2004, he served as President, Global Consumer Banking; from August 2000 to August 2001, he served as President, California; and from August 1998 to August 2000, he served as President, Southern California. He first became an officer in 1990. He also serves as President, Global Consumer and Small Business Banking and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). Brian T. Moynihan, age 46, President, Global Wealth and Investment Management. Mr. Moynihan was named to his present position in April 2004. Previously he held the following positions at FleetBoston Financial Corporation: from 9 1999 to April 2004, he served as Executive Vice President with responsibility for Brokerage and Wealth Management from 2000, and Regional Commercial Financial Services and Investment Management from May 2003. He first became an officer in 1993. He also serves as President, Global Wealth and Investment Management and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). R. Eugene Taylor, age 58, Vice Chairman and President, Global Corporate and Investment Banking. Mr. Taylor was named to his present position in July, 2005. From February 2005 to July 2005, he served as President, Global Business and Financial Services; from August 2004 to February 2005, he served as President, Commercial Banking; from June 2000 to August 2004, he served as President, Consumer and Commercial Banking; from February 2000 to June 2000, he served as President, Central Region; and from October 1998 to June 2000, he served as President, West Region. He first became an officer in 1970. He also serves as Vice-Chairman and President, Global Corporate and Investment Banking and a director of Bank of America, N.A., MBNA America Bank, N.A., MBNA America (Delaware), N.A. and Bank of America, N.A. (USA). 10 Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS PART II The principal market on which the Common Stock is traded is the New York Stock Exchange. The Common Stock is also listed on the London Stock Exchange and the Pacific Stock Exchange, and certain shares are listed on the Tokyo Stock Exchange. The following table sets forth the high and low closing sales prices of the Common Stock on the New York Stock Exchange for the periods indicated: Bank of America Corporation Quarter High Low 2004 2005 first second third fourth first second third fourth $41.38 42.72 44.98 47.44 47.08 47.08 45.98 46.99 $39.15 38.96 41.81 43.62 43.66 44.01 41.60 41.57 The above table has been adjusted to reflect the August 27, 2004 2-for-1 stock split. As of March 13, 2006, there were 279,463 record holders of Common Stock. During 2004 and 2005, the Corporation paid dividends on the Common Stock on a quarterly basis. The following table sets forth dividends paid per share of Common Stock for the periods indicated: 2004 2005 Quarter Dividend first second third fourth first second third fourth $.40 .40 .45 .45 .45 .45 .50 .50 The above table has been adjusted to reflect the August 27, 2004 2-for-1 stock split. For additional information regarding the Corporation’s ability to pay dividends, see “Government Supervision and Regulation – Distributions” and Note 15 of the Consolidated Financial Statements on page 136 which is incorporated herein by reference. For information on the Corporation’s equity compensation plans, see Note 17 of the Consolidated Financial Statements on page 144 which is incorporated herein by reference. See Note 14 of the Consolidated Financial Statements on page 134 for information on the monthly share repurchases activity for the three and twelve months ended December 31, 2005, 2004 and 2003, including total common shares repurchased and announced programs, weighted average per share price and the remaining buy back authority under announced programs which is incorporated herein by reference. The Corporation did not have any unregistered sales of its equity securities in fiscal year 2005. Item 6. SELECTED FINANCIAL DATA See Table 2 in the MD&A on page 23 and Table VII of the Statistical Financial Information on page 84 which are incorporated herein by reference. 11 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes forward- looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. In light of the risks, uncertainties and assumptions discussed under Item 1A. “Risk Factors” of this Annual Report on Form 10-K and other factors discussed in this section, there are risks that our actual experience will differ materially from the expectations and beliefs reflected in the forward-looking statements in this section and throughout this report. For more information regarding what constitutes a forward-looking statement, please refer to Item 1A. “Risk Factors.” The Corporation, headquartered in Charlotte, North Carolina, operates in 29 states, the District of Columbia and 44 foreign countries. The Corporation provides a diversified range of banking and nonbanking financial services and products domestically and internationally through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management. At December 31, 2005, we had $1.3 trillion in assets and approximately 177,000 full-time equivalent employees. Notes to Consolidated Financial Statements referred to in Management’s Discussion and Analysis of Results of Operations and Financial Condition are incorporated by reference into Management’s Discussion and Analysis of Results of Operations and Financial Condition. Certain prior period amounts have been reclassified to conform to current period presentation. Restatement As discussed in Notes 1 and 23 of the Consolidated Financial Statements, we are restating our historical financial statements for the years 2004 and 2003, for the quarters in 2005 and 2004, and other selected financial data for the years 2002 and 2001 (see Tables 2 and 3 on pages 23 and 25 for the restatements of Five-Year Summary of Selected Financial Data, and Supplemental Financial Data and Reconciliations to GAAP Financial Measures). These restatements and resulting revisions relate to the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). The Corporation is presenting this restatement in its 2005 Annual Report on Form 10-K. The Corporation uses interest rate contracts and foreign exchange contracts in its Asset and Liability Management (ALM) process. Use of such derivatives enables us to minimize significant fluctuations in earnings caused by interest rate and currency rate volatility. The Corporation had applied hedge accounting for certain derivative transactions that we believe met the requirements of SFAS 133. The application of hedge accounting produced financial statement results that were consistent with the economics of these transactions and our risk management activities. Hedge accounting reduces volatility in earnings by counterbalancing the changes in the hedged item and the derivative. As a result of a recent interpretation on the “shortcut” method for derivative instruments under SFAS 133, the Corporation undertook a review of all hedge accounting transactions, which was completed in the first quarter of 2006. Based on the review, we determined that certain hedges did not meet the requirements of SFAS 133. Since we could not apply hedge accounting for those transactions, the derivative transactions have been marked to market through our Consolidated Statement of Income with no related offset for hedge accounting. Accordingly, changes in interest rates and currency rates which impact the fair value of derivative instruments have had a direct impact on our Net Income. 12 The following tables set forth the effect of the adjustments described above on Net Income for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 and for the quarterly periods in 2005 and 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information. Increase (Decrease) in Net Income(1) (Dollars in millions) Year Ended December 31 2005(2) 2004 2003 2002 2001 As Previously Reported Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,886 $14,143 $10,810 $9,249 $6,792 Internal fair value hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internal cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (271) 25 (175) (421) (190) (281) 275 (196) (144) 104 (9) (49) 406 (176) 74 304 226 424 57 707 Restated Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,465 Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5)% $13,947 $10,762 $9,553 $7,499 (1.4)% (0.5)% 3.3% 10.4% (1) For presentation purposes, certain numbers have been rounded. (2) The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006. Increase (Decrease) in Quarterly Net Income(1, 2) 2005 2004 (Dollars in millions) Fourth(3) Third Second First Fourth Third Second First As Previously Reported Net income . . . . . . . . . . . $3,768 $4,127 $4,296 $4,695 $3,849 $3,764 $3,849 $2,681 Internal fair value hedges . . . . . . . . . . . . . . . . . . . Internal cash flow hedges . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustment . . . . . . . . . . . . . . . . . . . . . . . (74) (43) (77) (194) (148) (29) (108) (285) 130 125 106 361 (179) (28) (95) (302) (76) 18 65 7 157 (111) 293 339 (435) 146 (219) (508) 164 (334) 137 (33) Restated Net income . . . . . . . . . . . . . . . . . . . . . . . Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,574 $3,841 $4,657 $4,393 $3,855 $4,103 $3,341 $2,648 (5.1)% (6.9)% 8.4% (6.4)% 0.2% 9.0% (13.2)% (1.2)% (1) See Note 23 of the Consolidated Financial Statements for Restatement of Quarterly Financial Statements (unaudited). (2) For presentation purposes, certain numbers have been rounded. (3) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. During the first quarter of 2006, the Corporation terminated certain derivatives used as economic hedges as part of the ALM process that did not qualify for SFAS 133 hedge accounting and entered into new derivative contracts to hedge certain of its exposures to changes in interest rates and foreign currency rates. These new contracts are designated in hedging relationships and meet the requirement for SFAS 133 hedge accounting. Prior to the termination of the economic hedges noted above, the changes in fair value of such contracts were recorded in Other Income and had a direct impact on Net Income. As a result, we estimate that Net Income will be reduced by approximately $0.03 per share in the first quarter of 2006. 13 Effects of the Restatement The following tables set forth the effects of the restatement relating to derivative transactions on major caption items within our Consolidated Statement of Income for the years 2004 and 2003, and our Consolidated Balance Sheet as of December 31, 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information. Bank of America Corporation and Subsidiaries Consolidated Statement of Income (Dollars in millions, except per share information) As Previously Reported(1) 2005 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income available to common shareholders . . . Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,696 27,540 31,156 25,610 56,766 1,084 25,155 8,269 $16,886 $16,868 Year Ended December 31 2004 As Previously Reported $43,224 14,430 28,794 20,085 48,879 2,123 21,221 7,078 $14,143 $14,127 2003 As Previously Reported $31,563 10,099 21,464 16,450 37,914 941 15,861 5,051 $10,810 $10,806 Restated $31,172 10,667 20,505 17,329 37,834 941 15,781 5,019 $10,762 $10,758 Restated $42,953 14,993 27,960 21,005 48,965 1,724 20,908 6,961 $13,947 $13,931 Restated $58,626 27,889 30,737 25,354 56,091 1,084 24,480 8,015 $16,465 $16,447 $ 4.21 $ 4.15 $ 4.10 $ 4.04 $ 3.76 $ 3.69 $ 3.71 $ 3.64 $ 3.63 $ 3.57 $ 3.62 $ 3.55 (1) The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006. The impact of the restatement on our Consolidated Statement of Income was to reverse previously applied hedge accounting for affected hedging relationships in the relevant periods. For derivative instruments previously accounted for as fair value hedges, the net accruals for the derivatives were recorded to Net Interest Income, and net changes in fair values of the derivative instruments as a result of changes in rates were recorded as basis adjustments to the hedged items, such as Loans and Leases, and Long-term Debt. As a result of the restatement, the previous accounting treatment was reversed (i.e., the net accruals recorded to Net Interest Income were reversed and there was no basis adjustment for the hedged items), and the total changes in the fair values of the derivative instruments including interest accrual settlements were recorded directly to Other Income. In addition, for derivative instruments that were previously accounted for as cash flow hedges, the Corporation recorded accruals from the derivative instruments to Net Interest Income and recorded net changes in the fair values of the derivatives, net-of-tax, to Accumulated Other Comprehensive Income (OCI). As a result of the restatement, the cash flow hedge effects were reversed from Accumulated OCI and Net Interest Income, and recorded in Other Income. Accordingly, Net Interest Income decreased $419 million, $834 million and $959 million for 2005, 2004 and 2003, respectively. Other Income decreased $256 million in 2005, and increased $920 million and $879 million in 2004 and 2003. The change in Other Income (included in Total Noninterest Income) after the restatement adjustments was primarily due to the effects of changes in rates in each respective year on the fair values of derivative instruments used in the ALM process. These derivative instruments were primarily comprised of receive fixed interest rate swaps, long futures and forward contracts, which generally increase in value when interest rates fall, and decrease in value when interest rates rise. Gains on Sales of Debt Securities declined from the previously reported results by $399 million in the third quarter of 2004. The previously reported results did not recognize cash flow hedge losses upon sale of the underlying hedged securities. This cash flow hedge utilized a forward purchase agreement to hedge the variability in cash flows from the anticipated purchase of securities. The Corporation subsequently sold the related securities and did not previously reclassify the loss on the forward purchase agreement from Accumulated OCI into income. 14 Bank of America Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in millions) December 31 2005 2004 As Previously Reported(1) Restated As Previously Reported Restated Loans and leases, net of allowance for loan and lease losses . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 565,737 1,291,795 $ 565,746 1,291,803 $ 513,211 1,110,457 $ 513,187 1,110,432 Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,749 101,338 1,190,571 31,938 100,848 1,190,270 41,243 98,078 1,010,812 41,590 97,116 1,010,197 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,205 (7,518) 101,224 $1,291,795 67,552 (7,556) 101,533 $1,291,803 58,006 (2,587) 99,645 $1,110,457 58,773 (2,764) 100,235 $1,110,432 (1) The Corporation provided unaudited financial information relating to 2005 in its current report on Form 8-K filed on January 23, 2006. The impact of the restatement on our Consolidated Balance Sheet was to reverse fair value basis adjustments to items that previously qualified as fair value hedged items such as Loans and Leases, and Long-term Debt. Additionally, changes in the fair value of derivative instruments that previously qualified for cash flow hedge accounting were reversed from Accumulated OCI and recorded in income. Tax effects of these adjustments impacted Accrued Expenses and Other Liabilities. Accordingly, as of December 31, 2005 and 2004, this resulted in an increase of $9 million and a decrease of $24 million in Loans and Leases, an increase in Accrued Expenses and Other Liabilities of $189 million and $347 million, a decrease in Long-term Debt of $490 million and $962 million, an increase in Retained Earnings of $347 million and $767 million, and a decrease in Accumulated OCI of $38 million and $177 million. The following tables set forth the effects of the restatement relating to derivative transactions on major caption items within our Consolidated Statement of Income and our Consolidated Balance Sheet for the quarters in 2005 and 2004. Although the year and fourth quarter of 2005 are not restated, this information was previously provided in the Corporation’s current report on Form 8-K filed on January 23, 2006, and therefore, is included as part of the restatement information. See Note 23 of the Consolidated Financial Statements for restated quarterly financial statements. Bank of America Corporation and Subsidiaries Consolidated Statement of Income (Dollars in millions, except per share information) Total interest income . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . Income before income taxes . . . . . . . . Income tax expense . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Net income available to common 2005 Quarters Fourth Third Second First As Previously Reported(1) Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated $16,030 8,170 7,860 6,262 14,122 71 5,473 1,705 $ 3,768 $16,018 8,159 7,859 5,951 13,810 71 5,161 1,587 $ 3,574 $15,222 7,449 7,773 6,834 14,607 29 6,192 2,065 $ 4,127 $15,205 7,470 7,735 6,416 14,151 29 5,736 1,895 $ 3,841 $14,291 6,641 7,650 6,365 14,015 325 6,446 2,150 $ 4,296 $14,267 6,630 7,637 6,955 14,592 325 7,023 2,366 $ 4,657 $13,153 5,280 7,873 6,149 14,022 659 7,044 2,349 $ 4,695 $13,136 5,630 7,506 6,032 13,538 659 6,560 2,167 $ 4,393 shareholders . . . . . . . . . . . . . . . . . . . $ 3,764 $ 3,570 $ 4,122 $ 3,836 $ 4,292 $ 4,653 $ 4,690 $ 4,388 Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . $ 0.94 $ 0.93 $ 0.89 $ 0.88 $ 1.03 $ 1.02 $ 0.96 $ 0.95 $ 1.07 $ 1.06 $ 1.16 $ 1.14 $ 1.16 $ 1.14 $ 1.09 $ 1.07 (1) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. 15 Bank of America Corporation and Subsidiaries Consolidated Statement of Income Fourth Third Second First 2004 Quarters (Dollars in millions, except per share information) As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Total interest income . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . $12,195 4,448 7,747 $12,138 4,588 7,550 $11,487 3,822 7,665 $11,456 3,941 7,515 $10,990 3,409 7,581 $10,908 3,542 7,366 Total noninterest income . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . 5,966 13,713 101 6,174 13,724 101 4,922 12,587 732 6,012 13,527 333 5,467 13,048 795 4,870 12,236 795 Income before income taxes . . . . . . . . Income tax expense . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Net income available to common 5,775 1,926 $ 3,849 5,786 1,931 $ 3,855 5,648 1,884 $ 3,764 6,189 2,086 $ 4,103 5,826 1,977 $ 3,849 5,014 1,673 $ 3,341 $8,552 2,751 5,801 3,730 9,531 495 3,972 1,291 $2,681 $8,451 2,922 5,529 3,949 9,478 495 3,919 1,271 $2,648 shareholders . . . . . . . . . . . . . . . . . . . $ 3,844 $ 3,850 $ 3,759 $ 4,098 $ 3,844 $ 3,336 $2,680 $2,647 Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . $ 0.95 $ 0.94 $ 0.95 $ 0.94 $ 0.93 $ 0.91 $ 1.01 $ 0.99 $ 0.95 $ 0.93 $ 0.82 $ 0.81 $ 0.93 $ 0.91 $ 0.92 $ 0.90 Net Income volatility from the third quarter of 2004 to the second quarter of 2005 was primarily driven by the impact of changes in interest rates on the fair value of derivative instruments which did not qualify for SFAS 133 hedge accounting treatment. As rates decreased in the third quarter of 2004 and the second quarter of 2005, the Corporation’s Net Income increased driven by increases in the fair value of these derivative instruments. As rates increased in the first quarter of 2005, the Corporation’s Net Income decreased as the rise in rates adversely impacted the fair value of the derivative instruments. Bank of America Corporation and Subsidiaries Consolidated Balance Sheet 2005 Quarters (Dollars in millions) Fourth Third Second First As Previously Reported(1) Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Loans and leases, net of allowance for loan and lease losses . . . . . . . . . . . . . . $ 565,737 $ 565,746 $ 546,277 $ 546,286 $ 521,099 $ 521,109 $ 521,153 $ 521,144 Total assets . . . . . . . . . . . . . . . 1,291,795 1,291,803 1,252,259 1,252,267 1,246,330 1,246,339 1,212,239 1,212,229 Accrued expenses and other 35,319 liabilities . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . 98,107 Total liabilities . . . . . . . . . . . . . 1,190,571 1,190,270 1,151,001 1,150,539 1,145,790 1,145,004 1,113,720 1,113,302 31,938 100,848 31,749 101,338 33,250 99,149 32,976 99,885 34,470 96,894 34,940 95,638 35,081 98,763 Retained earnings . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . Total liabilities and 67,205 67,552 65,439 65,980 63,328 64,154 60,843 61,309 (7,518) 101,224 (7,556) 101,533 (6,509) 101,258 (6,580) 101,728 (4,992) 100,540 (5,023) 101,335 (5,559) 98,519 (5,617) 98,927 shareholders’ equity . . . . . . $1,291,795 $1,291,803 $1,252,259 $1,252,267 $1,246,330 $1,246,339 $1,212,239 $1,212,229 (1) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. 16 Bank of America Corporation and Subsidiaries Consolidated Balance Sheet 2004 Quarters Fourth Third Second First As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated (Dollars in millions) Loans and leases, net of allowance for loan and lease losses . . . . . . . . . $ 513,211 $ 513,187 $ 502,916 $ 502,890 $ 489,714 $ 489,685 1,024,701 1,110,432 Total assets . . . . . . . . . . . . . . . . . . . . . 1,110,457 1,024,731 1,072,802 1,072,829 $369,888 799,974 $369,858 799,942 Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . 41,243 98,078 1,010,812 41,590 97,116 1,010,197 28,851 100,586 974,818 29,205 99,582 974,168 28,682 98,319 928,910 28,747 98,082 928,738 18,635 81,231 751,198 19,269 79,474 750,075 Retained earnings . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . Total liabilities and shareholders’ 58,006 58,773 55,979 56,739 54,030 54,452 51,808 52,738 (2,587) 99,645 (2,764) 100,235 (2,669) 98,011 (2,806) 98,634 (3,862) 95,821 (4,142) 95,963 (2,743) 48,776 (2,582) 49,867 equity . . . . . . . . . . . . . . . . . . . . . . . . . $1,110,457 $1,110,432 $1,072,829 $1,072,802 $1,024,731 $1,024,701 $799,974 $799,942 Recent Events On June 30, 2005, we announced a definitive agreement to acquire all outstanding shares of MBNA Corporation (MBNA Merger), a leading provider of credit card and payment products, for approximately $35.0 billion in stock (85 percent) and cash (15 percent). This transaction closed on January 1, 2006. Under the terms of the agreement, MBNA stockholders received 0.5009 of a share of our common stock plus $4.125 for each MBNA share of common stock. On June 17, 2005, we announced a definitive agreement to purchase approximately nine percent of the stock of China Construction Bank (CCB) for $3.0 billion. Under this agreement, we made an initial purchase of CCB shares for $2.5 billion in August 2005 and an additional purchase of $500 million in October 2005, during CCB’s initial public offering. These shares are non-transferable until the third anniversary of the initial public offering. We also hold an option that allows us to increase our interest in CCB to 19.9 percent over the next five years. CCB is the third largest commercial bank in China based on total assets. Effective for the third quarter dividend, our Board of Directors (the Board) increased the quarterly cash dividend 11 percent from $0.45 to $0.50 per common share. In October 2005, the Board declared a fourth quarter cash dividend which was paid on December 23, 2005 to common shareholders of record on December 2, 2005. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share payable on March 24, 2006 to shareholders of record on March 3, 2006. On October 15, 2004, we acquired 100 percent of National Processing, Inc. (NPC), for $1.4 billion in cash, creating the second largest merchant processor in the United States. On April 1, 2004, we closed our merger with FleetBoston Financial Corporation (FleetBoston Merger). The merger was accounted for under the purchase method of accounting. Accordingly, results for 2004 include the impact of FleetBoston for nine months of combined company results. Economic Overview In 2005, economic performance was strong, despite a near doubling in energy prices, persistent hikes in the Federal Funds rate and the destructive hurricanes in the second half of 2005. In the United States, real Gross Domestic Product rose a solid 3.6 percent. Global economic expansion was healthy, as robust growth in Asian nations was offset by weaker activity in core European nations. In the U.S., consumer spending was particularly resilient to the higher energy prices that reduced real purchasing power. Rising employment and wages lifted personal income and financial wealth reached an all-time high, while the rate of personal savings fell again. Following several years of robust increases in real estate activity and housing values, real estate softened in the second half of 2005 and the volume of mortgage refinancing receded. Heightened efficiencies generated sustained productivity gains that constrained costs of production and contributed to record-breaking operating profits and cash flows. While business investment spending was strong and employment gains firm, inventories remained lean. The strong business performance generated growth in business lending and supported healthy credit quality. Although the higher energy prices pushed up headline inflation, core inflation, which excludes the volatile food and energy prices, remained low. The Federal Reserve raised rates at every Federal Open Market Committee meeting in 2005, lifting the Federal Funds rate to 4.25 percent at year-end. However, these rate hikes were widely anticipated, contributing to very low bond yields and a significantly flatter yield curve. 17 Performance Overview Net Income totaled $16.5 billion, or $4.04 per diluted common share in 2005, increases of 18 percent and 11 percent from $13.9 billion, or $3.64 per diluted common share in 2004. Business Segment Total Revenue and Net Income Total Revenue Net Income (Dollars in millions) 2005 2004 (Restated) Global Consumer and Small Business Banking . . . . . . . . . . . . . . . . . . $28,876 11,160 Global Business and Financial Services . . . . . . . . . . . . . . . . . . . . . . . . 9,009 Global Capital Markets and Investment Banking . . . . . . . . . . . . . . . . 7,393 Global Wealth and Investment Management . . . . . . . . . . . . . . . . . . . . 485 All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,156 9,251 9,046 5,933 296 2005 $ 7,156 4,562 1,736 2,388 623 2004 (Restated) $ 5,971 3,844 1,924 1,605 603 Total FTE basis(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FTE adjustment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,923 (832) 49,682 (717) 16,465 13,947 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,091 $48,965 $16,465 $13,947 (1) Total revenue for the segments and All Other is on a fully taxable-equivalent (FTE) basis. For more information on a FTE basis, see Supplemental Financial Data beginning on page 24. Global Consumer and Small Business Banking Net Income increased $1.2 billion, or 20 percent, to $7.2 billion in 2005. Driving the increase was the impact of FleetBoston, which contributed to increases in Net Interest Income, Card Income and Service Charges. Also impacting the increase in Net Income was higher Mortgage Banking Income driven by lower MSR impairment charges. Partially offsetting these increases was higher Provision for Credit Losses and Noninterest Expense. For more information on Global Consumer and Small Business Banking, see page 28. Global Business and Financial Services Net Income increased $718 million, or 19 percent, to $4.6 billion in 2005. The increase was primarily due to higher Net Interest Income as Average Loans and Leases, and Average Deposits increased. Also driving the increase in Net Income was higher other noninterest income, Service Charges and the impact of FleetBoston. Offsetting these increases were higher Noninterest Expense and a reduced benefit from Provision for Credit Losses. For more information on Global Business and Financial Services, see page 34. Global Capital Markets and Investment Banking Net Income decreased $188 million, or 10 percent, to $1.7 billion in 2005. The decrease was driven by lower trading- related Net Interest Income and Service Charges, and a reduced benefit from Provision for Credit Losses partially offset by higher Trading Account Profits, Equity Investment Gains, and Investment and Brokerage Services Income. For more information on Global Capital Markets and Investment Banking, see page 35. Global Wealth and Investment Management Net Income increased $783 million, or 49 percent, to $2.4 billion in 2005. The increase was due to higher Net Interest Income as we experienced increases in Average Deposits, and Average Loans and Leases driven by the impact of FleetBoston. Also impacting the increase in Net Income was higher Investment and Brokerage Services Income. Partially offsetting these increases was higher Personnel Expense. Total assets under management increased $30.9 billion to $482.4 billion at December 31, 2005. For more information on Global Wealth and Investment Management, see page 38. All Other Net Income increased $20 million, or three percent, to $623 million in 2005. This increase was primarily a result of an increase in Equity Investment Gains offset by a decrease in Gains on Sales of Debt Securities and Other Income. Other Income decreased primarily as a result of negative changes in the fair value of derivative instruments, which do not qualify for SFAS 133 hedge accounting, due to increasing rates during 2005. For more information on All Other, see page 40. 18 Financial Highlights Net Interest Income Net Interest Income on a FTE basis increased $2.9 billion to $31.6 billion in 2005 compared to 2004. The primary drivers of the increase were the FleetBoston Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, higher domestic deposit levels and a larger ALM portfolio (primarily securities). Partially offsetting these increases was the adverse impact of spread compression due to the flattening of the yield curve, which contributed to lower Net Interest Income. The net interest yield on a FTE basis declined 33 basis points (bps) to 2.84 percent in 2005. This was primarily due to the adverse impact of an increase in lower-yielding, trading-related balances and spread compression, which was partially offset by growth in core deposit and consumer loans. For more information on Net Interest Income on a FTE basis, see Table I on page 80. Noninterest Income (Dollars in millions) Noninterest Income 2005 2004 (Restated) Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,704 4,184 Investment and brokerage services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805 1,856 Investment banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,040 Equity investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,753 Card income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,812 Trading account profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,989 3,614 414 1,886 863 4,592 869 1,778 Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,354 $21,005 Noninterest Income increased $4.3 billion to $25.4 billion for 2005 compared to 2004, due to the following which includes the impact of FleetBoston: • Service Charges grew $715 million driven by organic account growth. • Investment and Brokerage Services increased $570 million due to increases in asset management fees and mutual fund fees. • Mortgage Banking Income increased $391 million due to lower MSR impairment charges which were partially offset by lower production income. • Equity Investment Gains increased $1.2 billion, primarily in Principal Investing, as liquidity in the private equity markets increased. • Card Income increased $1.2 billion due to increased interchange income and merchant discount fees driven by growth in debit and credit purchase volumes and the acquisition of NPC. • Trading Account Profits increased $943 million due to increased customer activity driven by our strategic initiative in Global Capital Markets and Investment Banking to expand business capabilities and opportunities, and the absence of a writedown of the Excess Spread Certificates (the Certificates) that occurred in the prior year. For more information on the Certificates, see Note 1 of the Consolidated Financial Statements. • Other Income decreased $578 million primarily related to losses on derivative instruments used as economic hedges in the ALM process that did not qualify for SFAS 133 hedge accounting. Provision for Credit Losses The Provision for Credit Losses increased $1.2 billion to $4.0 billion in 2005 with credit card being the primary driver of the increase. Consumer credit card net charge-offs increased $1.3 billion from 2004 to $3.7 billion with an estimated $578 million related to the increase in bankruptcy filings prior to the effective date of the new bankruptcy legislation enacted in the fourth quarter of 2005. We estimate that approximately 70 percent of these bankruptcy-related charge-offs represent acceleration from 2006 and were provided for previously. Also impacting credit card net charge-offs and the Provision for Credit Losses were organic growth and seasoning of the portfolio, the impact of the FleetBoston portfolio and new advances on accounts for which previous loan balances were sold to the securitization trusts. The provision also increased as the rate of credit quality improvement slowed in the commercial portfolio and a $50 million reserve was established for estimated losses associated with Hurricane Katrina. Partially offsetting these increases was a reduction in the reserves of $250 million due to reduced uncertainties resulting from the completion of credit-related integration activities for FleetBoston. 19 For more information on credit quality, see Credit Risk Management beginning on page 49. Gains on Sales of Debt Securities Gains on Sales of Debt Securities in 2005 were $1.1 billion compared to $1.7 billion in 2004. For more information on Gains on Sales of Debt Securities, see Market Risk Management beginning on page 65. Noninterest Expense Noninterest Expense (Dollars in millions) 2005 2004 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,054 $13,435 2,379 Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,349 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664 Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330 Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 4,457 Other general operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618 Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,588 1,199 1,255 930 809 1,487 827 4,120 412 Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,681 $27,012 Noninterest Expense increased $1.7 billion to $28.7 billion in 2005 compared to 2004, primarily due to the impact of FleetBoston and increases in personnel-related costs. Pre-tax cost savings from the FleetBoston Merger included in the above were $909 million in 2004 and $1.9 billion in 2005, which exceeded the $1.6 billion estimate in the October 2003 FleetBoston Merger announcement. Income Tax Expense Income Tax Expense was $8.0 billion in 2005, reflecting an effective tax rate of 32.7 percent. The effective tax rate was lower than 2004 primarily as a result of a tax benefit of $70 million related to the special one-time deduction associated with the repatriation of certain foreign earnings under the American Jobs Creation Act of 2004. In 2004, Income Tax Expense was $7.0 billion, reflecting an effective tax rate of 33.3 percent. For more information on Income Tax Expense, see Note 18 of the Consolidated Financial Statements. 20 Balance Sheet Analysis Table 1 Selected Balance Sheet Data (Dollars in millions) Assets Federal funds sold and securities purchased under agreements to December 31 Average Balance 2005 2004 (Restated) 2005 2004 (Restated) resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149,785 $ Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases, net of allowance for loan and lease losses . . . . . . . All other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,707 221,556 47 565,746 222,962 91,360 $ 169,132 $ 128,981 104,616 133,502 93,587 194,743 330 513,187 217,225 219,651 192 528,793 218,622 149,628 543 464,408 196,455 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,803 $1,110,432 $1,269,892 $1,044,631 Liabilities Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 634,670 $ 618,570 $ 632,432 $ 551,559 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper and other short-term borrowings . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,655 50,890 116,269 100,848 46,938 119,741 36,654 78,598 97,116 59,518 230,751 57,689 95,657 97,709 55,793 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190,270 101,533 1,010,197 100,235 1,170,031 99,861 165,218 35,326 62,347 92,303 53,063 959,816 84,815 Total liabilities and shareholders’ equity . . . . . . . $1,291,803 $1,110,432 $1,269,892 $1,044,631 Balance Sheet Overview At December 31, 2005, Total Assets were $1.3 trillion, an increase of $181.4 billion, or 16 percent, from December 31, 2004. Average Total Assets in 2005 increased $225.3 billion, or 22 percent, from 2004. Growth in Total Assets (both period end and average balances) in 2005 was attributable to increases in various line items primarily driven by an increase in trading-related activity due to the strategic growth initiative, growth in the ALM portfolio and growth in Loans and Leases. Average Total Assets also increased due to the impact of the FleetBoston Merger. At December 31, 2005, Total Liabilities were $1.2 trillion, an increase of $180.1 billion, or 18 percent, from December 31, 2004. Average Total Liabilities in 2005 increased $210.2 billion, or 22 percent, from 2004. Growth in Total Liabilities (both period end and average balances) in 2005 was primarily due to increases in trading-related liabilities due to the strategic growth initiative, increase in wholesale funding and organic growth in core deposits. Average Total Liabilities also increased due to the impact of the FleetBoston Merger. Federal Funds Sold and Securities Purchased under Agreements to Resell The Federal Funds Sold and Securities Purchased under Agreements to Resell average balance increased $40.2 billion to $169.1 billion in 2005 from activities in the trading businesses as a result of expanded trading activities related to the strategic initiative and to meet a variety of customers’ needs. Trading Account Assets Our Trading Account Assets consist primarily of fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $28.9 billion to $133.5 billion in 2005, which was due to growth in client-driven market-making activities in interest rate, credit and equity products, and an increase in proprietary trading activities. For additional information, see Market Risk Management beginning on page 65. Securities AFS Securities include fixed income securities such as mortgage-backed securities, foreign debt, asset-backed securities, municipal debt, equity instruments, U.S. Government agencies and corporate debt. We use the AFS portfolio 21 primarily to manage interest rate risk, liquidity risk and regulatory capital, and to take advantage of market conditions that create more economically attractive returns on these investments. The average balance in the AFS portfolio grew by $70.0 billion from 2004 primarily due to the reinvestment of available liquidity and as part of our ALM strategy. For additional information, see Market Risk Management beginning on page 66. Loans and Leases, Net of Allowance for Loan and Lease Losses Average Loans and Leases, net of allowance for loan and lease losses, were $528.8 billion in 2005, an increase of 14 percent from 2004. The increase of $40.0 billion in the consumer loan and lease portfolio and $24.6 billion in the commercial loan and lease portfolio was primarily due to organic loan growth. Average Loans and Leases, net of allowance for loan and lease losses, also increased due to the impact of the FleetBoston Merger. For a more detailed discussion of the loan portfolio and the allowance for credit losses, see Credit Risk Management beginning on page 49, and Notes 7 and 8 of the Consolidated Financial Statements. Deposits Average Deposits increased $80.9 billion to $632.4 billion in 2005 compared to 2004 due to a $46.3 billion increase in average domestic interest-bearing deposits and a $24.1 billion increase in average noninterest-bearing deposits primarily due to organic growth including the impact of FleetBoston. We categorize our deposits as core or market-based deposits. Core deposits are generally customer-based and represent a stable, low-cost funding source that usually reacts more slowly to interest rate changes than market-based deposits. Core deposits include savings, NOW and money market accounts, consumer CDs and IRAs, and noninterest-bearing deposits. Core deposits exclude negotiable CDs, public funds, other domestic time deposits and foreign interest-bearing deposits. Average core deposits increased $69.5 billion to $563.6 billion in 2005, a 14 percent increase from the prior year. The increase was distributed between consumer CDs, noninterest-bearing deposits, NOW and money market deposits, and savings. Average market-based deposit funding increased $11.4 billion to $68.8 billion in 2005 compared to 2004. The increase was primarily due to a $10.5 billion increase in foreign interest-bearing deposits. Federal Funds Purchased and Securities Sold under Agreements to Repurchase The Federal Funds Purchased and Securities Sold under Agreements to Repurchase average balance increased $65.5 billion to $230.8 billion in 2005 as a result of expanded trading activities related to the strategic initiative and investor client activities. Trading Account Liabilities Our Trading Account Liabilities consist primarily of short positions in fixed income securities (including government and corporate debt), equity and convertible instruments. The average balance increased $22.4 billion to $57.7 billion in 2005, which was due to growth in client-driven market-making activities in interest rate, credit and equity products, and an increase in proprietary trading activities. For additional information, see Market Risk Management beginning on page 66. Commercial Paper and Other Short-term Borrowings Commercial Paper and Other Short-term Borrowings provide a funding source to supplement Deposits in our ALM strategy. The average balance increased $33.3 billion to $95.7 billion in 2005 due to funding needs associated with the growth of core asset portfolios, primarily Loans and Leases, and AFS Securities. 22 Table 2 Five-Year Summary of Selected Financial Data(1) (Dollars in millions, except per share information) Income statement Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average common shares issued and outstanding 2005 2004 (Restated) 2003 (Restated) 2002 (Restated) 2001 (Restated) $ $ 30,737 25,354 56,091 4,014 1,084 28,681 24,480 8,015 16,465 $ 27,960 21,005 48,965 2,769 1,724 27,012 20,908 6,961 13,947 $ 20,505 17,329 37,834 2,839 941 20,155 15,781 5,019 10,762 $ 20,117 14,874 34,991 3,697 630 18,445 13,479 3,926 9,553 19,904 15,863 35,767 4,287 475 20,709 11,246 3,747 7,499 (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,008,688 3,758,507 2,973,407 3,040,085 3,189,914 Average diluted common shares issued and outstanding (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,068,140 3,823,943 3,030,356 3,130,935 3,251,308 Performance ratios Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common shareholders’ equity . . . . . . . . . . . . . . . . . Return on average tangible common shareholders’ equity(2) . . . . . . . . Total ending equity to total ending assets . . . . . . . . . . . . . . . . . . . . . . . Total average equity to total average assets . . . . . . . . . . . . . . . . . . . . . Dividend payout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per common share data Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.30% 1.34% 1.44% 1.46% 1.16% 16.51 34.03 7.86 7.86 46.61 4.10 4.04 1.90 25.32 $ 16.47 32.59 9.03 8.12 46.31 3.71 3.64 1.70 24.70 $ 21.50 29.20 6.76 6.69 39.76 3.62 3.55 1.44 16.86 $ 19.96 27.53 7.92 7.33 38.79 3.14 3.05 1.22 17.04 $ 15.42 23.51 7.92 7.55 48.40 2.35 2.30 1.14 15.63 Average balance sheet Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 537,218 1,269,892 632,432 97,709 99,590 99,861 $ 472,617 1,044,631 551,559 92,303 84,584 84,815 $ 356,220 749,104 406,233 67,077 50,035 50,091 $ 336,820 653,732 371,479 65,550 47,837 47,898 $ 365,447 644,887 362,653 69,621 48,610 48,678 Capital ratios (at year end) Risk-based capital: Tier 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25% 11.08 5.91 8.20% 11.73 5.89 8.02% 12.05 5.86 8.41% 12.63 6.44 8.44% 12.81 6.67 Market price per share of common stock Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 46.15 47.08 41.57 $ 46.99 47.44 38.96 $ 40.22 41.77 32.82 $ 34.79 38.45 27.08 31.48 32.50 23.38 (1) As a result of the adoption of SFAS 142 on January 1, 2002, we no longer amortize Goodwill. Goodwill amortization expense was $662 million in 2001. (2) Return on average tangible common shareholders’ equity equals net income available to common shareholders plus amortization of intangibles, divided by average common shareholders’ equity less goodwill, core deposit intangibles and other intangibles. MBNA Merger Overview Pursuant to the Agreement and Plan of Merger, dated June 30, 2005, by and between the Corporation and MBNA (the MBNA Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of MBNA on January 1, 2006. The MBNA Merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the company by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations. MBNA’s results of operations will be included in the Corporation’s results beginning January 1, 2006. The transaction will be accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA Merger date. Under the terms of the MBNA Merger Agreement, MBNA stockholders received 0.5009 of a share of the Corporation’s common stock plus $4.125 for each MBNA share of common stock. As provided by the MBNA Merger 23 Agreement, approximately 1.3 billion shares of MBNA common stock were exchanged for approximately 631 million shares of the Corporation’s common stock. At the date of the MBNA Merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. On November 3, 2005, MBNA redeemed all shares of its 7 1⁄ 2% Series A Cumulative Preferred Stock and Series B Adjustable Rate Cumulative Preferred Stock, in accordance with the terms of the MBNA Merger Agreement. Supplemental Financial Data Table 3 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by accounting principles generally accepted in the United States (GAAP). Other companies may define or calculate supplemental financial data differently. Operating Basis Presentation In managing our business, we may at times look at performance excluding certain non-recurring items. For example, as an alternative to Net Income, we view results on an operating basis, which represents Net Income excluding Merger and Restructuring Charges. The operating basis of presentation is not defined by GAAP. We believe that the exclusion of Merger and Restructuring Charges, which represent events outside our normal operations, provides a meaningful year-to-year comparison and is more reflective of normalized operations. Net Interest Income—FTE Basis In addition, we view Net Interest Income and related ratios and analysis (i.e. efficiency ratio, net interest yield and operating leverage) on a FTE basis. Although this is a non-GAAP measure, we believe managing the business with Net Interest Income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, Net Interest Income is adjusted to reflect tax-exempt income on an equivalent before-tax basis with a corresponding increase in Income Tax Expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of Net Interest Income arising from taxable and tax-exempt sources. Performance Measures As mentioned above, certain performance measures including the efficiency ratio, net interest yield, and operating leverage utilize Net Interest Income (and thus Total Revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many basis points we are earning over the cost of funds. Operating leverage measures the total percentage revenue growth minus the total percentage expense growth for the corresponding period. During our annual integrated planning process, we set operating leverage and efficiency targets for the Corporation and each line of business. Targets vary by year and by business and are based on a variety of factors, including: maturity of the business, investment appetite, competitive environment, market factors, and other items (e.g. risk appetite). The aforementioned performance measures and ratios, earnings per common share (EPS), return on average assets, return on average common shareholders’ equity and dividend payout ratio, as well as those measures discussed more fully below, are presented in Table 3. Return on Average Common Shareholders’ Equity, Return on Average Tangible Common Shareholders’ Equity and Shareholder Value Added We also evaluate our business based upon return on average common shareholders’ equity (ROE), return on average tangible common shareholders’ equity (ROTE) and shareholder value added (SVA) measures. ROE, ROTE and SVA utilize non-GAAP allocation methodologies. ROE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity allocated to that unit. ROTE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity reduced by Goodwill, Core Deposit Intangibles and Other Intangibles, allocated to that unit. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. For more information, see Basis of Presentation beginning on page 27. These measures are used to evaluate our use of equity (i.e. capital) at the individual unit level and are integral components in the analytics for resource allocation. Using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments. Investments and initiatives are analyzed using SVA during the annual planning process for maximizing allocation of corporate resources. In addition, profitability, relationship and investment models all use ROE and SVA as key measures to support our overall growth goal. 24 Table 3 Supplemental Financial Data and Reconciliations to GAAP Financial Measures (Dollars in millions, except per share information) 2005 2004 (Restated) 2003 (Restated) 2002 (Restated) 2001 (Restated) Operating basis(1,2) Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,740 4.17 Operating earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11 Diluted operating earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,594 Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating efficiency ratio (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leverage (combined basis)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.79 34.57 49.66 45.84 8.33 1.32% FTE basis data Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,569 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,923 Net interest yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.38 2.84% $14,358 3.82 3.75 5,718 $10,762 3.62 3.55 5,475 $ 9,553 3.14 3.05 4,030 $ 8,749 2.74 2.69 3,794 1.37% 1.44% 1.46% 1.36% 16.96 33.51 53.13 44.98 0.44 21.50 29.20 52.38 39.76 (6.06) 19.96 27.53 51.84 38.79 n/a 17.99 27.02 53.74 41.48 n/a $28,677 49,682 $21,149 38,478 $20,705 35,579 $20,247 36,110 3.17% 54.37 3.26% 52.38 3.63% 51.84 3.61% 57.35 Reconciliation of net income to operating earnings Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,465 412 Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137) Related income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,947 618 (207) $10,762 — — $ 9,553 — — $ 7,499 1,700 (450) Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,740 $14,358 $10,762 $ 9,553 $ 8,749 Reconciliation of EPS to operating EPS Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Reconciliation of diluted EPS to diluted operating EPS Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted operating earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.10 0.07 4.17 4.04 0.07 4.11 $ $ $ $ 3.71 0.11 3.82 3.64 0.11 3.75 $ $ $ $ 3.62 — 3.62 3.55 — 3.55 $ $ $ $ 3.14 — 3.14 3.05 — 3.05 $ $ $ $ 2.35 0.39 2.74 2.30 0.39 2.69 Reconciliation of net income to shareholder value added Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,465 809 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles(2) 275 Merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,947 664 411 $10,762 217 — $ 9,553 218 — $ 7,499 878 1,250 Cash basis earnings on an operating basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,549 (10,955) 15,022 (9,304) 10,979 (5,504) 9,771 (5,741) 9,627 (5,833) Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,594 $ 5,718 $ 5,475 $ 4,030 $ 3,794 Reconciliation of return on average assets to operating return on average assets Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.30% 0.02 1.32% 1.34% 0.03 1.37% 1.44% — 1.44% 1.46% — 1.46% 1.16% 0.20 1.36% Reconciliation of return on average common shareholders’ equity to operating return on average common shareholders’ equity Return on average common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.51% 0.28 16.47% 0.49 21.50% — 19.96% — 15.42% 2.57 Operating return on average common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.79% 16.96% 21.50% 19.96% 17.99% Reconciliation of return on average tangible common shareholders’ equity to operating return on average tangible common shareholders’ equity Return on average tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.03% 0.54 32.59% 0.92 29.20% — 27.53% — 23.51% 3.51 Operating return on average tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.57% 33.51% 29.20% 27.53% 27.02% Reconciliation of efficiency ratio to operating efficiency ratio (FTE basis) Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.38% (0.72) 54.37% (1.24) 52.38% — 51.84% — 57.35% (3.61) Operating efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.66% 53.13% 52.38% 51.84% 53.74% Reconciliation of dividend payout ratio to operating dividend payout ratio Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges, net of tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.61% (0.77) 46.31% (1.33) 39.76% — 38.79% — 48.40% (6.92) Operating dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45.84% 44.98% 39.76% 38.79% 41.48% Reconciliation of operating leverage to operating leverage (combined basis) Operating leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of FleetBoston pro forma results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.41% (0.93) 0.85 (4.91)% 3.07 2.28 Operating leverage (combined basis)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.33% 0.44% (1.12)% — (4.94) (6.06)% n/a n/a n/a n/a n/a n/a n/a n/a (1) Operating basis excludes Merger and Restructuring Charges. Merger and Restructuring Charges were $412 million and $618 million in 2005 and 2004. Merger and Restructuring Charges in 2001 represented Provision for Credit Losses of $395 million and Noninterest Expense of $1.3 billion, both of which were related to the exit of certain consumer finance businesses. (2) As a result of the adoption of SFAS 142 on January 1, 2002, we no longer amortize Goodwill. Goodwill amortization expense was $662 million in 2001. (3) Operating leverage (combined basis) includes the results of FleetBoston for the year ended December 31, 2004 and 2003 on a pro forma basis. In 2004, operating leverage was impacted by the costs to integrate FleetBoston; however, in 2005, operating leverage benefited from FleetBoston Merger’s cost savings. n/a = not available 25 Core Net Interest Income—Managed Basis In managing our business, we review core net interest income on a managed basis, which adjusts reported Net Interest Income on a FTE basis for the impact of trading-related activities and revolving securitizations. As discussed in the Global Capital Markets and Investment Banking business segment section beginning on page 35, we evaluate our trading results and strategies based on total trading-related revenue, calculated by combining trading-related Net Interest Income with Trading Account Profits. We also adjust for loans that we originated and sold into revolving credit card, home equity line and commercial loan securitizations. Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. An analysis of core net interest income—managed basis, core average earning assets—managed basis and core net interest yield on earning assets—managed basis, which adjusts for the impact of these two non-core items from reported Net Interest Income on a FTE basis, is shown below. Table 4 Core Net Interest Income—Managed Basis (Dollars in millions) Net interest income As reported (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Impact of trading-related net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of revolving securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 (Restated) 2003 (Restated) 31,569 $ 28,677 $ 21,149 (2,235) (2,039) (1,444) 30,125 708 26,638 882 18,914 311 Core net interest income—managed basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,833 $ 27,520 $ 19,225 Average earning assets As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,111,994 $ 905,273 $ 649,598 Impact of trading-related earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,428) (299,374) (227,230) Core average earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of revolving securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812,620 8,440 678,043 10,181 477,170 3,342 Core average earning assets—managed basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 821,060 $ 688,224 $ 480,512 Net interest yield contribution As reported (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of trading-related activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core net interest yield on earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of revolving securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.84% 0.87 3.71 0.04 3.17% 0.76 3.93 0.06 3.26% 0.70 3.96 0.03 Core net interest yield on earning assets—managed basis . . . . . . . . . . . . . . . . . . 3.75% 3.99% 3.99% Core net interest income on a managed basis increased $3.3 billion for 2005. This increase was driven by the impact of the FleetBoston Merger, organic growth in consumer (primarily credit card and home equity) and commercial loans, higher domestic deposit levels and a larger ALM portfolio (primarily securities). Partially offsetting these increases was the adverse impact of spread compression due to the flattening of the yield curve. Core average earning assets on a managed basis increased $132.8 billion primarily due to higher ALM levels (primarily securities) and higher levels of consumer loans (primarily home equity and credit card). The increases in these assets were due to organic growth as well as the impact of the FleetBoston Merger. The core net interest yield on a managed basis decreased 24 bps as a result of the impact of spread compression due to flattening of the yield curve and a larger ALM portfolio partially offset by higher levels of core deposits and consumer loans. Business Segment Operations Segment Description The Corporation reports the results of its operations through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management. During the third quarter of 2005, our operations in Mexico were realigned and are now included in the results of Global Business and Financial Services, rather than Global Capital Markets and Investment Banking. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new 26 segment is called Global Corporate and Investment Banking. This new segment will enable us to more effectively leverage the universal bank model in servicing our business clients. In the universal bank model, teams of consumer, commercial and investment bankers work together to provide all clients, regardless of size, the right combination of products and services to meet their needs. All Other consists primarily of Equity Investments, the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with the ALM process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities. For more information on All Other, see page 40. Basis of Presentation We prepare and evaluate segment results using certain non-GAAP methodologies and performance measures many of which are discussed in Supplemental Financial Data on page 24. We begin by evaluating the operating results of the businesses, which by definition excludes Merger and Restructuring Charges. The segment results also reflect certain revenue and expense methodologies, which are utilized to determine operating income. The Net Interest Income of the business segments includes the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics. Net Interest Income also reflects an allocation of Net Interest Income generated by assets and liabilities used in our ALM process. The results of the business segments will fluctuate based on the performance of corporate ALM activities. The restatement impact to Net Interest Income, associated with the economic hedges that did not qualify for SFAS 133 hedge accounting, was included in All Other, and was not allocated to the business segments. Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing costs, item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The costs of certain centralized or shared functions are allocated based on methodologies which reflect utilization. Equity is allocated to the business segments using a risk-adjusted methodology incorporating each unit’s credit, market and operational risk components. The nature of these risks is discussed further beginning on page 49. ROE is calculated by dividing Net Income by allocated equity. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital (i.e. equity). Cash basis earnings on an operating basis is defined as Net Income adjusted to exclude Merger and Restructuring Charges, and Amortization of Intangibles. The charge for capital is calculated by multiplying 11 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. Average equity is allocated to the business level using a methodology identical to that used in the ROE calculation. Management reviews the estimate of the rate used to calculate the capital charge annually. The Capital Asset Pricing Model is used to estimate our cost of capital. See Note 20 of the Consolidated Financial Statements for additional business segment information, selected financial information for the business segments and reconciliations to consolidated Total Revenue and Net Income amounts. 27 Global Consumer and Small Business Banking The strategy of Global Consumer and Small Business Banking is to attract, retain and deepen customer relationships. We achieve this strategy through our ability to offer a wide range of products and services through a franchise that stretches coast to coast through 29 states and the District of Columbia. We serve more than 38 million consumer and small business relationships utilizing our network of 5,873 banking centers, 16,785 domestic branded ATMs, and telephone and Internet channels. Within Global Consumer and Small Business Banking, our most significant product groups are Card Services, Consumer Real Estate and Consumer Deposit and Debit Products. Global Consumer and Small Business Banking (Dollars in millions) 2005 2004 Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,053 $ 15,911 Noninterest income: Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,996 1,012 5,476 339 11,823 28,876 4,271 (2) 13,440 11,163 4,007 4,329 589 4,359 (32) 9,245 25,156 3,333 117 12,555 9,385 3,414 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,156 $ 5,971 Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,013 $ 3,325 Net interest yield (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average: 21.31 46.54 21.28 49.91 5.63% 5.46% Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,019 $122,148 316,204 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,481 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,057 Common equity/Allocated equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,342 306,038 33,589 Year end: Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151,646 335,551 306,083 139,507 336,902 299,062 (1) Includes Credit Card Income of $3,847 million and $3,127 million for 2005 and 2004, and Debit Card Income of $1,629 million and $1,232 million for 2005 and 2004. In 2005, Net Interest Income increased $1.1 billion, or seven percent. Growth in deposits, a low cost source of funding, positively impacted Net Interest Income. Average Deposits increased $22.6 billion, or eight percent, driven by the impact of FleetBoston customers, deepening existing relationships and our focus on attracting new customers. Partially offsetting this growth was the migration of account balances of $28.1 billion from Global Consumer and Small Business Banking to Global Wealth and Investment Management. Net Interest Income was also positively impacted by the $21.9 billion, or 18 percent, increase in Average Loans and Leases. This increase was driven by higher average balances on home equity loans and lines of credit and average held credit card outstandings. The growth in held credit card outstandings was due to the impact of FleetBoston, increases in purchase volumes, the addition of more than 5 million new accounts primarily through our branch network and direct marketing programs, and new advances on accounts for which previous loan balances were sold to the securitization trusts. Noninterest Income increased $2.6 billion, or 28 percent, in 2005. The increase was primarily due to increases of $1.1 billion, or 26 percent, in Card Income, $667 million, or 15 percent, in Service Charges and $423 million in Mortgage Banking Income. Card Income increased mainly due to higher purchase volumes for credit and debit cards, the impact of the NPC acquisition in the fourth quarter of 2004, and increases in average managed credit card outstandings. The increases in card purchase volumes and average managed credit card outstandings were due to continued growth in our card business as we more effectively leveraged our branch network. The increase in Service Charges was due primarily 28 to the growth in new accounts. Mortgage Banking Income increased primarily due to a $400 million decrease in the impairment of MSRs. Also impacting these increases was the impact of FleetBoston. The Provision for Credit Losses increased $938 million, or 28 percent, to $4.3 billion in 2005 mainly due to credit card. For further discussion of the increased Provision for Credit Losses related to credit card, see the following section, Card Services. Noninterest Expense grew $885 million, or seven percent in 2005. The majority of the increase was due to the impact of FleetBoston and NPC. Card Services Card Services, which excludes debit cards, provides a broad offering of credit cards to an array of customers including consumers and small businesses. Our products include traditional credit cards, and a variety of co-branded and affinity card products. We also provide processing services for merchant card receipts, a business where we are a market leader, due in part to our acquisition of NPC during the fourth quarter of 2004. We evaluate our Card Services business on both a held and managed basis (a non-GAAP measure). Managed basis treats securitized loan receivables as if they were still on the balance sheet and presents the earnings on the sold loan receivables as if they were not sold. We evaluate credit card operations on a managed basis as the receivables that have been securitized are subject to the same underwriting standards and ongoing monitoring as the held loans. The credit performance of the managed portfolio is important to understanding the results of card operations. 29 The following table reconciles the credit card portfolio on a held basis to a managed basis to reflect the impact of securitizations. For assets that have been securitized, we record Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, as we are compensated for servicing income and gains or losses on securitizations. In a securitization, the credit card receivables, not the ongoing relationships, are sold to the trust. After the revolving period of the securitization, assuming no new securitizations, the newly generated credit card receivables arising from these relationships are recorded on our balance sheet. This has the effect of increasing Loans and Leases and increasing Net Interest Income and the Provision for Credit Losses (including net charge-offs), with a reduction in Noninterest Income. (Dollars in millions) Income Statement Data Credit Card Services 2005 2004 Held net interest income(1) Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,984 $ 4,283 799 572 Managed net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held noninterest income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managed noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held total revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managed total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held provision for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managed credit impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,556 5,082 3,951 (115) 3,243 (185) 3,836 8,935 457 9,392 3,999 434 4,433 3,058 7,526 614 8,140 3,112 524 3,636 Balance Sheet Data Average held credit card outstandings(1) Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,997 $43,435 6,861 5,051 Average managed credit card outstandings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,048 $50,296 Ending held credit card outstandings(1) Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,548 $51,726 6,903 2,237 Ending managed credit card outstandings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,785 $58,629 Credit Quality Statistics Held net charge-offs(1) Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,652 $ 2,305 524 434 Managed credit card net losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,086 $ 2,829 Held net charge-offs(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitizations impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managed credit card net losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.76% 0.16 6.92% 5.31% 0.31 5.62% (1) Held basis is a GAAP measure. Strong credit card growth drove Card Services revenue in 2005. Held credit card revenue increased $1.4 billion, or 19 percent, to $8.9 billion. Contributing to this increase was the $701 million increase in held Net Interest Income, due to a $10.6 billion, or 24 percent, increase in average held credit card outstandings. The increase in average held credit card outstandings was due to the impact of FleetBoston, increases in purchase volumes, the addition of more than 5 million new accounts primarily through our branch network and direct marketing programs, and new advances on accounts for which previous loan balances were sold to the securitization trusts. Also driving Card Services held revenue was an increase in Noninterest Income of $708 million, or 22 percent, in 2005. The increase resulted from higher merchant discount fees, interchange fees, cash advance fees and late fees. Merchant discount fees increased $418 million primarily due to the acquisition of NPC. Interchange fees increased $87 million mainly due to a $10.4 billion, or 13 percent, increase in consumer credit card purchase volumes. Cash advance fees increased $64 million due to higher balance transfers. Late fees increased $62 million in 2005. 30 Held Provision for Credit Losses increased $887 million to $4.0 billion in 2005, driven primarily by higher net charge-offs. Consumer card net charge-offs were $3.7 billion, or 6.76 percent in 2005 compared to $2.3 billion, or 5.31 percent in 2004. Higher credit card net charge-offs were driven by an increase in bankruptcy related charge-offs of $578 million as card customers “rushed to file” ahead of the new bankruptcy law. Also impacting net charge-offs were organic portfolio growth and seasoning, increases effective in 2004 in credit card minimum payment requirements, the impact of FleetBoston and new advances on accounts for which previous loan balances were sold to the securitization trusts. We estimate that approximately 70 percent of the increased bankruptcy-related charge-offs represent acceleration from 2006. Excluding bankruptcy-related charge-offs representing acceleration from 2006 and charge-offs associated with the 2004 changes in credit card minimum payment requirements that were provided for in late 2004, the increased net charge-offs were the primary driver of the higher Provision for Credit Losses. In addition, the Provision for Credit Losses was impacted by new advances on accounts for which previous loan balances were sold to the securitization trusts, and the establishment of reserves in 2005 for additional changes made in late 2005 in credit card minimum payment requirements. Managed card revenue increased $1.3 billion, or 15 percent, to $9.4 billion in 2005, driven by a $474 million, or nine percent, increase in managed Net Interest Income, and a $778 million, or 25 percent increase, in managed Noninterest Income. Average managed credit card outstandings were $59.0 billion in 2005 compared to $50.3 billion in 2004. The impact of FleetBoston and organic growth drove the increases in 2005. Managed consumer credit card net losses were $4.1 billion, or 6.92 percent of total average managed credit card loans in 2005, compared to $2.8 billion, or 5.62 percent in 2004. Higher managed credit card net losses were driven by an increase in bankruptcy net losses resulting from the change in the bankruptcy law, continued growth and seasoning, increases effective in 2004 in credit card minimum payment requirements and the impact of FleetBoston. For more information, see Credit Risk Management beginning on page 49. Consumer Real Estate Consumer Real Estate generates revenue by providing an extensive line of mortgage products and services to customers nationwide. Consumer Real Estate products are available to our customers through a retail network of personal bankers located in 5,873 banking centers, dedicated sales account executives in over 150 locations and through a dedicated sales force offering our customers direct telephone and online access to our products. Additionally, we serve our customers through a partnership with more than 6,600 mortgage brokers in 49 states. The mortgage product offerings for home purchase and refinancing needs include fixed and adjustable rate loans, and home equity lines of credit. To manage this portfolio, these products are either sold into the secondary mortgage market to investors while retaining Bank of America customer relationships or are held on our balance sheet for ALM purposes. Consumer Real Estate is managed with a focus on its two primary businesses, first mortgage and home equity. The first mortgage business includes the origination, fulfillment and servicing of first mortgage loan products. Servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers, and accounting for and remitting principal and interest payments to investors. Servicing income includes ancillary income derived in connection with these activities, such as late fees. The home equity business includes lines of credit and second mortgages. These two businesses provide us with a business model that meets customer real estate borrowing needs in various interest rate cycles. Total revenue for the Consumer Real Estate business increased $558 million to $3.2 billion in 2005. The following table shows the Global Consumer and Small Business Banking revenue components of the Consumer Real Estate business. Consumer Real Estate Revenue (Dollars in millions) 2005 2004 Net Interest Income Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,340 $1,108 Residential first mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,140 806 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,146 2,248 Mortgage banking income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 — 66 589 (349) 178 Total consumer real estate revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,224 $2,666 (1) For more information, see the following Mortgage Banking Income table. 31 Net Interest Income decreased $102 million primarily driven by the impact of spread compression due to flattening of the yield curve and the $2.3 billion decrease in average residential first mortgage balances. This decrease was partially offset by higher average balances in the home equity portfolio, which grew $11.2 billion, or 31 percent, to $47.7 billion which was attributable to account growth and larger line sizes resulting from enhanced product offerings, the expanding home equity market and the impact of FleetBoston. In 2005, home equity average balances across all business lines grew $18.8 billion, or 42 percent, to $63.9 billion and home equity production improved $15.3 billion, or 27 percent, to $72.0 billion compared to 2004. In 2005, there were no Trading Account Profits compared to a loss of $349 million in 2004, related to the Certificates. Effective June 1, 2004, the Certificates were converted to MSRs. Prior to the conversion, changes in the value of the Certificates, MSRs and derivatives used for risk management were recognized as Trading Account Profits. In 2004, Trading Account Profits included $342 million of downward adjustments for changes to valuation assumptions and prepayment adjustments. Mortgage Banking Income increased $423 million to $1.0 billion in 2005. The following summarizes the components of Mortgage Banking Income which include production income from loans sold in the secondary market and servicing income that reflects the performance of the servicing portfolio. Mortgage Banking Income (Dollars in millions) 2005 2004 Production income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 674 $ 765 Servicing income: Servicing fees and ancillary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net MSR and SFAS 133 derivative hedge adjustments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses on derivatives(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848 (613) 14 167 (15) (63) 338 615 (345) — 18 (1) (463) (176) Total mortgage banking income(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,012 $ 589 (1) Includes $(14) million and $2 million related to hedge ineffectiveness of cash flow hedges on our mortgage warehouse for 2005 and 2004. (2) Represents derivative hedge losses of $124 million under SFAS 133, offset by an increase in the value of the MSRs of $291 million for 2005, and derivative hedge gains of $228 million offset by a decrease in the value of the MSRs of $210 million for 2004. For additional information on MSRs, see Note 9 of the Consolidated Financial Statements. (3) Net losses on derivatives used as economic hedges of MSRs not designated as SFAS 133 hedges. (4) Includes revenue for mortgage services provided to other segments that are eliminated in consolidation (in All Other) of $207 million and $175 million for 2005 and 2004. Production for residential first mortgages, within Global Consumer and Small Business Banking, was $74.7 billion in 2005 compared to $80.2 billion in 2004, a decrease of seven percent. In 2005, production income decreased $91 million to $674 million due to lower production volume and margin compression. The volume reduction resulted in lower loan sales to the secondary market in 2005 of $65.1 billion, an eight percent decrease from 2004. Across all segments, residential first mortgage production was $86.8 billion in 2005 compared to $87.5 billion in 2004. Of the volume across all segments during 2005, $60.3 billion was originated through retail channels, and $26.5 billion was originated through the wholesale channel. This compares to $57.6 billion and $30.0 billion during 2004. Refinance activity in 2005 was approximately 49 percent of the production compared to 57 percent in 2004. The Consumer Real Estate servicing portfolio includes originated and retained residential mortgages, loans serviced for others and home equity loans. The servicing portfolio at December 31, 2005 was $368.4 billion, $35.9 billion higher than December 31, 2004, driven primarily by production, home equity account growth and lower prepayment rates. Net servicing income rose $514 million in 2005, primarily driven by a $400 million decrease in impairment of MSRs. Impairment charges in 2004 included a $261 million adjustment for changes in valuation assumptions and prepayment adjustments to align with changing market conditions and customer behavioral trends. 32 As of December 31, 2005, the MSR balance was $2.7 billion, an increase of $300 million, or 13 percent, from December 31, 2004. This value represented 122 bps of the related unpaid principal balance, a three percent increase from December 31, 2004. The following table outlines our MSR statistical information: Consumer Real Estate Mortgage Servicing Rights(1) December 31 2005 2004 (Dollars in millions) MSR data: Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,658 Capitalization value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.22% $ 2,358 1.19% Unpaid balance(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,172 Number of customers (in thousands) 1,619 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,795 1,582 (1) Excludes MSRs in Global Capital Markets and Investment Banking at December 31, 2005 and 2004 of $148 million and $123 million. (2) Represents the portion of our servicing portfolio for which a MSR asset has been recorded. MSRs are accounted for at the lower of cost or market with impairment recognized as a reduction to Mortgage Banking Income. A combination of derivatives and AFS securities (e.g. mortgage-backed securities) is utilized to hedge the changes in value associated with the MSRs. At December 31, 2005, $2.3 billion of MSRs were hedged using a SFAS 133 strategy and $250 million of MSRs were economically hedged using AFS securities. During 2005, Net Interest Income included $18 million on these AFS securities. At December 31, 2005, the unrealized loss on AFS securities used to economically hedge the MSRs was $29 million compared to an unrealized gain of $21 million at December 31, 2004. For more information on MSRs, see Notes 1 and 9 of the Consolidated Financial Statements. Consumer Deposit and Debit Products Consumer Deposit and Debit Products provides a comprehensive range of products to consumers and small businesses. Our products include traditional savings accounts, money market savings accounts, CDs and IRAs, regular and interest-checking accounts, debit cards and a variety of business checking options. In 2005, we added approximately 2.3 million net new retail checking accounts and 1.9 million net new retail savings accounts. This growth resulted from continued improvement in sales and service results in the Banking Center Channel, the introduction of new products, the addition of 99 new stores and the impact of FleetBoston. In the FleetBoston franchise, we opened 431,000 net new retail checking and 348,000 net new retail savings accounts since the FleetBoston Merger on April 1, 2004. Consumer deposit products provide a relatively stable and inexpensive source of liquidity. We earn net interest spread revenues from investing this liquidity in earning assets through client facing lending activity and our ALM process. The revenue streams from these activities are allocated to our deposit products using our funds transfer pricing process which takes into account the interest rates and maturity characteristics of the deposits. Deposits also generate account fees while debit cards generate interchange income. The following table shows the components of Total Revenue for Consumer Deposit and Debit Products. Consumer Deposit and Debit Products Revenue (Dollars in millions) 2005 2004 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,380 $ 6,982 Deposit service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debit card income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,986 1,629 6,615 4,321 1,232 5,553 Total deposit and debit revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,995 $12,535 Total deposit and debit revenue grew $2.5 billion, or 20 percent, in 2005. Driving this growth was an increase of $1.4 billion, or 20 percent, in Net Interest Income resulting from higher levels of deposits. Also impacting the growth in Net Interest Income was our pricing strategy and the positive impact of the FleetBoston Merger. Deposit service charges increased $665 million, or 15 percent, in 2005. The increase was primarily due to the growth of new accounts across our franchise and the impact of the FleetBoston Merger. 33 Debit card income, which is included in Card Income on the Consolidated Statement of Income, increased $397 million, or 32 percent, in 2005. Driving the increase was growth in transaction activity as purchase volumes increased 29 percent due to new accounts, growth in average ticket size and the positive impact of the FleetBoston Merger, as well as higher interchange rates on debit card transactions. Global Business and Financial Services Global Business and Financial Services serves mid-sized domestic and international business clients providing financial services, specialized industry expertise and local delivery through a global team of client managers and a variety of businesses including Global Treasury Services, Middle Market Banking, Business Banking, Commercial Real Estate Banking, Leasing, Business Capital, and Dealer Financial Services. It also includes our businesses in Latin America. During the third quarter of 2005, our operations in Mexico were realigned and are now included in the results of Global Business and Financial Services, rather than Global Capital Markets and Investment Banking. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new segment is called Global Corporate and Investment Banking. Global Treasury Services provides integrated working capital management and treasury solutions to clients across the U.S. and 50 countries through our network of proprietary offices and clearing arrangements with other financial institutions. Our clients include multinationals, middle-market companies, correspondent banks, commercial real estate firms and governments. Our services include treasury management, trade finance, foreign exchange, short-term credit facilities and short-term investing. The revenues and operating results are reflected in this segment as well as Global Consumer and Small Business Banking and Global Capital Markets and Investment Banking, based upon where customers and clients are serviced. Middle Market Banking provides commercial lending, treasury management products, investment banking, capital markets, and insurance services to middle-market companies across the U.S. Business Banking offers our client-managed small business customers a variety of business solutions to grow and manage their businesses. Products and services include a wide range of credit and treasury management solutions, advisory services such as merchant services, card products, payroll and employee benefits. Commercial Real Estate Banking, with offices in more than 60 cities across the U.S., provides project financing and treasury management solutions to private developers, homebuilders and commercial real estate firms. This business also includes community development banking, which provides lending and investing services to low- and moderate-income communities. Leasing provides leasing solutions to small businesses, middle-market and large corporations in the U.S. and internationally, offering expertise in the municipal, corporate aircraft, healthcare and vendor markets. Business Capital provides asset-based lending financing solutions that are customized to meet the capital needs of our clients by leveraging their assets on a primarily secured basis in the U.S., Canada and European markets. Dealer Financial Services provides indirect and direct lending and investing services, including floor plan programs and consumer financing for marine, recreational vehicle and auto dealerships through more than 10,000 dealer clients across the U.S. Latin America includes our full-service Latin American operations in Brazil, Chile, Argentina, and Uruguay, and our commercial and wealth and investment management operations in Mexico. These businesses primarily service indigenous and multinational corporations, small businesses and affluent consumers. On October 13, 2005, we announced an agreement to sell our asset management business in Mexico with $1.8 billion of assets under management to an entity in which we have a 24.9 percent investment. The sale will be completed in 2006. In December 2005, we entered into a definitive agreement for the sale of BankBoston Argentina assets and assumption of liabilities. The transaction is subject to obtaining all necessary regulatory approvals. For more information on our Latin American operations, see Foreign Portfolio beginning on page 56. 34 Global Business and Financial Services (Dollars in millions) 2005 2004 Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,788 $ 6,534 Noninterest income: Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and brokerage services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,469 221 1,682 3,372 11,160 (49) 146 4,162 7,193 2,631 1,287 168 1,262 2,717 9,251 (442) — 3,598 6,095 2,251 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,562 $ 3,844 Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,486 $ 1,297 Net interest yield (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average: 15.63 37.29 15.89 38.90 4.05% 4.06% Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,557 $151,725 184,771 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,254 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,193 Common equity/Allocated equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222,584 106,951 29,182 Year end: Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,532 237,679 114,241 170,698 214,045 107,838 Net Interest Income increased $1.3 billion, or 19 percent in 2005. The increase was largely due to growth in commercial loans and leases, deposit balances, and the impact of FleetBoston earning assets offset by spread compression driven by a flattening yield curve. Average outstanding Loans and Leases increased $28.8 billion, or 19 percent, in 2005 due to loan growth in Middle Market Banking, Dealer Financial Services (primarily due to consumer bulk purchases), Commercial Real Estate Banking, Leasing and Business Banking. Average commercial deposits, which are a lower cost source of funding, increased $13.7 billion, or 15 percent, in 2005, driven by deposit growth in Middle Market Banking, Business Banking, Latin America and Commercial Real Estate Banking. Noninterest Income increased $655 million, or 24 percent, in 2005. The increase was driven by a $420 million increase in other noninterest income to $1.7 billion, primarily due to the FleetBoston Merger and gains on early lease terminations. Higher Service Charges impacted the increase in Noninterest Income, primarily driven by the FleetBoston Merger. The Provision for Credit Losses increased $393 million to negative $49 million in 2005 compared to negative $442 million in 2004. The negative provision reflects continued improvement in commercial credit quality although at a slower rate than experienced in 2004. An improved risk profile in Latin America and reduced uncertainties resulting from the completion of credit-related integration activities for FleetBoston also contributed to the negative provision. For more information, see Credit Risk Management beginning on page 49. Noninterest Expense increased $564 million, or 16 percent. The increase was primarily due to higher Personnel expense as a result of increased performance based incentive compensation, higher processing costs and the FleetBoston Merger. Global Capital Markets and Investment Banking Our strategy is to align our resources with sectors where we can deliver value-added financial solutions to our issuer and investor clients. This segment provides a broad range of financial services to large corporate domestic and institutions, and government entities. It also provides significant resources and international clients, capabilities to our investor clients providing them with financial solutions as well as allowing greater access to market liquidity and risk management capabilities through various distribution channels. Clients are supported through offices in 27 countries that are divided into three distinct geographic regions: U.S. and Canada; Asia; and Europe, Middle East financial 35 and Africa. Our products and services include loan originations, mergers and acquisitions advisory, debt and equity underwriting, distribution and trading, cash management, derivatives, foreign exchange, leveraged finance, structured finance and trade services. During the third quarter of 2005, our operations in Mexico were realigned and are now included in the results of Global Business and Financial Services, rather than Global Capital Markets and Investment Banking. Also during the third quarter of 2005, we announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new segment is called Global Corporate and Investment Banking. During the fourth quarter of 2004, we announced a strategic initiative to invest approximately $675 million in Global Capital Markets and Investment Banking to expand on opportunities in the business’s platform. These investments were primarily focused on expanding our fixed income activities with both the issuer and investor client sectors. As of December 31, 2005, approximately 80 percent of this investment had been invested on personnel, technology and other infrastructure costs, which are all in various phases of execution. We remain committed to the build out of this business and believe that in time we will be well-positioned in the markets where we choose to compete. This segment offers clients a comprehensive range of global capabilities through the following three financial services: Global Investment Banking, Global Credit Products and Global Treasury Services. Global Investment Banking is comprised of Corporate and Investment Banking, and Global Capital Markets. Global Investment Banking underwrites and makes markets in equity and equity-linked securities, high-grade and high-yield corporate debt securities, commercial paper, and mortgage-backed and asset-backed securities. We also provide debt and equity securities research, loan syndications, mergers and acquisitions advisory services, and private placements. Further, we provide risk management solutions for customers using interest rate, equity, credit and commodity derivatives, foreign exchange, fixed income and mortgage-related products. In support of these activities, the businesses may take positions in these products and participate in market-making activities. The Global Investment Banking business is a primary dealer in the U.S. and in several international locations. Global Credit Products provides credit and lending services for our corporate clients and institutional investors. Global Credit Products is also responsible for actively managing loan and counterparty risk in our large corporate portfolio using risk mitigation techniques including credit default swaps (CDS). Global Treasury Services provides the technology, strategies and integrated solutions to help financial institutions, government agencies and corporate clients manage their cash flows. For additional information on Global Treasury Services, see Global Business and Financial Services on page 34. 36 Global Capital Markets and Investment Banking (Dollars in millions) Net interest income (FTE basis): 2005 2004 Core net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,854 $ 2,019 2,039 Trading-related net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,444 Total net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,298 4,058 Noninterest income: Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and brokerage services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,146 806 1,749 1,664 346 5,711 9,009 (244) 117 6,678 2,692 956 1,287 705 1,783 1,023 190 4,988 9,046 (445) (10) 6,581 2,900 976 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,736 $ 1,924 Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net interest yield (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average: 642 $ 0.92% 873 1.47% 16.73 74.13 19.34 72.76 Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,353 $ 33,891 227,230 Trading-related earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,743 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,738 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,946 Common equity/Allocated equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,374 410,979 84,979 10,372 Period end: Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading-related earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,213 282,456 395,900 86,144 33,387 189,596 303,897 76,986 Net Interest Income declined $760 million, or 19 percent, in 2005. Driving the decrease was lower trading-related Net Interest Income of $595 million, or 29 percent. Despite the growth in average trading-related earning assets of $70.9 billion, or 33 percent, the contribution to Net Interest Income decreased due to a flattening yield curve. In 2005, core net interest income decreased $165 million to $1.9 billion primarily due to spread compression. Average Deposits increased $10.2 billion, or 14 percent, due to higher foreign deposits and escrow balances. Noninterest Income increased $723 million, or 14 percent, in 2005. Driving the increase were higher Trading Account Profits of $641 million, Equity Investment Gains (included in all other income) of $123 million and Investment and Brokerage Services of $101 million. The increase in Trading Account Profits was due to growth in average trading- related earning assets as a result of increased client activity as we continued to invest in the business. These increases were partially offset by declines in Service Charges of $141 million due to effects of rising earnings credits on balances required for services and lower Investment Banking Income of $34 million. Provision for Credit Losses increased $201 million to negative $244 million in 2005, compared to negative $445 million in 2004, driven by a slower rate of improvement in commercial credit quality. Net charge-offs declined $245 million from the prior year, driven partially by increased recoveries. For more information, see Credit Risk Management beginning on page 49. Noninterest Expense remained relatively unchanged in 2005. Other general operating expense decreased primarily due to the segment’s share of the mutual fund settlement and other litigation reserves recorded in 2004. This decrease was offset by higher Personnel expense, including costs associated with the strategic initiative. 37 Trading-related revenue and equity commissions, both key measures reviewed by management, are presented in the following table. (Dollars in millions) 2005 2004 Trading-related Revenue and Equity Commissions Trading-related net interest income(1) Trading account profits(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,444 $2,039 1,023 1,664 Total trading-related revenue(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity commissions(1,3) 3,108 794 3,062 667 Total trading-related revenue and equity commissions . . . . . . . . . . . . . . . . . . . . $3,902 $3,729 Trading-related Revenue by Product and Equity Commissions Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,054 $1,547 Interest rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667 752 Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equities and equity commissions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 862 45 Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 767 744 1,201 87 Market-based trading-related revenue and equity commissions . . . . . . . . . . . . . . . . Credit portfolio hedges(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,853 49 3,873 (144) Total trading-related revenue and equity commissions(2) . . . . . . . . . . . . . . . . . . . $3,902 $3,729 (1) FTE basis (2) Total corporate Trading Account Profits were $1,812 million and $869 million in 2005 and 2004. Total corporate trading-related revenue was $3,256 million and $2,908 million in 2005 and 2004. (3) Equity commissions are included in Investment and Brokerage Services in the Consolidated Statement of Income. (4) Includes CDS and related products used for credit risk management. For additional information on CDS, see Concentrations of Commercial Credit Risk beginning on page 53. In 2005, market-based trading-related revenue was $3.9 billion, relatively unchanged from the prior year. Fixed income revenue decreased $493 million due to increased spread volatility in certain industries and lack of investor demand. Offsetting this decline were increases in equities and equity commissions, interest rate-related revenues and commodities. Trading-related revenue from equities and equity commissions increased $339 million due to higher customer activity and the absence of net losses on a stock position that occurred in 2004. Interest rate-related revenues increased $100 million primarily related to higher sales activity. In 2005, commodities revenue increased $42 million as the prior year included losses related to positions in gas and jet fuel. Total trading-related revenue and equity commissions included net gains of $49 million associated with credit portfolio hedges, an improvement of $193 million from 2004. The improvement was primarily due to widening of spreads on CDS in certain industries. The following table presents the detail of Investment Banking Income within the segment. Investment Banking Income (Dollars in millions) 2005 2004 Securities underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 787 $ 920 521 Syndications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 Advisory services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528 409 25 Total investment banking income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,749 $1,783 (1) Investment Banking Income recorded in other business units in 2005 and 2004 was $107 million and $103 million. Investment Banking Income decreased $34 million, or two percent, in 2005. The decrease was due primarily to a decline in securities underwriting as the overall market contracted and private placement activity declined. This decline was partially offset by market share gains in certain debt issuance markets and higher advisory services income due to increased merger and advisory activity. Global Wealth and Investment Management This segment provides tailored investment services to individual and institutional clients in various stages and economic cycles. Our clients are offered specific products and services based on their needs through five major businesses: Premier Banking and Investments (PB&I), The Private Bank, Family Wealth Advisors (FWA), Columbia Management Group (Columbia) and Other Services. 38 PB&I includes Banc of America Investments (BAI), our full-service retail brokerage business and our Premier Banking channel. PB&I brings personalized banking and investment expertise through priority service with client- dedicated teams. PB&I provides a high-touch client experience through a network of more than 2,100 client managers to our affluent customers with a personal wealth profile that includes investable assets plus a mortgage that exceeds $250,000 or they have at least $100,000 of investable assets. BAI is the third largest bank-owned brokerage company in the U.S. with $151 billion in client assets. BAI serves approximately 1.6 million accounts through a network of approximately 1,895 financial advisors throughout the U.S. The Private Bank provides integrated wealth management solutions to high-net-worth individuals, middle market institutions and charitable organizations with investable assets greater than $3 million. Services include investment, trust, banking and lending services as well as specialty asset management services (oil and gas, real estate, farm and ranch, timberland, private businesses and tax advisory). FWA at the Private Bank is designed to serve the needs of ultra high-net-worth individuals and families. This new business provides a higher level of contact and tailored service and wealth management solutions that address the complex needs of clients with investable assets greater than $50 million. FWA was rolled out during the first quarter of 2005. Columbia is an asset management organization primarily serving the needs of institutional customers. Columbia provides asset management services, liquidity strategies and separate accounts. Columbia also provides mutual funds offering a full range of investment styles across an array of products including equities, fixed income (taxable and nontaxable) and cash products (taxable and nontaxable). In addition to servicing institutional clients, Columbia distributes its products and services to individuals through The Private Bank, PB&I, FWA and nonproprietary channels including other brokerage firms. Other Services include the Investment Services Group, which provides products and services from traditional capital markets products to alternative investments and Banc of America Specialist, a New York Stock Exchange market- maker. Global Wealth and Investment Management (Dollars in millions) 2005 2004 Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,770 $ 2,869 Noninterest income: Investment and brokerage services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,122 501 3,623 7,393 (5) 3,672 3,726 1,338 2,728 336 3,064 5,933 (20) 3,431 2,522 917 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,388 $ 1,605 Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,337 $ Net interest yield (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average: 23.34 49.66 3.21% 754 3.36% 19.35 57.83 Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,021 $ 44,057 91,889 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,053 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,296 Common equity/Allocated equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,289 115,301 10,232 Year end: Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,277 127,156 113,389 49,783 122,587 111,107 Net Interest Income increased $901 million, or 31 percent, in 2005. This increase was due to growth in deposits and loans in PB&I and The Private Bank. Average Deposits increased $32.2 billion, or 39 percent, in 2005 primarily due to the migration of $28.1 billion of account balances from Global Consumer and Small Business Banking to PB&I, and organic growth in PB&I and The Private Bank. Average Loans and Leases increased $10.0 billion, or 23 percent, due to higher loan volume in PB&I and The Private Bank. The secondary driver of the increase in Average Deposits, and Loans and Leases was the impact of the FleetBoston portfolio. 39 Noninterest Income increased $559 million, or 18 percent, in 2005. Noninterest Income consists primarily of Investment and Brokerage Services, which represents fees earned on client assets and brokerage commissions. The Investment and Brokerage Services revenue increase in 2005, compared to 2004, was mainly due to the impact of FleetBoston. (Dollars in billions) Client Assets December 31 2005 2004 Assets under management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $482.4 $451.5 149.9 Client brokerage assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.0 Assets in custody . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161.7 94.2 Total client assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $738.3 $708.4 Total client assets increased $29.9 billion, or four percent, in 2005. This increase was due to the $30.9 billion increase in assets under management in 2005, which was driven by net inflows primarily in short-term money market assets and an increase in overall market valuations. Assets under management generate fees based on a percentage of their market value. They consist largely of mutual funds and separate accounts, which are comprised of taxable and nontaxable money market products, equities, and taxable and nontaxable fixed income securities. Noninterest Expense increased $241 million, or seven percent, in 2005. The increase was due primarily to increased Personnel expenses driven by PB&I growth in the Northeast and the impact of FleetBoston. This increase was partially offset by lower other general operating expenses due to the segment’s share of the mutual fund settlement recorded in 2004. All Other Included in All Other are our Equity Investments businesses, and Other. Equity Investments include Principal Investing and corporate investments. Principal Investing is comprised of a diversified portfolio of investments in privately-held and publicly-traded companies at all stages of their life cycle from start-up to buyout. Corporate investments include CCB, Grupo Financiero Santander Serfin and various other investments. Other includes the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. Other also includes certain amounts associated with the ALM process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities. The objective of the funds transfer pricing allocation methodology is to neutralize the business segments from changes in interest rate and foreign exchange fluctuations. Accordingly, for segment reporting purposes, the business segments receive the neutralizing benefit to Net Interest Income related to the economic hedges previously mentioned, with the offset recorded in Other. 40 All Other (Dollars in millions) Net interest income (FTE basis)(1) Noninterest income: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (340) $ (695) 2005 2004 (Restated) Equity investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,646 (821) Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825 485 41 823 412 317 538 (85) 750 241 991 296 343 1,617 618 229 723 120 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 623 $ 603 Shareholder value added . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (884) $ (531) (1) Included in these amounts are impacts related to derivatives designated as economic hedges which do not qualify for SFAS 133 hedge accounting treatment of $(419) million and $(834) million in Net Interest Income and $(256) million and $920 million in Noninterest Income. The impact, including $0 and a loss of $(399) million in Gains on Sales of Debt Securities, totaled $(675) million and $(313) million in 2005 and 2004. For additional information, see Note 1 of the Consolidated Financial Statements. Total Revenue for All Other increased $189 million to $485 million in 2005, primarily driven by an increase in Equity Investment Gains in 2005. Offsetting this increase was the decline in fair value of derivative instruments which were used as economic hedges of interest and foreign exchange rates as part of the ALM process. Changes in value of these derivative instruments were due to interest rate fluctuations during the year. Provision for Credit Losses decreased $302 million to $41 million in 2005, resulting from changes to components of the formula and other factors effective in 2004, and reduced credit costs in 2005 associated with previously exited businesses. These decreases were offset in part by the establishment of a $50 million reserve for estimated losses associated with Hurricane Katrina. Gains on Sales of Debt Securities decreased $794 million primarily due to lower gains realized in 2005 on mortgage- backed securities and corporate bonds than in 2004. Securities gains are the result of the repositioning of the securities portfolio to manage interest rate fluctuations and mortgage prepayment risk. The Corporation utilized a forward purchase agreement to hedge the variability of cash flows from the anticipated purchase of securities. The Corporation subsequently sold the related securities and did not originally reclassify the loss from Accumulated OCI at the time the related securities were sold. Merger and Restructuring Charges decreased $206 million in 2005 as the FleetBoston integration is nearing completion and the infrastructure initiative was completed in the first quarter of 2005. For more information on Merger and Restructuring Charges, see Note 2 of the Consolidated Financial Statements. The Income Tax Expense (Benefit) was a benefit of $85 million in 2005, compared to an expense of $120 million in 2004. The change in Income Tax Expense (Benefit) was driven by an increase in tax benefits for low-income housing credits. These tax benefits are allocated to Global Consumer and Small Business Banking as FTE Noninterest Income through our segment reporting process. All Other includes an offset to this FTE impact. Equity Investments Equity Investments reported Net Income of $796 million in 2005, a $594 million improvement compared to 2004. The improvements were primarily due to higher revenues in Principal Investing driven by increasing liquidity in the private equity markets. When compared to the prior year, Principal Investing revenue increased $966 million to $1.4 billion. The increased revenues were driven by higher realized gains and reduced impairments compared to the prior year. 41 The following table presents the carrying value of equity investments in the Principal Investing portfolio by major industry at December 31, 2005 and 2004: Equity Investments in the Principal Investing Portfolio (Dollars in millions) December 31 2005 2004 Consumer discretionary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,607 $2,058 Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089 Industrials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,118 Telecommunication services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 606 Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576 Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 Consumer staples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Individual trusts, nonprofits, government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1,131 1,017 708 632 560 288 213 188 56 43 19 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,462 $7,250 On- and Off-balance Sheet Financing Entities Off-balance Sheet Commercial Paper Conduits 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 underlying assets. Additionally, some customers receive the benefit of commercial paper financing rates related to certain lease arrangements. We facilitate 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 or by support provided by third parties. The rating agencies require that a certain percentage of the commercial paper entity’s assets be supported by 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 provided 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 liquidity facility has the same legal priority as the commercial paper. We do not enter into any other form of guarantee with these entities. We manage our credit risk on these commitments by subjecting them to our normal underwriting and risk management processes. At December 31, 2005 and 2004, we had off-balance sheet liquidity commitments and SBLCs to these entities of $25.9 billion and $23.8 billion. Substantially all of these liquidity commitments and SBLCs mature within one year. These amounts are included in Table 6. Net revenues earned from fees associated with these off-balance sheet financing entities were approximately $71 million and $80 million in 2005 and 2004. From time to time, we may purchase some of the commercial paper issued by certain of these entities for our own account or acting as a dealer on behalf of third parties. Derivative instruments related to these entities are marked to market through the Consolidated Statement of Income. SBLCs are initially recorded at fair value in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees” (FIN 45). Liquidity commitments and SBLCs subsequent to inception are accounted for pursuant to SFAS No. 5, “Accounting for Contingencies” (SFAS 5), and are discussed further in Note 13 of the Consolidated Financial Statements. The commercial paper conduits are variable interest entities (VIEs) as defined in FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R), which provides a framework for identifying VIEs and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements. In accordance with FIN 46R, the primary beneficiary is the party that consolidates a VIE based on its assessment that it will absorb a 42 majority of the expected losses or expected residual returns of the entity, or both. We have determined that we are not the primary beneficiary of the commercial paper conduits described above and, therefore, have not included the assets and liabilities or results of operations of these conduits in the Consolidated Financial Statements of the Corporation. On-balance Sheet Commercial Paper Conduits In addition to the off-balance sheet financing entities previously described, we also utilize commercial paper conduits that have been consolidated based on our determination that we are the primary beneficiary of the entities in accordance with FIN 46R. At December 31, 2005 and 2004, the consolidated assets and liabilities of these conduits were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Capital Markets and Investment Banking. At December 31, 2005 and 2004, we held $6.6 billion and $7.7 billion of assets of these entities while our maximum loss exposure associated with these entities, including unfunded lending commitments, was approximately $8.0 billion and $9.4 billion. We manage our credit risk on the on-balance sheet commitments by subjecting them to the same processes as the off-balance sheet commitments. Qualified Special Purpose Entities In addition, to control our capital position, diversify funding sources and provide customers with commercial paper investments, we will, from time to time, sell assets to off-balance sheet commercial paper entities. The commercial paper entities are Qualified Special Purpose Entities (QSPEs) that have been isolated beyond our reach or that of our creditors, even in the event of bankruptcy or other receivership. The accounting for these entities is governed by SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125,” (SFAS 140) which provides that QSPEs are not included in the consolidated financial statements of the seller. Assets sold to the entities consist of high-grade corporate or municipal bonds, collateralized debt obligations and asset-backed securities. These entities issue collateralized commercial paper or notes with similar repricing characteristics to third party market participants and passive derivative instruments to us. Assets sold to the entities typically have an investment rating ranging from Aaa/AAA to Aa/AA. We may provide liquidity, SBLCs or similar loss protection commitments to the entity, or we may enter into derivatives with the entity in which we assume certain risks. The liquidity facility and derivatives have the same legal standing with the commercial paper. The derivatives provide interest rate, currency and a pre-specified amount of credit protection to the entity in exchange for the commercial paper rate. These derivatives are provided for in the legal documents and help 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 automatically dispose of the asset once the asset falls below the specified 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 manage any credit or market risk on commitments or derivatives through normal underwriting and risk management processes. At December 31, 2005 and 2004, we had off-balance sheet liquidity commitments, SBLCs and other financial guarantees to these entities of $7.1 billion and $7.4 billion. Substantially all of these commitments mature within one year and are included in Table 6. Derivative activity related to these entities is included in Note 5 of the Consolidated Financial Statements. Net revenues earned from fees associated with these entities were $86 million and $61 million in 2005 and 2004. 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 purchase any of the commercial paper for our own account. Derivative instruments related to these entities are marked to market through the Consolidated Statement of Income. SBLCs are initially recorded at fair value in accordance with FIN 45. Liquidity commitments and SBLCs subsequent to inception are accounted for pursuant to SFAS 5 and are discussed further in Note 13 of the Consolidated Financial Statements. Credit and Liquidity Risks Because we provide liquidity and credit support to the commercial paper conduits and QSPEs described above, 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 seek to manage these risks, along with all other credit and liquidity risks, within our policies and practices. See Notes 1 and 9 of the Consolidated Financial Statements for additional discussion of off-balance sheet financing entities. 43 Other Off-balance Sheet Financing Entities To improve our capital position and diversify funding sources, we also sell assets, primarily loans, to other off-balance sheet QSPEs that obtain financing primarily by issuing term notes. We may retain a portion of the investment grade notes issued by these entities, and we may also retain subordinated interests in the entities which reduce the credit risk of the senior investors. We may provide liquidity support in the form of foreign exchange or interest rate swaps. We generally do not provide other forms of credit support to these entities, which are described more fully in Note 9 of the Consolidated Financial Statements. In addition to the above, we had significant involvement with variable interest entities (VIEs) other than the commercial paper conduits. These VIEs were not consolidated because we will not absorb a majority of the expected losses or expected residual returns and are therefore not the primary beneficiary of the VIEs. These entities are described more fully in Note 9 of the Consolidated Financial Statements. Obligations and Commitments We have contractual obligations to make future payments on debt and lease agreements. Additionally, in the normal course of business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations. Included in purchase obligations are vendor contracts of $4.0 billion, commitments to purchase securities of $34.2 billion and commitments to purchase loans of $51.7 billion. The most significant of our vendor contracts include communication services, processing services and software contracts. Other long-term liabilities include our obligations related to the Qualified Pension Plans, Nonqualified Pension Plans and Postretirement Health and Life Plans (the Plans). Obligations to the Plans are based on the current and projected obligations of the Plans, performance of the Plans’ assets and any participant contributions, if applicable. During 2005 and 2004, we contributed $1.1 billion and $303 million to the Plans, and we expect to make at least $134 million of contributions during 2006. Management believes the effect of the Plans on liquidity is not significant to our overall financial condition. Debt, lease and other obligations are more fully discussed in Notes 12 and 13 of the Consolidated Financial Statements. Table 5 presents total long-term debt and other obligations at December 31, 2005. Table 5 Long-term Debt and Other Obligations December 31, 2005 (Dollars in millions) Long-term debt and capital leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 1 year or less $11,188 44,635 1,324 134 Due after 1 year through 3 years Due after 3 years through 5 years $24,065 21,235 2,202 — $20,689 22,989 1,449 — Due after 5 years $44,906 1,076 3,477 — Total $100,848 89,935 8,452 134 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $57,281 $47,502 $45,127 $49,459 $199,369 (1) Includes principal payments and capital lease obligations of $40 million. (2) Obligations that are legally binding agreements whereby we agree to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time are defined as purchase obligations. Many of our lending relationships contain funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded component of these commitments is not recorded on our balance sheet until a draw is made under the loan facility; however, a reserve is established for probable losses. These commitments, as well as guarantees, are more fully discussed in Note 13 of the Consolidated Financial Statements. 44 The following table summarizes the total unfunded, or off-balance sheet, credit extension commitment amounts by expiration date. At December 31, 2005, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.4 billion (related outstandings of $171 million) were not included in credit card line commitments in the table below. Table 6 Credit Extension Commitments December 31, 2005 (Dollars in millions) Loan commitments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit and financial guarantees . . . . . . . . . . . . . . . . . . . . . . . Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expires in 1 year or less $112,829 1,317 22,320 4,627 Legally binding commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,093 180,694 Expires after 1 year through 3 years Expires after 3 years through 5 years $55,840 714 8,661 29 65,244 12,274 $80,748 1,673 5,361 17 87,799 — Expires after 5 years $ 28,340 74,922 6,753 481 Total $277,757 78,626 43,095 5,154 110,496 — 404,632 192,968 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $321,787 $77,518 $87,799 $110,496 $597,600 (1) At December 31, 2005, there were equity commitments of $1.4 billion related to obligations to further fund Principal Investing equity investments. Managing Risk Overview Our management governance structure enables us to manage all major aspects of our business through an integrated planning and review process that includes strategic, financial, associate, customer and risk planning. We derive much of our revenue from managing risk from customer transactions for profit. In addition to qualitative factors, we utilize quantitative measures to optimize risk and reward trade offs in order to achieve growth targets and financial objectives while reducing the variability of earnings and minimizing unexpected losses. Risk metrics that allow us to measure performance include economic capital targets, SVA targets and corporate risk limits. By allocating capital to a business unit, we effectively define that unit’s ability to take on risk. Country, trading, asset allocation and other limits supplement the allocation of economic capital. These limits are based on an analysis of risk and reward in each business unit and management is responsible for tracking and reporting performance measurements as well as any exceptions to guidelines or limits. Our risk management process continually evaluates risk and appropriate metrics needed to measure it. Our business exposes us to the following major risks: strategic, liquidity, credit, market and operational. Strategic Risk is the risk that adverse business decisions, ineffective or inappropriate business plans or failure to respond to changes in the competitive environment, business cycles, customer preferences, product obsolescence, execution and/or other intrinsic risks of business will impact our ability to meet our objectives. Liquidity risk is the inability to accommodate liability maturities and deposit withdrawals, fund asset growth and meet contractual obligations through unconstrained access to funding at reasonable market rates. Credit risk is the risk of loss arising from a borrower’s or counterparty’s inability to meet its obligations. Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions, such as interest rate movements. Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. Risk Management Processes and Methods We have established control processes and use various methods to align risk-taking and risk management throughout our organization. These control processes and methods are designed around “three lines of defense”: lines of business; support units (including Risk Management, Compliance, Finance, Human Resources and Legal); and Corporate Audit. Management is responsible for identifying, quantifying, mitigating and managing all risks within their lines of business, while certain enterprise-wide risks are managed centrally. For example, except for trading-related business activities, interest rate risk associated with our business activities is managed in the Corporate Treasury and Corporate Investment functions. Line of business management makes and executes the business plan and is closest to the changing nature of risks and, therefore, we believe is best able to take actions to manage and mitigate those risks. Our lines of business prepare quarterly self-assessment reports to identify the status of risk issues, including mitigation plans, if 45 appropriate. These reports roll up to executive management to ensure appropriate risk management and oversight, and to identify enterprise-wide issues. Our management processes, structures and policies aid us in complying with laws and regulations and provide clear lines for decision-making and accountability. Wherever practical, we attempt to house decision-making authority as close to the transaction as possible while retaining supervisory control functions from both in and outside of the lines of business. The Risk Management organization translates approved business plans into approved limits, approves requests for changes to those limits, approves transactions as appropriate, and works closely with lines of business to establish and monitor risk parameters. Risk Management has assigned a Risk Executive to each of the lines of business who is responsible for the oversight of all risks associated with that line of business. In addition, Risk Management has assigned Risk Executives to monitor enterprise-wide credit, market and operational risks. Corporate Audit provides an independent assessment of our management 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 materially complete, accurate and reliable; and employees’ actions are in compliance with corporate policies, standards, procedures, and applicable laws and regulations. We use various methods to manage risks at the line of business levels and corporate-wide. Examples of these methods include planning and forecasting, risk committees and forums, limits, models, and hedging strategies. Planning and forecasting facilitates analysis of actual versus planned results and provides an indication of unanticipated risk levels. Generally, risk committees and forums are comprised of lines of business, risk management, treasury, compliance, legal and finance personnel, among others, who actively monitor performance against plan, limits, potential issues, and introduction of new products. Limits, the amount of exposure that may be taken in a product, relationship, region or industry, seek to align risk goals with those of each line of business and are part of our overall risk management process to help reduce the volatility of market, credit and operational losses. Models are used to estimate market value and net interest income sensitivity, and to estimate expected and unexpected losses for each product and line of business, where appropriate. Hedging strategies are used to manage the risk of borrower or counterparty concentration risk and to manage market risk in the portfolio. The formal processes used to manage risk represent only one portion of our overall risk management process. Corporate culture and the actions of our associates are also critical to effective risk management. Through our 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 our products or services to our customers. We instill a risk-conscious culture through communications, roles and responsibilities. Additionally, we continue to strengthen the linkage between the associate performance management process and individual compensation to encourage associates to work toward corporate-wide risk goals. training, policies, procedures, and organizational Oversight The Board evaluates risk through the Chief Executive Officer (CEO) and three committees. The Finance Committee, a committee appointed by the Board, establishes policies and strategies for managing the strategic, liquidity, credit, market and operational risks to corporate earnings and capital. The Asset Quality Committee, a Board committee, reviews credit and selected market risks; and the Audit Committee, a Board committee, provides direct oversight of the corporate audit function and the independent registered public accounting firm. Additionally, senior management oversight of our risk-taking and risk management activities is conducted through four senior management committees: the Risk and Capital Committee (RCC), the Asset and Liability Committee (ALCO), the Compliance and Operational Risk Committee (CORC) and the Credit Risk Committee (CRC). The RCC, a senior management committee, reviews corporate strategies and corporate objectives, evaluates business performance, and reviews business plans, including capital allocation, for the Corporation and for major businesses. The ALCO, a subcommittee of the Finance Committee, provides oversight for Corporate Treasury’s and Corporate Investment’s process of managing interest rate risk, otherwise known as the ALM process, and reviews ALM and credit hedging activities. ALCO also approves limits for trading activities and manages the risk of loss of value and related Net Interest Income of our trading activities. The CORC, a subcommittee of the Finance Committee, provides oversight and consistent communication of operational and compliance issues. The CRC, a subcommittee of the Finance Committee, establishes corporate credit practices and limits, including industry and country concentration limits and approval requirements. The CRC also reviews asset quality results versus plan, portfolio management, and the adequacy of the allowance for credit losses. Each committee and subcommittee has the ability to delegate authority to officers of subcommittees to manage specific risks. Management continues to direct corporate-wide efforts to address the Basel Committee on Banking Supervision’s new risk-based capital standards (Basel II). The Finance Committee and the Audit Committee provide oversight of management’s plans including the Corporation’s preparedness and compliance with Basel II. For additional information, see Basel II on page 49 and Note 15 of the Consolidated Financial Statements. The following sections, Strategic Risk Management, Liquidity Risk and Capital Management, Credit Risk Management beginning on page 49, Market Risk Management beginning on page 65 and Operational Risk Management 46 beginning on page 73, address in more detail the specific procedures, measures and analyses of the major categories of risk that we manage. Strategic Risk Management The Board provides oversight for strategic risk through the CEO and the Finance Committee. We use an integrated business planning process to help manage strategic risk. A key component of the planning process aligns strategies, goals, tactics and resources. The process begins with an assessment that creates a plan for the Corporation, setting the corporate strategic direction. The planning process then cascades through the business units, creating business unit plans that are aligned with the Corporation’s direction. Tactics and metrics are monitored to ensure adherence to the plans. As part of this monitoring, business units perform a quarterly self-assessment further described in the Operational Risk Management section beginning on page 73. This assessment looks at changing market and business conditions, and the overall risk in meeting objectives. Corporate Audit in turn monitors, and independently reviews and evaluates, the plans and self-assessments. One of the key tools for managing strategic risk is capital allocation. Through allocating capital, we effectively manage each business segment’s ability to take on risk. Review and approval of business plans incorporates approval of capital allocation, and economic capital usage is monitored through financial and risk reporting. Liquidity Risk and Capital Management Liquidity Risk Liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals, fund asset growth and business operations, and meet contractual obligations through unconstrained access to funding at reasonable market rates. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, wholesale market-based funding, and liquidity provided by the sale or securitization of assets. We manage liquidity at two levels. The first is the liquidity of the parent company, which is the holding company that owns the banking and nonbanking subsidiaries. The second 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. Through ALCO, 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. Corporate Treasury is responsible for planning and executing our funding activities and strategy. In order to ensure adequate liquidity through the full range of potential operating environments and market conditions, we conduct our liquidity management and business activities in a manner that will preserve and enhance funding stability, flexibility, and diversity. Key components of this operating strategy include a strong focus on customer-based funding, maintaining direct relationships with wholesale market funding providers, and maintaining the ability to liquefy certain assets when, and if, requirements warrant. We develop and maintain contingency funding plans for both the parent company and bank liquidity positions. These plans evaluate our liquidity position under various operating circumstances and allow us to ensure that we would be able to operate though a period of stress when access to normal sources of funding is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing through the problem period, and define roles and responsibilities. They are reviewed and approved annually by ALCO. Our borrowing costs and ability to raise funds are directly impacted by our credit ratings. The credit ratings of Bank of America Corporation and Bank of America, National Association (Bank of America, N.A.) are reflected in the table below. Table 7 Credit Ratings December 31, 2005 Bank of America Corporation Bank of America, N.A. Senior Debt Subordinated Debt Commercial Paper Short-term Borrowings Long-term Debt Moody’s . . . . . . . . . . . . . . . . . . . . . . . . . . . Standard & Poor’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fitch, Inc. Aa2 AA- AA- P-1 A-1+ F1+ P-1 A-1+ F1+ Aa1 AA AA- Aa3 A+ A+ 47 Under normal business conditions, primary sources of funding for the parent company include dividends received from its banking and nonbanking subsidiaries, and proceeds from the issuance of senior and subordinated debt, as well as commercial paper and equity. Primary uses of funds for the parent company include repayment of maturing debt and commercial paper, share repurchases, dividends paid to shareholders, and subsidiary funding through capital or debt. The parent company maintains a cushion of excess liquidity that would be sufficient to fully fund holding company and nonbank affiliate operations for an extended period during which funding from normal sources is disrupted. The primary measure used to assess the parent company’s liquidity is the “Time to Required Funding” during such a period of liquidity disruption. 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 while continuing to meet nondiscretionary uses needed to maintain bank operations and repayment of contractual principal and interest payments owed by the parent company and affiliated companies. Under this scenario, the amount of time the parent company and its nonbank subsidiaries can operate and meet all obligations before the current liquid assets are exhausted is considered the “Time to Required Funding”. ALCO approves the target range set for this metric, in months, and monitors adherence to the target. Maintaining excess parent company cash that ensures that “Time to Required Funding” remains in the target range is the primary driver of the timing and amount of the Corporation’s debt issuances. As of December 31, 2005 “Time to Required Funding” was 29 months. The primary sources of funding for our banking subsidiaries include customer deposits, wholesale market–based funding, and asset securitizations. Primary uses of funds for the banking subsidiaries include growth in the core asset portfolios, including loan demand, and in the ALM portfolio. We use the ALM portfolio primarily to manage interest rate risk and liquidity risk. The strength of our balance sheet is a result of rigorous financial and risk discipline. Our excess deposits, which are a low cost of funding source, fund the purchase of additional securities and result in a lower loan to deposit ratio. Mortgage-backed securities and mortgage loans have prepayment risk which has to be actively managed. Repricing of deposits is a key variable in this process. The capital generated in excess of capital adequacy targets and to support business growth, is available for the payment of dividends and share repurchases. ALCO determines prudent parameters for wholesale market-based borrowing and regularly reviews the funding plan for the bank subsidiaries to ensure compliance with these parameters. The contingency funding plan for the banking subsidiaries evaluates liquidity over a 12-month period in a variety of business environment scenarios assuming different levels of earnings performance and credit ratings as well as public and investor relations factors. Funding exposure related to our role as liquidity provider to certain off-balance sheet financing entities is also measured under a stress scenario. In this analysis, 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 analyzed to assess potential funding exposure. One ratio used to monitor the stability of our funding composition is the “loan to domestic deposit” (LTD) ratio. This ratio reflects the percent of Loans and Leases that are funded by domestic customer deposits, a relatively stable funding source. A ratio below 100 percent indicates that our loan portfolio is completely funded by domestic customer deposits. The ratio was 102 percent at December 31, 2005 compared to 93 percent at December 31, 2004. The increase was primarily attributable to organic growth in the loan and lease portfolio. We originate loans for retention on our balance sheet and for distribution. As part of our “originate to distribute” strategy, commercial loan originations are distributed through syndication structures, and residential mortgages originated by Consumer Real Estate are frequently distributed in the secondary market. In connection with our balance sheet management activities, we may retain mortgage loans originated as well as purchase and sell loans based on our assessment of market conditions. Regulatory Capital As a regulated financial services company, we are governed by certain regulatory capital requirements. Presented in Note 15 of the Consolidated Financial Statements are the regulatory capital ratios, actual capital amounts and minimum required capital amounts for the Corporation, Bank of America, N.A., Fleet National Bank and Bank of America, N.A. (USA) at December 31, 2005 and 2004. On June 13, 2005, Fleet National Bank merged with and into Bank of America, N.A., with Bank of America, N.A. as the surviving entity. As of December 31, 2005, the entities were classified as “well-capitalized” for regulatory purposes, the highest classification. Certain corporate sponsored trust companies which issue trust preferred securities (Trust Securities) are deconsolidated under FIN 46R. As a result, the Trust Securities are not included on our Consolidated Balance Sheets. On March 1, 2005, the FRB issued Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital (the Final Rule) which allows Trust Securities to continue to qualify as Tier 1 Capital with revised quantitative limits that would be effective after a five-year transition period. As a result, we continue to include Trust Securities in Tier 1 Capital. 48 The FRB’s Final Rule limits restricted core capital elements to 15 percent for internationally active bank holding companies. In addition, the FRB revised the qualitative standards for capital instruments included in regulatory capital. Internationally active bank holding companies are those with consolidated assets greater than $250 billion or on-balance sheet exposure greater than $10 billion. At December 31, 2005, our restricted core capital elements comprised 16.6 percent of total core capital elements. We expect to be fully compliant with the revised limits prior to the implementation date of March 31, 2009. Basel II In June 2004, Basel II was published with the intent of more closely aligning regulatory capital requirements with underlying risks. Similar to economic capital measures, Basel II seeks to address credit risk, market risk and operational risk. While economic capital is measured to cover unexpected losses, we also maintain a certain threshold in terms of regulatory capital to adhere to legal standards of capital adequacy. With recent updates to the U.S. implementation, these thresholds or leverage ratios, will continue to be utilized for the foreseeable future. Maintaining capital adequacy with our regulatory capital under Basel II, does not impact internal profitability or pricing. In the U.S., Basel II will not be implemented until January 1, 2008, which will serve as our parallel test year, followed by full implementation in 2009. The impact on our capital management processes and capital requirements continues to be evaluated. As Basel II is an international regulation, U.S. regulatory agencies are drafting a U.S. oriented measure which follows the Basel II construct. Recently, an assessment of the potential effect on regulatory capital known as Quantitative Impact Study 4 was completed, which generated disparate results among participants. In order to address the potential changes in capital levels, regulators have established floors or limits as to how much capital can decrease from period to period after full implementation through at least 2011. We are committed to working with the regulators and continue to proactively monitor their efforts towards achieving a successful implementation of Basel II. Implementation of Basel II requires a significant enterprise-wide effort. During 2005, our dedicated Basel II Program Management Office, supported by a number of business segment specialists and technologists, completed major planning activities required to achieve Basel II preparedness. During 2006, we are aggressively moving forward with policy, process and technology changes required to achieve full compliance by the start of parallel processing in 2008. We continue to work closely with the regulatory agencies in this process. Dividends Effective for the third quarter 2005 dividend, the Board increased the quarterly cash dividend 11 percent from $0.45 to $0.50 per common share. In October 2005, the Board declared a fourth quarter cash dividend which was paid on December 23, 2005 to common shareholders of record on December 2, 2005. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share payable on March 24, 2006 to shareholders of record on March 3, 2006. Share Repurchases We will continue to repurchase shares, from time to time, in the open market or in private transactions through our approved repurchase programs. We repurchased 126.4 million shares of common stock in 2005, which more than offset the 79.6 million shares issued under our company’s employee stock plans. During 2006 we expect to use available excess capital to repurchase shares in excess of shares issued under our employee stock plans. For additional information on common share repurchases, see Note 14 of the Consolidated Financial Statements. Credit Risk Management Credit risk is the risk of loss arising from a borrower’s or counterparty’s inability to meet its obligations. Credit risk can also arise from operational failures that result in an advance, commitment or investment of funds. We define the credit exposure to a borrower or counterparty as the loss potential arising from all product classifications, including loans and leases, derivatives, trading account assets, assets held-for-sale, and unfunded lending commitments that include loan commitments, letters of credit and financial guarantees. For derivative positions, our credit risk is measured as the net replacement cost in the event the counterparties with contracts in a gain position to us completely fail to perform under the terms of those contracts. We use the current mark-to-market value to represent credit exposure without giving consideration to future mark-to-market changes. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements. Our consumer and commercial credit extension and review procedures take into account credit exposures that are funded or unfunded. For additional information on derivatives and credit extension commitments, see Notes 5 and 13 of the Consolidated Financial Statements. 49 We manage credit risk based on the risk profile of the borrower or counterparty, repayment sources, the nature of underlying collateral, and other support given current events, conditions and expectations. We classify our Loans and Leases as either consumer or commercial and monitor their credit risk separately as discussed below. Consumer Portfolio Credit Risk Management Credit risk management for the consumer portfolio begins with initial underwriting and continues throughout a borrower’s credit cycle. Statistical techniques are used to establish product pricing, risk appetite, operating processes and metrics to balance risks and returns. Consumer exposure is grouped by product and other attributes for purposes of evaluating credit risk. Statistical models are built using detailed behavioral information from external sources such as credit bureaus as well as internal historical experience. These models are essential to our consumer credit risk management process and are used in the determination of credit decisions, collections management strategies, portfolio management decisions, determination of the allowance for consumer loan and lease losses, and economic capital allocations for credit risk. Table 8 presents outstanding consumer loans and leases for each year in the five-year period ending at December 31, 2005. Table 8 Outstanding Consumer Loans and Leases 2005 2004 (Restated) December 31 2003 (Restated) 2002 (Restated) 2001 (Restated) (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Residential mortgage . . . . . . . . . $182,596 58,548 Credit card . . . . . . . . . . . . . . . . . . 62,098 Home equity lines . . . . . . . . . . . . 45,490 Direct/Indirect consumer . . . . . . 6,725 . . . . . . . . . . . . Other consumer(1) 51.3% $178,079 51,726 16.5 50,126 17.5 40,513 12.8 7,439 1.9 54.3% $140,483 34,814 15.8 23,859 15.3 33,415 12.3 7,558 2.3 58.5% $108,332 24,729 14.5 23,236 9.9 31,068 13.9 10,355 3.2 54.8% $ 78,203 19,884 12.5 22,107 11.8 30,317 15.7 14,744 5.2 47.3% 12.0 13.4 18.4 8.9 Total consumer loans and leases . . . . . . . . . . . . $355,457 100.0% $327,883 100.0% $240,129 100.0% $197,720 100.0% $165,255 100.0% (1) Includes consumer finance of $2,849 million, $3,395 million, $3,905 million, $4,438 million, and $5,331 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively; foreign consumer of $3,841 million, $3,563 million, $1,969 million, $1,970 million, and $2,092 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively; and consumer lease financing of $35 million, $481 million, $1,684 million, $3,947 million, and $7,321 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively. Concentrations of Consumer Credit Risk Our consumer credit risk is diversified both geographically and through our various product offerings. In addition, credit decisions are statistically based with tolerances set to decrease the percentage of approvals as the risk profile increases. From time to time, we purchase credit protection on certain portions of our consumer portfolio. This protection is designed to enhance our overall risk management strategy. At December 31, 2005 and 2004, we have mitigated a portion of our credit risk on approximately $110.4 billion and $88.7 billion of residential mortgage and indirect automobile loans through the purchase of credit protection. Our regulatory risk-weighted assets were reduced as a result of these transactions because we transferred a portion of our credit risk to unaffiliated parties. These transactions had the cumulative effect of reducing our risk-weighted assets by $30.6 billion and $25.5 billion at December 31, 2005 and 2004, and resulted in 28 bp and 26 bp increases in our Tier 1 Capital ratio. Consumer Portfolio Credit Quality Performance Credit quality continued to be strong and consistent with performance from a year ago with the exception of the credit card portfolio. Managed credit card performance was impacted by increased bankruptcy filings prior to legislation which became effective October 17, 2005, continued growth and seasoning of the portfolio, and increased minimum payment requirements implemented in April 2004. The year 2005 compared to 2004 was also impacted by the FleetBoston credit card portfolio. The entire balance of an account is contractually delinquent if the minimum payment is not received by the specified date on the customer’s billing statement. Interest and fees continue to accrue on our past due loans until the date the loan goes into nonaccrual status, if applicable. Delinquency is reported on accruing loans that are 30 days or more past due. 50 Credit card loans are generally 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 and leases are charged off at 120 days past due and are generally not classified as nonperforming. Real estate secured consumer loans are placed on nonaccrual and are classified as nonperforming no later than 90 days past due. The amount deemed uncollectible on real estate secured loans is charged off at 180 days past due. Table 9 presents consumer net charge-offs and net charge-off ratios on the held portfolio for 2005 and 2004. Table 9 Consumer Net Charge-offs and Net Charge-off Ratios(1) (Dollars in millions) 2005 2004 (Restated) Amount Percent Amount Percent Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27 3,652 31 248 275 0.02% $ 6.76 0.05 0.55 3.99 36 2,305 15 208 193 0.02% 5.31 0.04 0.55 2.51 Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,233 1.26% $2,757 0.93% (1) Percentage amounts are calculated as net charge-offs divided by average outstanding loans and leases during the year for each loan category. As presented in Table 9, consumer net charge-offs from on-balance sheet loans increased $1.5 billion to $4.2 billion in 2005. Of these increased amounts, $1.3 billion was related to credit card net charge-offs. Higher credit card net charge-offs were driven by an increase in bankruptcy net charge-offs of $578 million resulting from changes in bankruptcy legislation, organic portfolio growth and seasoning, increases effective in 2004 in credit card minimum payment requirements, the impact of the FleetBoston portfolio and new advances on accounts for which previous loan balances were sold to the securitization trusts. The increase in direct/indirect consumer charge-offs was driven primarily by the growth and seasoning of the auto loan portfolio. The increase in other consumer charge-offs was primarily driven by an increase in charge-offs for checking account overdraft balances due to deposit growth and a change in the fourth quarter of 2005 in our charge-off policy for overdraft balances from 120 days to 60 days. Net losses for the managed credit card portfolio increased $1.3 billion to $4.1 billion, or 6.92 percent of total average managed credit card loans in 2005, compared to 5.62 percent of total average managed credit card loans in 2004. Higher managed credit card net losses were driven by an increase in bankruptcy net losses resulting from the change in bankruptcy law, continued portfolio growth and seasoning, increases effective in 2004 in credit card minimum payment requirements and the impact of the FleetBoston portfolio. As presented in Table 10, nonperforming consumer assets increased $39 million from December 31, 2004 to $846 million at December 31, 2005. The increase was due to a $47 million increase in nonperforming consumer loans and leases to $785 million, representing 0.22 percent of outstanding consumer loans and leases at December 31, 2005 compared to $738 million, representing 0.23 percent of outstanding consumer loans and leases at December 31, 2004. Nonperforming residential mortgages increased $16 million primarily due to modest portfolio growth, partially offset by sales of $112 million in 2005. Nonperforming home equity lines increased $51 million due to the seasoning of the portfolio. Other consumer nonperforming loans and leases fell $24 million due to the continued liquidation of the portfolios in our previously exited consumer businesses and a decline in foreign nonperforming loans and leases. Broad- based loan growth offset the increase in nonperforming consumer loans resulting in an improvement in the nonperforming ratios. 51 Table 10 Nonperforming Consumer Assets (Dollars in millions) December 31 2005 2004 2003 2002 2001 Nonperforming consumer loans and leases Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 570 $ 554 $ 531 $ 612 $ 556 80 Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 37 61 66 33 85 43 28 36 66 30 25 Total nonperforming consumer loans and leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785 61 738 69 638 81 733 99 679 334 Total nonperforming consumer assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 846 $ 807 $ 719 $ 832 $1,013 Nonperforming consumer loans and leases as a percentage of outstanding consumer loans and leases (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.22% 0.23% 0.27% 0.37% 0.41% Nonperforming consumer assets as a percentage of outstanding consumer loans, leases and foreclosed properties (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.24 0.25 0.30 0.42 0.61 (1) In 2005, $50 million in Interest Income was estimated to be contractually due on nonperforming consumer loans and leases classified as nonperforming at December 31, 2005 provided that these loans and leases had been paid according to their terms and conditions. Of this amount, approximately $9 million was received and included in Net Income for 2005. (2) Balances do not include $5 million, $28 million, $16 million, $41 million, and $646 million of nonperforming consumer loans held- for-sale, included in Other Assets at December 31, 2005, 2004, 2003, 2002, and 2001, respectively. Table 11 presents the additions and reductions to nonperforming assets in the consumer portfolio during 2005 and 2004. Net additions to nonperforming loans and leases in 2005 were $47 million compared to $100 million in 2004. Table 11 Nonperforming Consumer Assets Activity (Dollars in millions) 2005 2004 Nonperforming loans and leases Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 738 $ 638 Additions to nonperforming loans and leases: FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New nonaccrual loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,108 122 1,443 Reductions in nonperforming loans and leases: Paydowns and payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Returns to performing status(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net additions to nonperforming loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total nonperforming loans and leases, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed properties Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to foreclosed properties: FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions in foreclosed properties: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net reductions in foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total foreclosed properties, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (223) (112) (531) (121) (69) (5) 47 785 (363) (96) (793) (128) (86) 1 100 738 69 81 — 125 5 119 (108) (25) (8) 61 (123) (13) (12) 69 Nonperforming consumer assets, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 846 $ 807 (1) Consumer loans are generally returned to performing status when principal or interest is less than 90 days past due. (2) Our policy is not to classify consumer credit card and consumer non-real estate loans and leases as nonperforming; therefore, the charge-offs on these loans are not included above. 52 On-balance sheet consumer loans and leases 90 days or more past due and still accruing interest totaled $1.3 billion at December 31, 2005, and were up $131 million from December 31, 2004, primarily driven by a $122 million increase in credit card past due loans due to continued seasoning and growth. Commercial Portfolio Credit Risk Management Credit risk management for the commercial portfolio begins with an assessment of the credit risk profile of the borrower or counterparty based on an analysis of the borrower’s or counterparty’s financial position. As part of the overall credit risk assessment of a borrower or counterparty, each commercial credit exposure or transaction is assigned a risk rating and is subject to approval based on defined credit approval standards. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the borrower’s or counterparty’s financial condition, cash flow or financial situation. We use risk rating aggregations to measure and evaluate concentrations within portfolios. Risk ratings are a factor in determining the level of assigned economic capital and the allowance for credit losses. In making decisions regarding credit, we consider risk rating, collateral, country, industry and single name concentration limits while also balancing the total borrower or counterparty relationship and SVA. Our lines of business and Risk Management personnel use a variety of tools to continuously monitor a borrower’s or counterparty’s ability to perform under its obligations. Additionally, we utilize syndication of exposure to other entities, loan sales and other risk mitigation techniques to manage the size and risk profile of the loan portfolio. Table 12 presents outstanding commercial loans and leases for each year in the five-year period ending December 31, 2005. Table 12 Outstanding Commercial Loans and Leases 2005 2004 2003 2002 2001 December 31 (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial—domestic . . . . . . . . $140,533 35,766 Commercial real estate(1) . . . . . . 20,705 Commercial lease financing . . . . 21,330 Commercial—foreign . . . . . . . . . 64.3% $122,095 32,319 16.4 21,115 9.5 18,401 9.8 62.9% $ 91,491 19,367 16.7 9,692 10.9 10,754 9.5 69.7% $ 99,151 20,205 14.7 10,386 7.4 15,428 8.2 68.3% $110,981 22,655 13.9 11,404 7.2 18,858 10.6 67.7% 13.8 7.0 11.5 Total commercial loans and leases . . . . . . . . . . . . $218,334 100.0% $193,930 100.0% $131,304 100.0% $145,170 100.0% $163,898 100.0% (1) Includes domestic commercial real estate loans of $35,181 million, $31,879 million, $19,043 million, $19,910 million, and $22,272 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively; and foreign commercial real estate loans of $585 million, $440 million, $324 million, $295 million, and $383 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively. Concentrations of Commercial Credit Risk Portfolio credit risk is evaluated and managed with a goal that concentrations of credit exposure do not result in undesirable levels of risk. We review, measure, and manage concentrations of credit exposure by industry, product, geography and customer relationship. Distribution of loans and leases by loan size is an additional measure of the portfolio risk diversification. We also review, measure, and manage commercial real estate loans by geographic location and property type. In addition, within our international portfolio, we evaluate borrowings by region and by country. Tables 13 through 19 summarize these concentrations. From the perspective of portfolio risk management, customer concentration management is most relevant in Global Capital Markets and Investment Banking. Within that portfolio, concentrations are actively managed through the underwriting and ongoing monitoring processes, the established strategy of “originate to distribute”, and partly through the purchase of credit protection through credit derivatives. We utilize various risk mitigation tools to economically hedge our risk to certain credit counterparties. Credit derivatives are financial instruments that we purchase for protection against the deterioration of credit quality. Earnings volatility increases due to accounting asymmetry as we mark to market the CDS, as required by SFAS 133, while the loans are recorded at historical cost less an allowance for credit losses or, if held-for-sale, at the lower of cost or market. 53 At December 31, 2005 and 2004, we had a net notional amount of credit default protection purchased in our credit derivatives portfolio of $14.7 billion and $10.8 billion. Our credit portfolio hedges, including the impact of mark-to-market, resulted in net gains of $49 million in 2005 and net losses of $144 million in 2004. Gains for 2005 primarily reflected the impact of spread widening in certain industries in the first half of the year. Table 13 shows commercial utilized credit exposure by industry based on Standard & Poor’s industry classifications and includes commercial loans and leases, SBLCs and financial guarantees, derivative assets, assets held-for-sale, and commercial letters of credit. These amounts exclude the impact of our credit hedging activities, which are separately included in the table. To lessen the cost of obtaining our desired credit protection levels, credit exposure may be added within an industry, borrower or counterparty group by selling protection. A negative notional amount indicates a net amount of protection purchased in a particular industry; conversely, a positive notional amount indicates a net amount of protection sold in a particular industry. Credit protection is purchased to cover the funded portion as well as the unfunded portion of credit exposure. As shown in the table below, commercial utilized credit exposure is diversified across a range of industries. Table 13 Commercial Utilized Credit Exposure and Net Credit Default Protection by Industry Commercial Utilized Credit Exposure(1) Net Credit Default Protection(2) December 31 December 31 (Dollars in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate(3) Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diversified financials . . . . . . . . . . . . . . . . . . . . . . . . . . Retailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education and government . . . . . . . . . . . . . . . . . . . . . Individuals and trusts . . . . . . . . . . . . . . . . . . . . . . . . . Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer durables and apparel . . . . . . . . . . . . . . . . . Capital goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial services and supplies . . . . . . . . . . . . . . . Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Healthcare equipment and services . . . . . . . . . . . . . . Leisure and sports, hotels and restaurants . . . . . . . Food, beverage and tobacco . . . . . . . . . . . . . . . . . . . . . Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Religious and social organizations . . . . . . . . . . . . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food and staples retailing . . . . . . . . . . . . . . . . . . . . . . Technology hardware and equipment . . . . . . . . . . . . Telecommunication services . . . . . . . . . . . . . . . . . . . . Software and services . . . . . . . . . . . . . . . . . . . . . . . . . . Automobiles and components . . . . . . . . . . . . . . . . . . . Pharmaceuticals and biotechnology . . . . . . . . . . . . . . Household and personal products . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 $ 41,665 26,514 25,859 23,913 22,331 17,237 16,477 14,988 13,640 13,605 13,449 13,294 13,005 11,578 9,992 6,608 6,340 4,858 4,692 3,802 3,737 3,461 2,668 1,681 1,647 379 2,587 $320,007 2004 $ 36,672 25,265 25,932 23,149 17,429 16,110 14,123 13,427 12,633 11,944 13,234 12,196 13,331 11,687 7,579 6,232 5,710 5,615 5,851 3,610 3,398 3,030 3,292 1,894 1,441 371 3,132 $298,287 2005 $ (788) 31 (543) (1,124) — (30) (1,149) (772) (751) (472) (392) (709) (874) (621) (559) (1,790) — (899) (1,453) (334) (563) (1,205) (299) (679) (470) 75 1,677(4) $(14,693) $ 2004 (268) 61 (1,177) (829) — — (469) (406) (819) (175) (143) (354) (357) (226) (457) (801) — (402) (643) (258) (301) (808) (131) (1,431) (202) 8 (260)(4) $(10,848) (1) Derivative assets are reported on a mark-to-market basis and have not been reduced by the amount of collateral applied. Derivative asset collateral totaled $17.1 billion and $17.7 billion at December 31, 2005 and 2004. (2) Represents notional amounts at December 31, 2005 and 2004. (3) Industries are viewed from a variety of perspectives to best isolate the perceived risks. For purposes of this table, the real estate industry is defined based upon the borrowers’ or counterparties’ primary business activity using operating cash flow and primary source of repayment as key factors. (4) Represents net CDS index positions, which were principally investment grade. Indices are comprised of corporate credit derivatives that trade as an aggregate index value. Generally, they are grouped into portfolios based on specific ratings of credit quality or global geographic location. As of December 31, 2005, CDS index positions were sold to reflect a short-term positive view of the credit markets. 54 Table 14 shows the maturity profile of the net credit default protection portfolio at December 31, 2005 and 2004. Table 14 Net Credit Default Protection by Maturity Profile Less than or equal to one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — % Greater than one year and less than or equal to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greater than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 35 3% 87 10 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% Table 15 shows our net credit default protection portfolio by credit exposure debt rating at December 31, 2005 and December 31 2005 2004 2004. Table 15 Net Credit Default Protection by Credit Exposure Debt Rating (Dollars in millions) Ratings December 31 2005 2004 Net Notional Percent Net Notional Percent AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CCC and below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NR(1) $ 22 523 4,861 8,572 1,792 424 149 (1,650) 0.2% $ 3.6 33.1 58.2 12.2 2.9 1.0 (11.2) 89 340 2,884 5,777 1,233 250 15 260 0.8% 3.1 26.6 53.3 11.4 2.3 0.1 2.4 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,693 100.0% $10,848 100.0% (1) In addition to unrated names, “NR” includes $1,677 million in net CDS index positions. While index positions are principally investment grade, CDS indices include names in and across each of the ratings categories. 55 Table 16 presents outstanding commercial real estate loans and the geographic region and property type diversification. The amounts outstanding exclude commercial loans and leases secured by owner-occupied real estate. Commercial loans and leases secured by owner-occupied real estate are made on the general creditworthiness of the borrower where real estate is obtained as additional security and the ultimate repayment of the credit is not dependent on the sale, lease and rental, or refinancing of the real estate. For purposes of this table, commercial real estate reflects loans dependent on the sale, lease and rental, or refinancing of the real estate as the primary source of repayment. Table 16 Outstanding Commercial Real Estate Loans December 31 (Dollars in millions) By Geographic Region(1) California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,615 $ 6,293 6,700 Northeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,562 Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,448 Southeast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,265 Southwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,860 Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,038 Northwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,379 Midsouth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,184 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,150 Geographically diversified(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,766 $32,319 6,337 4,507 4,370 3,658 2,595 2,048 1,485 873 1,693 585 2005 2004 By Property Type Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,601 $ 5,992 5,434 Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,940 Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,490 Shopping centers/retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,388 Land and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,263 Industrial/warehouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744 Multiple use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909 Hotels/motels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 Resorts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,907 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(3) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,766 $32,319 4,984 4,461 4,165 3,715 3,031 996 790 183 5,840 (1) Distribution is based on geographic location of collateral. Geographic regions are in the U.S. unless otherwise noted. (2) The geographically diversified category is comprised primarily of unsecured outstandings to real estate investment trusts and national homebuilders whose portfolios of properties span multiple geographic regions. (3) Represents loans to borrowers whose primary business is commercial real estate, but the exposure is not secured by the listed property types. Foreign Portfolio Table 17 sets forth total foreign exposure broken out by region at December 31, 2005 and 2004. Total foreign exposure is defined to include credit exposure, net of local liabilities, plus securities and other investments for all exposure with a country of risk other than the United States. Table 17 Regional Foreign Exposure(1) December 31 (Dollars in millions) Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,953 $62,428 10,736 Asia Pacific(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,948 Latin America(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,327 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(4) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $92,221 $90,204 14,113 10,651 616 110 4,778 2005 2004 (1) Reflects the subtraction of local funding or liabilities from local exposures as allowed by the Federal Financial Institutions Examination Council (FFIEC). (2) Includes Australia and New Zealand. (3) Includes Bermuda and Cayman Islands. (4) Other includes Canada and supranational entities. 56 Our total foreign exposure was $92.2 billion at December 31, 2005, an increase of $2.0 billion from December 31, 2004. Our foreign exposure was concentrated in Europe, which accounted for $62.0 billion, or 67 percent, of total foreign exposure. The European exposure was mostly in Western Europe and was distributed across a variety of industries with the largest concentration in the banking sector that accounted for 47 percent of the total exposure in Europe. At December 31, 2005, the United Kingdom and Germany were the only countries whose total cross-border outstandings exceeded 0.75 percent of our total assets. Our second largest foreign exposure of $14.1 billion, or 15 percent, was in Asia Pacific as growth in the total foreign exposure during 2005 was concentrated in that region. Our $3.0 billion equity investment in CCB was the most significant driver of the growth. Latin America accounted for $10.7 billion, or 12 percent, of total foreign exposure. The decline in exposure in Latin America during 2005 was primarily due to the sales of branch assets in Peru, Colombia and Panama as well as the reduction of exposure in Argentina, partially offset by an increase in Mexico. For more information on our Asia Pacific and Latin America exposure, see discussion in the foreign exposure to selected countries defined as emerging markets on page 58. As shown in Table 18, at December 31, 2005 and 2004, the United Kingdom had total cross-border exposure of $22.9 billion and $11.9 billion, representing 1.78 percent and 1.07 percent of total assets. At December 31, 2005 and 2004, Germany had total cross-border exposure of $12.5 billion and $12.0 billion, representing 0.97 percent and 1.08 percent of total assets. At December 31, 2005, the largest concentration of the exposure to these countries was in the private sector. Table 18 Total Cross-border Exposure Exceeding One Percent of Total Assets(1,2) (Dollars in millions) United Kingdom Germany December 31 Public Sector Banks Private Sector Cross- border Exposure Exposure as a Percentage of Total Assets (Restated) 2005 2004 2003 2005 2004 2003 $298 74 143 $285 659 441 $8,915 $13,727 8,606 6,552 3,239 3,426 $5,751 $ 6,484 5,081 2,978 6,251 3,436 $22,940 11,919 10,121 $12,520 11,991 6,855 1.78% 1.07 1.41 0.97% 1.08 0.95 (1) Exposure includes cross-border claims by our 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, SBLCs, commercial letters of credit and formal guarantees. Sector definitions are based on the FFIEC instructions for preparing the Country Exposure Report. (2) The total cross-border exposure for the United Kingdom and Germany at December 31, 2005 includes derivatives exposure of $2.3 billion and $3.4 billion, against which we hold collateral totaling $1.9 billion and $2.6 billion. As shown in Table 19, at December 31, 2005, foreign exposure to borrowers or counterparties in emerging markets increased by $1.6 billion to $17.2 billion compared to $15.6 billion at December 31, 2004, and represented 19 percent and 17 percent of total foreign exposure at December 31, 2005 and 2004. At December 31, 2005, 51 percent of the emerging markets exposure was in Asia Pacific, compared to 40 percent at December 31, 2004. Asia Pacific emerging markets exposure increased by $2.4 billion due to our $3.0 billion equity investment in CCB partially offset by declines in other countries. At December 31, 2005, 48 percent of the emerging markets exposure was in Latin America compared to 58 percent at December 31, 2004. Driving the decrease in Latin America were mostly lower exposures in Other Latin America and Argentina, partially offset by an increase in Mexico. Lower exposures in Other Latin America were attributable to the sales of branch assets in Peru, Colombia and Panama, as well as lower securities trading exposure in Venezuela. The reduction in Argentina was mostly in cross-border exposure. Our 24.9 percent investment in Grupo Financiero Santander Serfin accounted for $2.1 billion and $1.9 billion of reported exposure in Mexico at December 31, 2005 and 2004. Our largest exposure in Latin America was in Brazil. Our exposure in Brazil at December 31, 2005 and 2004 included $1.2 billion and $1.6 billion of traditional cross-border credit exposure (Loans and Leases, letters of credit, etc.), and $2.2 billion and $1.8 billion of local country exposure net of local liabilities. We had risk mitigation instruments associated with certain exposures in Brazil, including structured trade related transfer risk mitigation of $830 million and $950 million, third party funding of $313 million and $286 million, and 57 linked certificates of deposit of $59 million and $125 million at December 31, 2005 and 2004. The resulting total foreign exposure net of risk mitigation for Brazil was $2.3 billion and $2.2 billion at December 31, 2005 and 2004. On October 13, 2005, we announced an agreement to sell our asset management business in Mexico with $1.8 billion of assets under management to an entity in which we have a 24.9 percent investment. The sale will be completed in 2006. In December 2005, we entered into a definitive agreement with a consortium led by Johannesburg-based Standard Bank Group Ltd for the sale of BankBoston Argentina assets and the assumption of liabilities. The transaction is subject to obtaining all necessary regulatory approvals. Table 19 sets forth regional foreign exposure to selected countries defined as emerging markets. Table 19 Selected Emerging Markets(1) Loans and Leases, and Loan Commitments Other Financing(2) Derivative Assets(3) Securities/ Other Investments(4) Total Cross- border Exposure(5) Local Country Exposure Net of Local Liabilities(6) Total Foreign Exposure December 31, 2005 Increase/ (Decrease) from December 31, 2004 (Dollars in millions) Region/Country Asia Pacific China(7) . . . . . . . . . . . . . . . . . India . . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . Taiwan . . . . . . . . . . . . . . . . . Hong Kong . . . . . . . . . . . . . . Singapore . . . . . . . . . . . . . . . . . . . . . Other Asia Pacific(8) $ $ 172 547 267 266 216 209 46 Total Asia Pacific . . . . 1,723 Latin America Brazil . . . . . . . . . . . . . . . . . . Mexico . . . . . . . . . . . . . . . . . . Chile . . . . . . . . . . . . . . . . . . . Argentina . . . . . . . . . . . . . . . Other Latin America(8) . . . . Total Latin 1,008 821 236 68 126 America . . . . . . . . . . . . 2,259 Central and Eastern Europe(8) . . . . . . . . . . . . . 26 91 176 474 77 76 7 88 989 187 176 19 24 134 540 42 $110 341 52 84 99 45 43 774 — 58 — — 7 65 9 $3,031 482 305 48 216 209 248 4,539 44 2,271 8 102 84 $ 3,404 1,546 1,098 475 607 470 425 8,025 1,239 3,326 263 194 351 $ — 45 57 448 — — 170 720 2,232 — 717 — 8 $ 3,404 1,591 1,155 923 607 470 595 8,745 3,471 3,326 980 194 359 $3,296 99 (228) (404) (512) 130 49 2,430 (79) 460 (200) (197) (716) 2,509 5,373 2,957 8,330 (732) 65 142 — 142 (99) Total . . . . . . . . . . . . . . . $4,008 $1,571 $848 $7,113 $13,540 $3,677 $17,217 $1,599 (1) There is no generally accepted definition of emerging markets. The definition that we use includes all countries in Latin America excluding Cayman Islands and Bermuda; all countries in Asia Pacific excluding Japan, Australia and New Zealand; and all countries in Central and Eastern Europe excluding Greece. (2) Includes acceptances, SBLCs, commercial letters of credit and formal guarantees. (3) Derivative assets are reported on a mark-to-market basis and have not been reduced by the amount of collateral applied. Derivative asset collateral totaled $58 million and $361 million at December 31, 2005 and 2004. (4) Generally, cross-border resale agreements are presented based on the domicile of the counterparty because the counterparty has the legal obligation for repayment except where the underlying securities are U.S. Treasuries, in which case the domicile is the U.S., and therefore, excluded from this presentation. For regulatory reporting under FFIEC guidelines, cross-border resale agreements are presented based on the domicile of the issuer of the securities that are held as collateral. (5) Cross-border exposure includes amounts payable to us by borrowers or counterparties with a country of residence 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. (6) Local country exposure includes amounts payable to us by borrowers with a country of residence in which the credit is booked, regardless of the currency in which the claim is denominated. Management subtracts local funding or liabilities from local exposures as allowed by the FFIEC. Total amount of available local liabilities funding local country exposure at December 31, 2005 was $24.2 billion compared to $17.2 billion at December 31, 2004. Local liabilities at December 31, 2005 in Asia Pacific and Latin America were $13.6 billion and $10.6 billion of which $8.4 billion were in Hong Kong, $5.3 billion in Brazil, $3.1 billion in Singapore, $1.7 billion in Argentina, $1.6 billion in Chile, $1.2 billion in Mexico, $782 million in India and $718 million in Uruguay. There were no other countries with available local liabilities funding local country exposure greater than $500 million. (7) Securities/Other Investments includes equity investment of $3.0 billion in CCB. (8) Other Asia Pacific, Other Latin America, and Central and Eastern Europe include countries each with total foreign exposure of less than $300 million. 58 Commercial Portfolio Credit Quality Performance Overall commercial credit quality continued to improve in 2005; however, the rate of improvement slowed in the second half of the year. Table 20 presents commercial net charge-offs and net charge-off ratios for 2005 and 2004. Table 20 Commercial Net Charge-offs and Net Charge-off Ratios(1) (Dollars in millions) Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 Amount Percent Amount Percent $170 — 231 (72) $329 0.13% $177 (3) — 9 1.13 173 (0.39) 0.16% $356 0.15% (0.01) 0.05 1.05 0.20% (1) Percentage amounts are calculated as net charge-offs divided by average outstanding loans and leases during the year for each loan category. Commercial net charge-offs were $329 million for 2005 compared to $356 million for 2004. Commercial lease financing net charge-offs increased $222 million in 2005 compared to 2004 primarily due to the domestic airline industry. Commercial—foreign net recoveries were $72 million in 2005 compared to net charge-offs of $173 million in 2004. Recoveries were centered in Bermuda, Latin America, India and the United Kingdom. Commercial—foreign net charge-offs of $173 million in 2004 were primarily related to one borrower in the food products industry. As presented in Table 21, commercial criticized credit exposure decreased $2.7 billion, or 27 percent, to $7.5 billion at December 31, 2005. The net decrease was driven by $9.9 billion of paydowns, payoffs, credit quality improvements, charge-offs principally related to the domestic airline industry, and loan sales. Reductions were distributed across many industries of which the largest were airlines, utilities and media. These decreases were partially offset by $7.2 billion of newly criticized exposure. Global Business and Financial Services accounted for 54 percent, or $1.5 billion, of the decrease in commercial criticized exposure centered in Commercial Aviation, Latin America and Middle Market Banking, which comprised 20 percent, 15 percent and 9 percent of the total decrease. Global Capital Markets and Investment Banking accounted for 33 percent, or $896 million, of the decrease in criticized exposure. Table 21 Commercial Criticized Exposure(1) (Dollars in millions) Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial criticized exposure . . . . . . . . . . . . . . . . . December 31 2005 2004 Amount Percent(2) Amount Percent(2) $5,259 723 611 934 $7,527 2.62% $ 6,340 1,028 1.63 1,347 2.95 1,534 1.73 2.35% $10,249 3.38% 2.54 6.38 3.12 3.44% (1) Criticized exposure corresponds to the Special Mention, Substandard and Doubtful asset categories defined by regulatory authorities. Exposure amounts include loans and leases, SBLCs and financial guarantees, derivative assets, assets held-for-sale and commercial letters of credit. (2) Commercial criticized exposure is taken as a percentage of total commercial utilized exposure. 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 full collection of principal and/or interest in accordance with its contractual terms is not probable. As presented in Table 22, nonperforming commercial assets decreased $891 million to $757 million at December 31, 2005 due primarily to the $749 million decrease in nonperforming commercial loans and leases. The decrease in total nonperforming commercial loans and leases primarily resulted from paydowns and payoffs of $686 million, gross charge-offs of $669 million, returns to performing status of $152 million and loan sales of $108 million. These decreases were partially offset by new nonaccrual loans of $929 million. 59 Nonperforming commercial—domestic loans and leases decreased by $274 million and represented 0.41 percent of commercial—domestic loans and leases at December 31, 2005 compared to 0.70 percent at December 31, 2004. The improvement in the percentage of nonperforming commercial—domestic to total commercial—domestic was driven by a broad-based decrease in nonperforming loans and leases across several industries, the largest of which were utilities, and metals and mining. Nonperforming commercial lease financing decreased $204 million primarily due to the previously mentioned charge-offs associated with the domestic airline industry, and represented 0.30 percent of commercial lease financing at December 31, 2005 compared to 1.26 percent at December 31, 2004. Nonperforming commercial—foreign decreased $233 million and represented 0.16 percent of commercial—foreign at December 31, 2005 compared to 1.45 percent at December 31, 2004. The improvement in the percentage of nonperforming commercial— foreign to total commercial—foreign was attributable to Latin America. The $140 million decrease in nonperforming securities from December 31, 2004 was primarily driven by an exchange of nonperforming securities for performing securities in Argentina that resulted from the completion of a government mandated securities exchange program. Table 22 presents nonperforming commercial assets for each year in the five-year period ending December 31, 2005. Table 22 Nonperforming Commercial Assets (Dollars in millions) December 31 2005 2004 2003 2002 2001 Nonperforming commercial loans and leases Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 581 $ 855 $1,388 $2,621 $2,991 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 164 160 1,359 142 127 578 87 266 267 49 62 34 Total nonperforming commercial loans and leases(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonperforming securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726 — 31 1,475 140 33 2,235 — 67 4,304 — 126 3,827 — 68 Total nonperforming commercial assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 757 $1,648 $2,302 $4,430 $3,895 Nonperforming commercial loans and leases as a percentage of outstanding commercial loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.33% 0.76% 1.70% 2.96% 2.33% Nonperforming commercial assets as a percentage of outstanding commercial loans, leases and foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.35 0.85 1.75 3.05 2.38 (1) In 2005, $51 million in Interest Income was estimated to be contractually due on nonperforming commercial loans and leases classified as nonperforming at December 31, 2005, including troubled debt restructured loans of which $31 million were performing at December 31, 2005 and not included in the table above. Approximately $15 million of the estimated $51 million in contractual interest was received and included in net income for 2005. (2) Primarily related to international securities held in the AFS portfolio. (3) Balances do not include $45 million, $123 million, $186 million, $73 million, and $289 million of nonperforming commercial assets, primarily commercial loans held-for-sale, included in Other Assets at December 31, 2005, 2004, 2003, 2002, and 2001, respectively. 60 Table 23 presents the additions and reductions to nonperforming assets in the commercial portfolio during 2005 and 2004. Table 23 Nonperforming Commercial Assets Activity (Dollars in millions) 2005 2004 Nonperforming loans and leases Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,475 $ 2,235 Additions to nonperforming loans and leases: FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New nonaccrual loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 892 37 948 1,272 82 Reductions in nonperforming loans and leases: Paydowns and payoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Returns to performing status(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net reductions in nonperforming loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (686) (108) (152) (669) (44) (19) (749) (1,392) (515) (348) (640) (145) (22) (760) Total nonperforming loans and leases, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726 1,475 Nonperforming securities Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 — Additions to nonperforming securities: FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New nonaccrual securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions in nonperforming securities: Paydowns, payoffs, and exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net additions to (reductions in) nonperforming securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total nonperforming securities, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed properties Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to foreclosed properties: FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions in foreclosed properties: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net reductions in foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total foreclosed properties, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 15 (144) (11) (140) — 33 — 32 (24) (8) (2) (2) 31 135 56 (39) (12) 140 140 67 9 44 (74) (13) — (34) 33 Nonperforming commercial assets, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 757 $ 1,648 (1) Commercial loans and leases may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well secured and is in the process of collection. (2) Certain loan and lease products, including commercial credit card, are not classified as nonperforming; therefore, the charge-offs on these loans are not included above. 61 At December 31, 2005, Other Assets included commercial loans held-for-sale of $7.3 billion, of which $45 million was nonperforming, and leveraged lease partnership interests of $183 million. At December 31, 2005, there were no nonperforming leveraged lease partnership interests. At December 31, 2004, Other Assets included $1.3 billion and $198 million of commercial loans held-for-sale and leveraged lease partnership interests, of which, $100 million and $23 million were nonperforming. Commercial loans and leases 90 days or more past due and still accruing interest, were $168 million at December 31, 2005, an increase of $30 million compared to December 31, 2004. The increase was driven by commercial —foreign loans in the U.K. See Note 1 of the Consolidated Financial Statements for additional information on past due commercial loans and leases. Provision for Credit Losses The Provision for Credit Losses was $4.0 billion, a 45 percent increase over 2004. The consumer portion of the Provision for Credit Losses increased $992 million to $4.4 billion in 2005, primarily driven by consumer net charge-offs of $4.2 billion. Credit card net charge-offs increased $1.3 billion from 2004 to $3.7 billion with an estimated $578 million related to the increase in bankruptcy filings as customers rushed to file ahead of the new law. Also contributing to the increase in credit card net charge-offs were organic growth and seasoning of the portfolio, increases effective in 2004 in credit card minimum payment requirements, the impact of the FleetBoston portfolio and the impact of new advances on accounts for which previous loan balances were sold to the securitization trusts. We estimate that approximately 70 percent of the bankruptcy-related charge-offs represent acceleration of charge-offs from 2006. Excluding bankruptcy-related charge-offs representing acceleration from 2006 and charge-offs associated with the 2004 changes in credit card minimum payment requirements that were provided for in late 2004, the increased credit card net charge-offs were the primary driver of higher Provision for Credit Losses. In addition, the Provision for Credit Losses was impacted by new advances on accounts for which previous loan balances were sold to the securitization trusts, and the establishment of reserves in 2005 for additional changes made in late 2005 in credit card minimum payment requirements. The establishment of a $50 million reserve associated with Hurricane Katrina for estimated losses on residential mortgage, home equity and indirect automobile products also contributed to the provision increase. The commercial portion of the Provision for Credit Losses increased $161 million to negative $370 million. The negative provision in 2005 reflects continued improvement in commercial credit quality, although at a slower pace than experienced in 2004. An improved risk profile in Latin America and reduced uncertainties resulting from the completion of credit-related integration activities for FleetBoston also drove the negative provision. The Provision for Credit Losses related to unfunded lending commitments increased $92 million to negative $7 million as the rate of improvement in commercial credit quality slowed. Allowance for Credit Losses Allowance for Loan and Lease Losses The Allowance for Loan and Lease Losses is allocated based on two components. We evaluate the adequacy of the Allowance for Loan and Lease Losses based on the combined total of these two components. The first component of the Allowance for Loan and Lease Losses covers those commercial loans that are either nonperforming or impaired. An allowance is allocated when the discounted cash flows (or collateral value or observable market price) are lower than the carrying value of that loan. For purposes of computing the specific loss component of the allowance, larger impaired loans are evaluated individually and smaller impaired loans are evaluated as a pool using historical loss experience for the respective product type and risk rating of the loans. The second component of the Allowance for Loan and Lease Losses covers performing commercial loans and leases, and consumer loans. The allowance for commercial loan and lease losses is established by product type after analyzing historical loss experience by internal risk rating, current economic conditions, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information. The commercial historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic environment. As of December 31, 2005, quarterly updating of historical loss experience did not have a material impact to the allowance for commercial loan and lease losses. The allowance for consumer loan and lease losses is based on aggregated portfolio segment evaluations, generally by product type. Loss forecast models are utilized for consumer products that consider a variety of factors including, but not limited to, historical loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic trends and credit scores. These consumer loss forecast models are updated on a quarterly basis in order to incorporate information reflective of the current economic environment. As of December 31, 2005, quarterly updating of the loss forecast models to reflect estimated bankruptcy-related net charge-offs accelerated from 2006 resulted in a decrease in the allowance for consumer loan and lease losses. 62 Included within the second component of the Allowance for Loan and Lease Losses are previously unallocated reserves maintained to cover uncertainties that affect our estimate of probable losses including the imprecision inherent in the forecasting methodologies, domestic and global economic uncertainty, large single name defaults and event risk. In the fourth quarter of 2005, we assigned these reserves to our individual products to better reflect our view of risk in these portfolios. We monitor differences between estimated and actual incurred loan and lease losses. This monitoring process includes periodic assessments by senior management of loan and lease portfolios and the models used to estimate incurred losses in those portfolios. Additions to the Allowance for Loan and Lease Losses are made by charges to the Provision for Credit Losses. Credit exposures deemed to be uncollectible are charged against the Allowance for Loan and Lease Losses. Recoveries of previously charged off amounts are credited to the Allowance for Loan and Lease Losses. The Allowance for Loan and Lease Losses for the consumer portfolio as presented in Table 25 increased $137 million from December 31, 2004 to $4.5 billion at December 31, 2005. Credit card accounted for $153 million of this increase and was primarily driven by new advances on accounts for which previous loan balances were sold to the securitization trusts, organic growth and continued seasoning which resulted in higher loss expectations. These increases were mostly offset by the use of reserves to absorb the estimated bankruptcy net charge-off acceleration from 2006. Increases in the allowance for non-credit card consumer products were driven by broad-based loan growth and seasoning, with the exception of the other consumer product category which decreased as a result of the run-off portfolios from our previously exited consumer businesses. The allowance for commercial loan and lease losses was $3.5 billion at December 31, 2005, a $718 million decrease from December 31, 2004. This decrease resulted from continued improvement in commercial credit quality, including reduced exposure and an improved risk profile in Latin America, the use of reserves to absorb a portion of domestic airline charge-offs and a reduction of reserves due to reduced uncertainties resulting from the completion of credit- related integration activities for FleetBoston during 2005. Reserve for Unfunded Lending Commitments In addition to the Allowance for Loan and Lease Losses, we also estimate probable losses related to unfunded lending commitments, such as letters of credit and financial guarantees, and binding unfunded loan commitments. Unfunded lending commitments are subject to individual reviews, and are analyzed and segregated by risk according to our 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 result in the estimation of the reserve for unfunded lending commitments. The reserve for unfunded lending commitments is included in Accrued Expenses and Other Liabilities on the Consolidated Balance Sheet. We monitor differences between estimated and actual incurred credit losses upon draws of the commitments. This monitoring process includes periodic assessments by senior management of credit portfolios and the models used to estimate incurred losses in those portfolios. Changes to the reserve for unfunded lending commitments are made through the Provision for Credit Losses. The reserve for unfunded lending commitments at December 31, 2005 was $395 million, a decrease of $7 million from December 31, 2004. 63 Table 24 presents a rollforward of the allowance for credit losses for five years ending December 31, 2005. Table 24 Allowance for Credit Losses (Dollars in millions) 2005 2004 2003 2002 2001 Allowance for loan and lease losses, January 1 . . . . . . . . . . . . . . . . . . . . . . $ 8,626 $ 6,163 $ 6,358 $ 6,278 $ 6,365 — 2,763 — — — FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases charged off Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (4,018) (46) (380) (376) (4,878) (535) (5) (315) (61) (916) (62) (2,536) (38) (344) (295) (3,275) (504) (12) (39) (262) (817) Total loans and leases charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,794) (4,092) Recoveries of loans and leases previously charged off Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 366 15 132 101 645 365 5 84 133 587 Total recoveries of loans and leases previously charged off . . . . . . . . . 1,232 26 231 23 136 102 518 327 15 30 89 461 979 (64) (1,657) (38) (322) (343) (2,424) (857) (46) (132) (408) (1,443) (3,867) 24 143 26 141 88 422 224 5 8 102 339 761 (56) (1,210) (40) (355) (395) (2,056) (1,625) (45) (168) (566) (2,404) (4,460) 14 116 14 145 99 388 314 7 9 45 375 763 (39) (753) (32) (389) (1,216) (2,429) (2,021) (46) (99) (249) (2,415) (4,844) 13 81 13 139 135 381 167 7 4 41 219 600 Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,562) (3,113) (3,106) (3,697) (4,244) Provision for loan and lease losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses, December 31 . . . . . . . . . . . . . . . Reserve for unfunded lending commitments, January 1 . . . . . . . . . . . . . FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for unfunded lending commitments, December 31 . . . . . . . . 4,021 (40) 8,045 402 — (7) 395 2,868 (55) 8,626 416 85 (99) 402 2,916 (5) 6,163 493 — (77) 416 3,801 (24) 6,358 597 — (104) 493 4,163 (6) 6,278 473 — 124 597 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,440 $ 9,028 $ 6,579 $ 6,851 $ 6,875 Loans and leases outstanding at December 31 (Restated) . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses as a percentage of loans and leases $573,791 $521,813 $371,433 $342,890 $329,153 outstanding at December 31 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.40% 1.65% 1.66% 1.85% 1.91% Consumer allowance for loan and lease losses as a percentage of consumer loans and leases outstanding at December 31 (Restated) (3) . . . . . . . . . . . . . . 1.27 1.34 1.25 0.95 1.12 Commercial allowance for loan and lease losses as a percentage of commercial loans and leases outstanding at December 31(3) . . . . . . . . . . . . . . Average loans and leases outstanding during the year (Restated) . . . . . . . . . . . Net charge-offs as a percentage of average loans and leases outstanding 1.62 $537,218 2.19 $472,617 2.40 $356,220 2.43 $336,820 2.16 $365,447 during the year (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.85% 0.66% 0.87% 1.10% 1.16% Allowance for loan and lease losses as a percentage of nonperforming loans and leases at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of the allowance for loan and lease losses at December 31 to net charge- offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532 1.76 390 2.77 215 1.98 126 1.72 139 1.48 (1) Includes $635 million related to the exit of the subprime real estate lending business in 2001. (2) Includes $395 million related to the exit of the subprime real estate lending business in 2001. (3) The 2004 and 2003 data presented in the table have been reclassified to reflect the assignment of general reserves to individual products. 64 For reporting purposes, we allocate the allowance for credit losses across products. However, the allowance is available to absorb any credit losses without restriction. Table 25 presents our allocation by product type. Table 25 Allocation of the Allowance for Credit Losses by Product Type (Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent 2005 2004 2003 2002 2001 December 31 Allowance for loan and lease losses Residential mortgage . . . . . . . . . . . . . . . . . . $ 277 3,301 Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Home equity lines . . . . . . . . . . . . . . . . . . . . . 421 Direct/Indirect consumer . . . . . . . . . . . . . . 380 Other consumer . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . Commercial—domestic . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . Total commercial(1) . . . . . . . . . . . . . . . . 4,515 2,100 609 232 589 3,530 General(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Allowance for loan and lease 3.4% $ 240 3,148 115 375 500 41.0 1.7 5.2 4.8 2.8% $ 185 1,947 72 347 456 36.5 1.3 4.3 5.9 3.0% $ 108 1,031 49 361 332 31.6 1.2 5.6 7.4 1.7% $ 145 821 83 367 443 16.2 0.8 5.7 5.2 56.1 26.1 7.6 2.9 7.3 43.9 — 4,378 2,101 644 442 1,061 4,248 — 50.8 24.3 7.5 5.1 12.3 49.2 — 3,007 1,756 484 235 681 3,156 — 48.8 28.5 7.9 3.8 11.0 51.2 — 1,881 2,231 439 n/a 855 3,525 952 29.6 35.1 6.9 n/a 13.4 55.4 15.0 1,859 1,901 905 n/a 730 3,536 883 2.3% 13.1 1.3 5.8 7.1 29.6 30.3 14.4 n/a 11.6 56.3 14.1 losses . . . . . . . . . . . . . . . . . . . . . 8,045 100.0% 8,626 100.0% 6,163 100.0% 6,358 100.0% 6,278 100.0% Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . 395 Total . . . . . . . . . . . . . . . . . . . . $8,440 402 $9,028 416 $6,579 493 $6,851 597 $6,875 (1) Includes allowance for loan and lease losses of commercial impaired loans of $55 million, $202 million, $391 million, $919 million, and $763 million at December 31, 2005, 2004, 2003, 2002, and 2001, respectively. (2) At December 31, 2005, general reserves were assigned to individual product types to better reflect our view of risk in these portfolios. The 2004 and 2003 data presented in the table have been reclassified to reflect the assignment of general reserves. Information was not available to assign general reserves by product types prior to 2003. n/a = Not available; included in commercial—domestic at December 31, 2002 and 2001. Market Risk Management Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as market movements. This risk is inherent in the financial instruments associated with our operations and/or activities including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, and derivatives. Market-sensitive assets and liabilities are generated through loans and deposits associated with our traditional banking business, our customer and proprietary trading operations, our ALM process, credit risk mitigation activities, and mortgage banking activities. Our traditional banking loan and deposit products are nontrading positions and are reported at amortized cost for assets or the amount owed for liabilities (historical cost). While the 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. Interest rate risk is the effect of changes in the economic value of our loans and deposits, as well as our other interest rate sensitive instruments, and is reflected in the levels of future income and expense produced by these positions versus levels that would be generated by current levels of interest rates. We seek to mitigate interest rate risk as part of the ALM process. We seek to mitigate trading risk within our prescribed risk appetite using hedging techniques. Trading positions are reported at estimated market value with changes reflected in income. Trading positions are subject to various risk factors, which include exposures to interest rates and foreign exchange rates, as well as equity, mortgage, commodity and issuer risk factors. We seek to mitigate these risk exposures by utilizing a variety of financial instruments. The following discusses the key risk components along with respective risk mitigation techniques. Interest Rate Risk Interest rate risk represents exposures we have to instruments whose values vary with the level of interest rates. These instruments include, but are not limited to, loans, debt securities, certain trading-related assets and liabilities, deposits, borrowings and derivative instruments. We seek to mitigate risks associated with the exposures in a variety of ways that typically involve taking offsetting positions in cash or derivative markets. The cash and derivative 65 instruments allow us to seek to mitigate risks by reducing the effect of movements in the level of interest rates, changes in the shape of the yield curve as well as changes in interest rate volatility. Hedging instruments used to mitigate these risks include related derivatives such as options, futures, forwards and swaps. Foreign Exchange Risk Foreign exchange risk represents exposures we have to changes in the values of current holdings and future cash flows denominated in other currencies. The types of instruments exposed to this risk include investments in foreign subsidiaries, foreign currency-denominated loans, foreign currency-denominated securities, future cash flows in foreign currencies arising from foreign exchange transactions, and various foreign exchange derivative instruments whose values fluctuate with changes in currency exchange rates or foreign interest rates. Instruments used to mitigate this risk are foreign exchange options, currency swaps, futures, forwards and deposits. These instruments help insulate us against losses that may arise due to volatile movements in foreign exchange rates or interest rates. Mortgage Risk Our exposure to mortgage risk takes several forms. First, we trade and engage in market-making activities in a including whole loans, pass-through certificates, commercial mortgages, and variety of mortgage securities, collateralized mortgage obligations. Second, we originate a variety of asset-backed securities, which involves the accumulation of mortgage-related loans in anticipation of eventual securitization. Third, we may hold positions in mortgage securities and residential mortgage loans as part of the ALM portfolio. Fourth, we create MSRs as part of our mortgage activities. See Notes 1 and 9 of the Consolidated Financial Statements for additional information on MSRs. These activities generate market risk since these instruments are sensitive to changes in the level of market interest rates, changes in mortgage prepayments and interest rate volatility. Options, futures, forwards, swaps, swaptions and mortgage-backed securities are used to hedge mortgage risk by seeking to mitigate the effects of changes in interest rates. Equity Market Risk Equity market risk arises from exposure to securities that represent an ownership interest in a corporation in the form of common stock or other equity-linked instruments. The instruments held that would lead to this exposure include, but are not limited to, the following: common stock, listed equity options (puts and calls), over-the-counter equity options, equity total return swaps, equity index futures and convertible bonds. We seek to mitigate the risk associated with these securities via hedging on a portfolio or name basis that focuses on reducing volatility from changes in stock prices. Instruments used for risk mitigation include options, futures, swaps, convertible bonds and cash positions. Commodity Risk Commodity risk represents exposures we have to products traded in the petroleum, natural gas, metals and power markets. Our principal exposure to these markets emanates from customer-driven transactions. These transactions consist primarily of futures, forwards, swaps and options. We seek to mitigate exposure to the commodity markets with instruments including, but not limited to, options, futures and swaps in the same or similar commodity product, as well as cash positions. Issuer Credit Risk Our portfolio is exposed to issuer credit risk where the value of an asset may be adversely impacted for various reasons directly related to the issuer, such as management performance, financial leverage or reduced demand for the issuer’s goods or services. Perceived changes in the creditworthiness of a particular debtor or sector can have significant effects on the replacement costs of cash and derivative positions. We seek to mitigate the impact of credit spreads, credit migration and default risks on the market value of the trading portfolio with the use of CDS, and credit fixed income and similar securities. Trading Risk Management Trading-related revenues represent the amount earned from our trading positions, which include trading account assets and liabilities, as well as derivative positions and, prior to the conversion of the Certificates into MSRs, market value adjustments to the Certificates and the MSRs. Trading positions are taken in a diverse range of financial instruments and markets. Trading account assets and liabilities, and derivative positions are reported at fair value. MSRs are reported at the lower of cost or market. For more information on fair value, see Complex Accounting Estimates beginning on page 74. For additional information on MSRs, see Notes 1 and 9 of the Consolidated Financial Statements. Trading Account Profits represent the net amount earned from our trading positions and, as reported in the 66 Consolidated Statement of Income, do not include the Net Interest Income recognized on trading positions, or the related funding charge or benefit. Trading Account Profits can be volatile and are largely driven by general market conditions and customer demand. Trading Account Profits are 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. The histogram of daily revenue or loss below is a graphic depiction of trading volatility and illustrates the daily level of trading-related revenue for 2005. Trading-related revenue encompasses proprietary trading and customer-related activities. During 2005, positive trading-related revenue was recorded for 81 percent of the trading days. Furthermore, only six percent of the total trading days had losses greater than $10 million, and the largest loss was $41 million. This can be compared to 2004, where positive trading-related revenue was recorded for 87 percent of the trading days and only five percent of the total trading days had losses greater than $10 million, and the largest loss was $27 million. 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 statistic used to measure and manage market risk. Trading limits and VAR are used to manage day-to-day risks and are subject to testing where we compare expected performance to actual performance. This testing provides us a view of our models’ predictive accuracy. All limit excesses are communicated to senior management for review. A VAR model estimates a range of hypothetical scenarios to calculate a potential loss which is not expected to be exceeded with a specified confidence level. These estimates are impacted by the nature of the positions in the portfolio and the correlation within the portfolio. Within any VAR model, there are significant and numerous assumptions that will differ from company to company. Our VAR model assumes a 99 percent confidence level. Statistically, this means that losses will exceed VAR, on average, one out of 100 trading days, or two to three times each year. Actual losses did not exceed VAR in 2005 or 2004. In addition to reviewing our underlying model assumptions, we seek to mitigate the uncertainties related to these assumptions and estimates through close monitoring and by updating the assumptions and estimates on an ongoing basis. If the results of our analysis indicate higher than expected levels of risk, proactive measures are taken to adjust risk levels. 67 The following graph shows actual losses did not exceed VAR in 2005. 68 Table 26 presents average, high and low daily VAR for 2005 and 2004. Table 26 Trading Activities Market Risk Twelve Months Ended December 31 2005 VAR 2004 VAR (Dollars in millions) Average High(1) Low(1) Average High(1) Low(1) Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate/mortgage(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.6 24.7 55.4 11.4 18.1 6.6 (59.6) $12.1 58.2 77.3 20.7 35.1 10.6 — $ 2.6 10.8 35.9 6.5 9.6 3.5 — $ 3.6 26.2 35.7 10.5 21.8 6.5 (56.3) $ 8.1 51.5 61.4 26.0 51.5 10.2 — $ 1.4 10.7 21.9 4.6 7.9 3.8 — Total trading portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62.2 $92.4 $38.0 $ 48.0 $78.5 $29.4 Total market-based trading portfolio(4) . . . . . . . . . . . . . . . . . . . . . $ 40.7 $66.4 $26.4 $ 44.1 $79.0 $23.7 (1) 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. (2) Credit includes credit fixed income and CDS used for credit risk management. Average VAR for CDS was $69.0 million and $23.5 million in 2005 and 2004. In 2005, the Credit VAR was less than VAR for CDS used for credit risk management as the positions in credit fixed income typically offset the risk of CDS. The relationship between overall Credit VAR and the VAR for CDS can change over time as a result of changes in the relative sizes of the credit fixed income and CDS exposures. (3) Real estate/mortgage includes capital market real estate and the Certificates. Effective June 1, 2004, Real estate/mortgage no information on the Certificates, see Note 1 of the Consolidated Financial longer includes the Certificates. For additional Statements. (4) Total market-based trading portfolio excludes CDS used for credit risk management, net of the effect of diversification. The increase in average VAR of the trading portfolio for 2005 was primarily due to increases in the average risk taken in credit due to an increase in credit protection purchased to hedge the credit risk in our commercial loan portfolio. 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, we will preserve our capital; to determine the effects of significant historical 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 management as part of the regular reporting process. The results of certain specific, extreme hypothetical scenarios are presented to the Asset and Liability Committee. Interest Rate Risk Management Interest rate risk represents the most significant market risk exposure to our nontrading financial instruments. Our overall goal is to manage interest rate risk so that movements in interest rates do not adversely affect Net Interest Income. Interest rate risk is measured as the potential volatility in our Net Interest Income caused by changes in market interest rates. Client facing activities, primarily lending and deposit-taking, create interest rate sensitive positions on our balance sheet. Interest rate risk from these activities as well as the impact of changing market conditions is managed through the ALM process. 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, debt securities, 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. loans, deposits, borrowings and derivative instruments. In addition, The Balance Sheet Management group maintains a Net Interest Income forecast utilizing different rate scenarios, with the base case utilizing the forward market curve. The Balance Sheet Management group constantly updates the Net Interest Income forecast for changing assumptions and differing outlooks based on economic trends and market conditions. Thus, we continually monitor our balance sheet position in an effort to maintain an acceptable level of exposure to volatile interest rate changes. 69 We prepare forward looking forecasts of Net Interest Income. These baseline forecasts take into consideration expected future business growth, ALM positioning, and the direction of interest rate movements as implied by the markets’ forward interest rate curve. We then measure and evaluate the impact that alternative interest rate scenarios have to these static baseline forecasts in order to assess interest rate sensitivity under varied conditions. The spot and 12-month forward rates used in our respective baseline forecasts at December 31, 2005 and 2004 were as follows: Table 27 Forward Rates Spot rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-month forward rates . . . . . . . . . . . . . . . . . . . . . . 4.25% 4.75 4.94% 4.97 2005 Federal Funds Ten-Year Constant Maturity Swap 2004 Ten-Year Constant Maturity Swap 4.64% 4.91 Federal Funds 2.25% 3.25 December 31 The following table reflects the pre-tax dollar impact to forecasted Core Net Interest Income over the next twelve months from December 31, 2005 and 2004, resulting from a 100 bp gradual parallel increase, a 100 bp gradual parallel decrease, a 100 bp gradual curve flattening (increase in short-term rates) and a 100 bp gradual curve steepening (increase in long-tem rates) from the forward curve. Table 28 Estimated Net Interest Income at Risk (Dollars in millions) Curve Change December 31 Short Rate Long Rate 2005 2004 (Restated) +100 Parallel shift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100 Parallel shift . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100 -100 +100 $(357) 244 -100 $(183) (126) Flatteners Short end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100 — — -100 (523) (298) (462) (677) Steepeners Short end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100 — — +100 536 168 497 97 The sensitivity analysis above assumes that we take no action in response to these rate shifts over the indicated years. Beyond what is already implied in the forward curve, we are modestly exposed to rising rates primarily due to increased funding costs. Conversely, we would benefit from falling rates or a steepening of the yield curve beyond what is already implied in the forward curve. As part of the ALM process, we use securities, residential mortgages, and interest rate and foreign exchange derivatives in managing interest rate sensitivity. Securities The securities portfolio is integral to our ALM process. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, liquidity and regulatory requirements, and the relative mix of our cash and derivative positions. During 2005, we purchased securities of $204.5 billion, sold $134.5 billion, and received paydowns of $37.7 billion. During 2004, we purchased securities of $243.6 billion, sold $117.7 billion, and received paydowns of $31.8 billion. During the year, we continuously monitored our interest rate risk position and effected changes in the securities portfolio in order to manage prepayment risk and interest rate risk. Through sales in the securities portfolio, we realized $1.1 billion in Gains on Sales of Debt Securities during 2005 and $1.7 billion during 2004. The decrease was primarily due to lower gains realized on mortgage-backed securities and corporate bonds. including the interest rate environment, Residential Mortgage Portfolio During 2005, we purchased $32.0 billion of residential mortgages related to the ALM process. We had whole mortgage loan sales of $10.1 billion during 2005. During 2004, we purchased $65.9 billion of residential mortgages related to the ALM process and had minimal sales of whole mortgage loans. Additionally, we received paydowns of $35.8 billion and $44.4 billion for 2005 and 2004. Through sales of whole mortgage loans, we recognized gains that were recorded as Other Income of $45 million for 2005, compared to losses of $2 million in 2004. 70 Interest Rate and Foreign Exchange Derivative Contracts Interest rate and foreign exchange derivative contracts are utilized in our ALM process and serve as an efficient tool to mitigate our risk. We use derivatives to hedge the changes in cash flows or market values of our balance sheet. See Note 5 of the Consolidated Financial Statements for additional information on our hedging activities. Our interest rate contracts are generally nonleveraged generic interest rate and basis swaps, options, futures, and forwards. In addition, we use foreign currency contracts to mitigate the foreign exchange risk associated with foreign currency-denominated assets and liabilities, as well as our equity investments in foreign subsidiaries. Table 29 reflects the notional amounts, fair value, weighted average receive fixed and pay fixed rates, expected maturity, and estimated duration of our open ALM derivatives at December 31, 2005 and 2004. The changes in our swap and option positions reflect actions taken associated with interest rate risk management. The decisions to reposition our derivative portfolio are based upon the current assessment of economic and financial conditions including the interest rate environment, balance sheet composition and trends, and the relative mix of our cash and derivative positions. The notional amount of our net receive fixed swap position (including foreign exchange contracts) decreased $328 million to $22.8 billion at December 31, 2005 compared to December 31, 2004. The notional amount of our net option position decreased $266.6 billion to $57.2 billion at December 31, 2005 compared to December 31, 2004. The vast majority of the decrease in the option notional amount was related to terminations and maturities of short duration options which were hedging short-term repricing risk of our liabilities. Included in the futures and forward rate contract amounts are $35.0 billion of forward purchase contracts of mortgage-backed securities and mortgage loans at December 31, 2005 settling from January 2006 to April 2006 with an average yield of 5.46 percent and $46.7 billion of forward purchase contracts of mortgage-backed securities and mortgage loans at December 31, 2004 that settled from January 2005 to February 2005 with an average yield of 5.26 percent. There were no forward sale contracts of mortgage-backed securities at December 31, 2005, compared to $25.8 billion at December 31, 2004 that settled from January 2005 to February 2005 with an average yield of 5.47 percent. 71 The following table includes derivatives utilized in our ALM process, including those designated as SFAS 133 hedges and those used as economic hedges that do not qualify for SFAS 133 hedge accounting treatment. The fair value of net ALM contracts decreased from $3.4 billion at December 31, 2004 to $(386) million at December 31, 2005. The decrease was attributable to decreases in the value of options, foreign exchange contracts and futures and forward rate contracts, partially offset by increases in the value of interest rate swaps. The decrease in the value of options was due to reduction in outstanding option positions due to terminations, maturities and decreases in the values of remaining open options positions. The decrease in the value of foreign exchange contracts was due to the strengthening of the U.S. dollar against most foreign currencies during 2005. The decrease in the value of futures and forward rate contracts was due to the impact of increases in interest rates during 2005 on long futures and forward rate contracts. Table 29 Asset and Liability Management Interest Rate and Foreign Exchange Contracts December 31, 2005 (Dollars in millions, average estimated duration in years) Fair Value Receive fixed interest rate swaps(1) . . . . . . . . . . . . . . . . . . . . $(1,390) Notional amount . . . . . . . . . . . . Weighted average fixed rate . . . . . . . . . . . . . . . . . . . . . Pay fixed interest rate swaps(1) . . . . . . . . . . . . . . . . . . . . Notional amount . . . . . . . . . . . . Weighted average fixed Notional amount(3) rate . . . . . . . . . . . . . . . . . . . . . Basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option products(2) . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange contracts . . . . Notional amount . . . . . . . . . . . . Notional amount(3) Futures and forward rate contracts(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . Notional amount(3) (408) (644) 1,349 909 (202) Net ALM contracts . . . . . . $ (386) December 31, 2004 (Dollars in millions, average estimated duration in years) Fair Value Receive fixed interest rate swaps(1) . . . . . . . . . . . . . . . . . . . . $ (880) Notional amount . . . . . . . . . . . . Weighted average fixed rate . . . . . . . . . . . . . . . . . . . . . Pay fixed interest rate swaps(1) . . . . . . . . . . . . . . . . . . . . Notional amount . . . . . . . . . . . . Weighted average fixed Notional amount(3) rate . . . . . . . . . . . . . . . . . . . . . Basis swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option products(2) . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange contracts . . . . Notional amount . . . . . . . . . . . . Notional amount(3) Futures and forward rate contracts(4) . . . . . . . . . . . . . . . . . Notional amount(3) . . . . . . . . . . (2,248) (4) 3,492 2,748 287 Expected Maturity Total 2006 2007 2008 2009 2010 Thereafter $108,985 $ 4,337 $ 13,080 $ 6,144 $39,107 $10,387 $35,930 4.62% 4.75% 4.66% 4.02% 4.51% 4.43% 4.77% $102,281 $ 5,100 $ 55,925 $10,152 $ — $ — $31,104 4.61% 3.23% 4.46% 4.24% — % — % 5.21% $ 17,806 $ 514 $ 174 $ 884 $ 2,839 $ 3,094 $10,301 57,246 — — 57,246 — — — 16,061 1,335 51 1,436 1,826 3,485 7,928 34,716 34,716 — — — — — Expected Maturity Total 2005 2006 2007 2008 2009 Thereafter $ 167,324 $ 2,580 $ 7,290 $ 23,598 $ 46,917 $ 25,601 $ 61,338 4.04% 4.78% 4.52% 3.11% 3.47% 3.83% 4.83% $ 157,837 $ 39 $ 6,320 $ 62,584 $ 16,136 $ 10,289 $ 62,469 4.24% 5.01% 3.54% 3.58% 3.91% 3.85% 5.13% $ 6,700 $ 500 $ 4,400 $ — $ — $ — $ 1,800 323,835 145,200 90,000 17,500 58,404 — 12,731 13,606 71 1,529 55 1,587 2,091 8,273 (10,889) 10,111 (21,000) — — — — Average Estimated Duration 4.17 3.85 Average Estimated Duration 4.43 4.77 Net ALM contracts . . . . . . $ 3,395 (1) At December 31, 2005, $46.6 billion of the receive fixed swap notional amount and $41.9 billion of the pay fixed swap notional amount represented forward starting swaps that will not be effective until their respective contractual start dates. At December 31, 2004, $39.9 billion of the receive fixed swap notional amount and $75.9 billion of the pay fixed swap notional amount represented forward starting swaps that will not be effective until their respective contractual start dates. (2) Option products include caps, floors, swaptions and exchange-traded options on index futures contracts. These strategies may include option collars or spread strategies, which involve the buying and selling of options on the same underlying security or interest rate index. (3) Reflects the net of long and short positions. (4) Futures and forward rate contracts include Eurodollar futures, U.S. Treasury futures, and forward purchase and sale contracts. 72 The Corporation uses interest rate and foreign exchange rate derivative instruments to hedge the variability in the cash flows of its variable rate assets and liabilities, and other forecasted transactions (cash flow hedges). The net losses on both open and closed derivative instruments recorded in Accumulated OCI net-of-tax at December 31, 2005 was $(4.3) billion. These net losses are expected to be reclassified into earnings in the same period when the hedged item affects earnings and will decrease income or increase expense on the respective hedged items. Assuming no change in open cash flow derivative hedge positions and no changes to interest and foreign exchange rates beyond what is implied in forward yield curves at December 31, 2005, the net losses are expected to be reclassified into earnings as follows: 9 percent within the next year, 57 percent within five years, 82 percent within 10 years, with the remaining 18 percent thereafter. For more information on derivatives designated as cash flow hedges, see Note 5 of the Consolidated Financial Statements. The amount included in Accumulated OCI for terminated derivative contracts was a loss of $2.5 billion and a gain of $143 million, net-of-tax, at December 31, 2005 and 2004. The decrease was due primarily to the termination of derivative contracts with previously unrealized losses caused by interest rate fluctuations. Mortgage Banking Risk Management Interest rate lock commitments (IRLCs) on loans intended to be sold are subject to interest rate risk between the date of the IRLC and the date the loan is funded. Loans held-for-sale are subject to interest rate risk from the date of funding until the loans are sold to the secondary market. To hedge interest rate risk, we utilize forward loan sale commitments and other derivative instruments including purchased options. These instruments are used either as an economic hedge of IRLCs and loans held-for-sale, or designated as a cash flow hedge of loans held-for-sale, in which case their net-of-tax unrealized gains and losses are included in Accumulated OCI. At December 31, 2005, the notional amount of derivatives hedging the IRLCs and loans held-for-sale was $26.9 billion. The related net-of-tax unrealized loss on the derivatives designated as cash flow hedges included in Accumulated OCI at December 31, 2005 was $3 million. The notional amount of the IRLCs adjusted for fallout in the pipeline at December 31, 2005 was $4.3 billion. The amount of loans held-for-sale at December 31, 2005 was $6.1 billion. We manage changes in the value of MSRs by entering into derivative financial instruments and by purchasing and selling securities. MSRs are an intangible asset created when the underlying mortgage loan is sold to investors and we retain the right to service the loan. As of December 31, 2005, the MSR balance in Consumer Real Estate was $2.7 billion, or 13 percent higher than December 31, 2004. For more information on Consumer Real Estate MSRs, refer to page 31. We designate certain derivatives such as purchased options and interest rate swaps as fair value hedges of specified MSRs under SFAS 133. At December 31, 2005, the amount of MSRs identified as being hedged by derivatives in accordance with SFAS 133 was approximately $2.3 billion. The notional amount of the derivative contracts designated as SFAS 133 hedges of MSRs at December 31, 2005 was $33.7 billion. The changes in the fair values of the derivative contracts are substantially offset by changes in the fair values of the MSRs that are hedged by these derivative contracts. During 2005, the change in value attributed to SFAS 133 hedged MSRs was $291 million, offset by derivative hedge losses of $124 million. In addition, we hold additional derivatives and certain securities (i.e. mortgage-backed securities) as economic hedges of MSRs, which are not designated as SFAS 133 accounting hedges. During 2005, Interest Income from securities used as an economic hedge of MSRs of $18 million was recognized. At December 31, 2005, the amount of MSRs covered by such economic hedges was $250 million. At December 31, 2005, the unrealized loss on AFS Securities held as economic hedges of MSRs was $29 million compared to an unrealized gain of $21 million on December 31, 2004. See Notes 1 and 9 of the Consolidated Financial Statements for additional information. Operational Risk Management Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, including system conversions and integration, and external events. Successful operational risk management 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 our management governance structure, the lines of business are responsible for all the risks within the business including operational risks. Such risks are managed through corporate-wide or line of business 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, business recovery planning, and new product introduction processes. We approach operational risk from two perspectives, enterprise-wide and line of business-specific. The Compliance and Operational Risk Committee, chartered in 2005 as a subcommittee of the Finance Committee, provides consistent communication and oversight of significant operational and compliance issues and oversees the adoption of best practices. Two groups within Risk Management, Compliance Risk Management and Enterprise Operational Risk 73 Management, facilitate the consistency of effective policies, industry best practices, controls and monitoring tools for managing and assessing operational risks across the Corporation. These groups also work with the line of business executives and their Risk Management counterparts to implement appropriate policies, processes and assessments at the line of business level and support groups. Compliance and operational risk awareness is also driven across the Corporation through training and strategic communication efforts. For selected risks, we establish specialized support groups, for example, Information Security and Supply Chain Management. These specialized groups develop corporate- wide risk management practices, such as an information security program and a supplier program to ensure suppliers adopt appropriate policies and procedures when performing work on behalf of the Corporation. These specialized groups also assist the lines of business in the development and implementation of risk management practices specific to the needs of the individual businesses. At the line of business level, the Line of Business Risk Executives are responsible for adherence to corporate practices and oversight of all operational risks in the line of business they support. Operational and compliance risk management, working in conjunction with senior line of business executives, have developed key tools to help manage, monitor and summarize operational risk. One tool the businesses and executive management utilize is a corporate-wide self-assessment process, which helps to identify and evaluate the status of risk issues, including mitigation plans, if appropriate. Its goal is to continuously assess changing market and business conditions and evaluate all operational risks impacting the line of business. The self-assessment process assists in identifying emerging operational risk issues and determining at the line of business or corporate level how they should be managed. In addition to information gathered from the self-assessment process, key operational risk indicators have been developed and are used to help identify trends and issues on both a corporate and a line of business level. More generally, we mitigate operational risk through a broad-based approach to process management and process improvement. Improvement efforts are focused on reduction of variation in outputs. We have a dedicated Quality and Productivity team to manage and certify the process management and improvement efforts. Recent Accounting and Reporting Developments See Note 1 of the Consolidated Financial Statements for a discussion of recently issued or proposed accounting pronouncements. Complex Accounting Estimates Our significant accounting principles as described in Note 1 of the Consolidated Financial Statements, are essential in understanding Management’s Discussion and Analysis of Results of Operations and Financial Condition. Many of our significant accounting principles require complex judgments to estimate values of assets and liabilities. We have procedures and processes to facilitate making these judgments. The more judgmental estimates are summarized below. We have identified and described the development of the variables most important in the estimation process that, with the exception of accrued taxes, involves mathematical models to derive the estimates. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs to the model. Where alternatives exist, we have used the factors that we believe represent the most reasonable value in developing the inputs. Actual performance that differs from our estimates of the key variables could impact Net Income. Separate from the possible future impact to Net Income from input and model variables, the value of our lending portfolio and market sensitive assets and liabilities may change subsequent to the balance sheet measurement, often significantly, due to the nature and magnitude of future credit and market conditions. Such credit and market conditions may change quickly and in unforeseen ways and the resulting volatility could have a significant, negative effect on future operating results. These fluctuations would not be indicative of deficiencies in our models or inputs. Allowance for Credit Losses The allowance for credit losses is our estimate of probable losses in the loans and leases portfolio and within our unfunded lending commitments. Changes to the allowance for credit losses are reported in the Consolidated Statement of Income in the Provision for Credit Losses. Our process for determining the allowance for credit losses is discussed in the Credit Risk Management section beginning on page 49 and Note 1 of the Consolidated Financial Statements. Due to the variability in the drivers of the assumptions made in this process, estimates of the portfolio’s inherent risks and overall collectibility change with changes in the economy, individual industries, countries and individual borrowers’ or counterparties’ ability and willingness to repay their obligations. The degree to which any particular assumption affects the allowance for credit losses depends on the severity of the change and its relationship to the other assumptions. Key judgments used in determining the allowance for credit losses include: (i) risk ratings for pools of commercial loans and leases, (ii) market and collateral values and discount rates for individually evaluated loans, (iii) product type classifications for consumer and commercial loans and leases, (iv) loss rates used for consumer and commercial loans and leases, (v) adjustments made to assess current events and conditions, (vi) considerations regarding domestic and global economic uncertainty, and (vii) overall credit conditions. 74 Our Allowance for Loan and Lease Losses is sensitive to the risk rating assigned to commercial loans and leases and to the loss rates used for the consumer and commercial portfolios. Assuming a downgrade of one level in the internal risk rating for commercial loans and leases, except loans already risk rated Doubtful as defined by regulatory authorities, the Allowance for Loan and Lease Losses for the commercial portfolio would increase by approximately $894 million at December 31, 2005. The Allowance for Loan and Lease Losses as a percentage of loan and lease outstandings at December 31, 2005 was 1.40 percent and this hypothetical increase in the allowance would raise the ratio to approximately 1.56 percent. A 10 percent increase in the loss rates used on the consumer and commercial loan and lease portfolios would increase the Allowance for Loan and Lease Losses at December 31, 2005 by approximately $348 million, of which $283 million would relate to consumer and $65 million to commercial. These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the Allowance for Loan and Lease Losses to changes in key inputs. We believe the risk ratings and loss severities currently in use are appropriate and that the probability of a downgrade of one level of the internal credit ratings for commercial loans and leases within a short period of time is remote. The process of determining the level of the allowance for credit losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions. Fair Value of Financial Instruments Trading Account Assets and Liabilities are recorded at fair value, which is primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. Liquidity is a significant factor in the determination of the fair value of Trading Account Assets or Liabilities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Situations of illiquidity generally are triggered by the market’s perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer’s financial statements and changes in credit ratings made by one or more rating agencies. At December 31, 2005, $4.9 billion, or four percent, of Trading Account Assets were fair valued using these alternative approaches. An immaterial amount of Trading Account Liabilities were fair valued using these alternative approaches at December 31, 2005. Trading Account Profits, which represent the net amount earned from our trading positions, can be volatile and are largely driven by general market conditions and customer demand. Trading Account Profits are 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. 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 trading limits, stress testing and tools such as VAR modeling, which estimates a potential loss which is not expected to be exceeded with a specified confidence level, to measure and manage market risk. At December 31, 2005, the amount of our VAR was $61 million based on a 99 percent confidence level. For more information on VAR, see pages 67 through 69. The fair values of Derivative Assets and Liabilities include adjustments for market liquidity, counterparty credit quality, future servicing costs and other deal specific factors, where appropriate. To ensure the prudent application of estimates and management judgment in determining the fair value of Derivative Assets and Liabilities, various processes and controls have been adopted, which include: a Model Validation Policy that requires a review and approval of quantitative models used for deal pricing, financial statement fair value determination and risk quantification; a Trading Product Valuation Policy that requires verification of all traded product valuations; and a periodic review and substantiation of daily profit and loss reporting for all traded products. These processes and controls are performed independently of the business segment. The fair values of Derivative Assets and Liabilities traded in the over-the-counter market are determined using quantitative models that require the use of multiple market inputs including interest rates, prices, and indices to generate continuous yield or pricing curves and volatility factors, which are used to value the position. The predominance of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available or are unobservable, in which case quantitative based extrapolations of rate, price or index scenarios are used in determining fair values. At December 31, 2005, the fair values of Derivative Assets and Liabilities determined by these quantitative models were $10.5 billion and $6.4 billion. These amounts reflect the full fair value of the derivatives and do not isolate the discrete value associated with the subjective valuation variable. Further, they represent four percent and three percent of Derivative Assets and Liabilities, before the impact of legally enforceable master netting agreements. For the year ended December 31, 2005, there were no changes to the quantitative models, or uses of such models, that resulted in a material adjustment to the income statement. 75 The Corporation recognizes gains and losses at inception of a derivative contract only if the fair value of the contract is evidenced by a quoted market price in an active market, an observable price or other market transaction, or other observable data supporting a valuation model. For those gains and losses not evidenced by the above mentioned market data, the transaction price is used as the fair value of the derivative contract. Any difference between the transaction price and the model fair value is considered an unrecognized gain or loss at inception of the contract. Previously unrecognized gains and losses are recorded in income using the straight line method of amortization over the contractual life of the derivative contract. Earlier recognition of the full unrecognized gain or loss is permitted if the trade is terminated early, subsequent market activity is observed which supports the model fair value of the contract, or significant inputs used in the valuation model become observable. AFS Securities are recorded at fair value, which is generally based on direct market quotes from actively traded markets. Principal Investing Principal Investing is included within Equity Investments and is discussed in more detail in Business Segment Operations beginning on page 26. Principal Investing is comprised of a diversified portfolio of investments in privately- held and publicly-traded companies at all stages, from start-up to buyout. These investments are made either directly in a company or held through a fund. Some of these companies may need access to additional cash to support their long- term business models. Market conditions and company performance may impact whether funding is available from private investors or the capital markets. Investments with active market quotes are carried at estimated fair value; however, the majority of our investments do not have publicly available price quotations. At December 31, 2005, we had nonpublic investments of $6.1 billion or approximately 95 percent of the total portfolio. Valuation of these investments requires significant management judgment. Management determines values of the underlying investments based on multiple methodologies including in-depth semi-annual reviews of the investee’s financial statements and financial condition, discounted cash flows, the prospects of the investee’s industry and current overall market conditions for similar investments. In addition, on a quarterly basis as events occur or information comes to the attention of management that indicates a change in the value of an investment is warranted, investments are adjusted from their original invested amount to estimated fair values at the balance sheet date with changes being recorded in Equity Investment Gains in the Consolidated Statement of Income. Investments are not adjusted above the original amount invested unless there is clear evidence of a fair value in excess of the original invested amount. This evidence is often in the form of a recent transaction in the investment. As part of the valuation process, senior management reviews the portfolio and determines when an impairment needs to be recorded. The Principal Investing portfolio is not material to our Consolidated Balance Sheet, but the impact of the valuation adjustments may be material to our operating results for any particular quarter. Accrued Income Taxes As more fully described in Notes 1 and 18 of the Consolidated Financial Statements, we account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109). Accrued income taxes, reported as a component of Accrued Expenses and Other Liabilities on our Consolidated Balance Sheet, represents the net amount of current income taxes we expect to pay to or receive from various taxing jurisdictions attributable to our operations to date. We currently file income tax returns in more than 100 jurisdictions and consider many factors—including statutory, judicial and regulatory guidance—in estimating the appropriate accrued income taxes for each jurisdiction. In applying the principles of SFAS 109, we monitor relevant tax authorities and change our estimate of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities. These revisions of our estimate of accrued income taxes, which also may result from our own income tax planning and from the resolution of income tax controversies, can materially affect our operating results for any given quarter. Goodwill and Other Intangibles The nature of and accounting for Goodwill and Other Intangibles is discussed in detail in Notes 1 and 10 of the Consolidated Financial Statements. Goodwill is reviewed for potential impairment at the reporting unit level on an annual basis, or in interim periods if events or circumstances indicate a potential impairment. The reporting units utilized for this test were those that are one level below the business segments identified on page 26. The impairment test is performed in two steps. 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, the second step must be performed. The second step compares the implied fair value of the reporting unit’s Goodwill, as defined in SFAS No. 142, “Goodwill and Other Intangible Assets” (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. 76 For Intangible Assets subject to amortization, impairment exists when the carrying amount of the Intangible Asset exceeds its fair value. An impairment loss shall be recognized only if the carrying amount of the Intangible Asset is not recoverable and exceeds its fair value. The carrying amount of the Intangible Asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from it. An Intangible Asset subject to amortization shall be tested for recoverability whenever events or changes in circumstances, such as a significant or adverse change in the business climate that could affect the value of the Intangible Asset, indicate that its carrying amount may not be recoverable. An impairment loss shall be measured as the amount by which the carrying amount of the Intangible Asset exceeds its fair value. The fair values of the reporting units were determined using a combination of valuation techniques consistent with the income approach and the market approach and the fair values of the Intangible Assets were determined using the income approach. For purposes of the income approach, discounted cash flows were calculated by taking the net present value of estimated cash flows using a combination of historical results, estimated future cash flows and an appropriate price to earnings multiple. We use our internal forecasts to estimate future cash flows and actual results may differ from forecasted results. However, these differences have not been material and we believe that this methodology provides a reasonable means to determine fair values. Cash flows were discounted using a discount rate based on expected equity return rates, which was 11 percent for 2005. Expected rates of equity returns were estimated based on historical market returns and risk/return rates for similar industries of the reporting unit. For purposes of the market approach, valuations of reporting units were based on actual comparable market transactions and market earnings multiples for similar industries of the reporting unit. Our evaluations for the year ended December 31, 2005 indicated there was no impairment of Goodwill and Other Intangibles. 2004 Compared to 2003 The following discussion and analysis provides a comparison of our results of operations for 2004 and 2003. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes on pages 89 through 165. In addition, Tables 2 and 3 contain financial data to supplement this discussion. Overview Net Income Net Income totaled $13.9 billion, or $3.64 per diluted common share, in 2004 compared to $10.8 billion, or $3.55 per diluted common share, in 2003. The return on average common shareholders’ equity was 16.47 percent in 2004 compared to 21.50 percent in 2003. These earnings provided sufficient cash flow to allow us to return $8.8 billion and $9.8 billion in 2004 and 2003, in capital to shareholders in the form of dividends and share repurchases, net of employee stock options exercised. Net Interest Income Net Interest Income on a FTE basis increased $7.5 billion to $28.7 billion in 2004. This increase was driven by the impact of the FleetBoston Merger, higher ALM portfolio levels (primarily consisting of securities and whole loan mortgages), the impact of higher rates, growth in consumer loan levels (primarily credit card and home equity) and higher core deposit funding levels. Partially offsetting these increases were reductions in the large corporate and foreign loan balances, lower trading-related contributions, lower mortgage warehouse levels and the continued runoff of previously exited consumer businesses. The net interest yield on a FTE basis declined nine bps to 3.17 percent in 2004 due to the adverse impact of increased trading-related balances, which have a lower yield than other earning assets. Noninterest Income Noninterest Income increased $3.7 billion to $21.0 billion in 2004, due primarily to increases in Card Income of $1.5 billion, Service Charges of $1.4 billion, Investment and Brokerage Services of $1.2 billion, Equity Investment Gains of $648 million, and Trading Account Profits of $461 million. Card Income increased due to increased fees and interchange income, including the impact of the FleetBoston card portfolio. Investment and Brokerage Services increased due to the impact of the FleetBoston business as well as market appreciation. Service Charges grew driven by organic account growth and the impact of FleetBoston customers. Offsetting these increases was lower Mortgage Banking Income of $1.5 billion due to lower production levels, a decrease in the gains on sales of loans to the secondary market and writedowns of the value of MSRs. Provision for Credit Losses The Provision for Credit Losses declined $70 million to $2.8 billion in 2004 driven by lower commercial net charge- offs of $748 million and continued improvements in credit quality in the commercial loan portfolio. Offsetting these decreases were increases in the Provision for Credit Losses in our consumer credit card portfolio. These increases 77 reflected higher credit card net charge-offs of $791 million in part due to the impact of the FleetBoston credit card portfolio, organic growth and continued seasoning of accounts, and new advances on accounts for which previous loan balances were sold to the securitization trusts. Also contributing to the consumer provision was the establishment of reserves for changes made to card minimum payment requirements. Gains on Sales of Debt Securities Gains on Sales of Debt Securities in 2004 and 2003, were $1.7 billion and $941 million, as we continued to reposition the ALM portfolio in response to interest rate fluctuations and to manage mortgage prepayment risk. Noninterest Expense Noninterest Expense increased $6.9 billion in 2004 from 2003, due primarily to higher Personnel Expense, increased Other General Operating Expense, and higher Merger and Restructuring Charges. Personnel Expense increased $3.0 billion primarily due to the impact of FleetBoston associates. Other General Operating Expense increased $1.5 billion related to the impact of FleetBoston, $370 million of litigation expenses incurred during 2004 and the $285 million related to the mutual fund settlement. Merger and Restructuring Charges were $618 million in connection with the integration of FleetBoston’s operations. Income Tax Expense Income Tax Expense was $7.0 billion, reflecting an effective tax rate of 33.3 percent, in 2004 compared to $5.0 billion and 31.8 percent, in 2003. The difference in the effective tax rate between years resulted primarily from the application of purchase accounting to certain leveraged leases acquired in the FleetBoston Merger, an increase in state tax expense generally related to higher tax rates in the Northeast and the reduction in 2003 of Income Tax Expense resulting from a tax settlement with the Internal Revenue Service. Business Segment Operations Global Consumer and Small Business Banking Total Revenue increased $5.6 billion, or 28 percent, in 2004 compared to 2003, primarily due to the impact of FleetBoston. Overall loan and deposit growth from the impact of FleetBoston customers contributed to the $4.9 billion, or 44 percent, increase in Net Interest Income. This increase was largely due to the net effect of growth in consumer loans and leases, deposit balances and ALM activities. Increases in Card Income of 51 percent, and Service Charges of 26 percent drove the $703 million, or eight percent, increase in Noninterest Income. FleetBoston also contributed to the increase in Noninterest Income. Partially offsetting these increases was a decrease in Mortgage Banking Income of 72 percent. Net Income rose $642 million, or 12 percent, due to the increases in Net Interest Income and Noninterest Income discussed above, offset by increases in the Provision for Credit Losses and Noninterest Expense. Higher credit card net charge-offs, the impact of the FleetBoston credit card portfolio, organic growth and seasoning of credit card accounts, new advances on accounts for which previous loan balances were sold to the securitization trusts, and increases in card minimum payment requirements resulted in a $1.6 billion, or 97 percent, increase in the Provision for Credit Losses. Noninterest Expense increased $3.0 billion, or 31 percent, due to increases in Processing Costs, Personnel Expense and Other General Operating Expense related to the impact of FleetBoston. Global Business and Financial Services Total Revenue increased $3.4 billion, or 58 percent, in 2004 compared to 2003. Net Interest Income increased $2.3 billion, or 54 percent, largely due to the increase in commercial loans and leases, deposit balances driven by the impact of FleetBoston earning assets and the net results of ALM activities. Noninterest Income increased $1.1 billion, or 68 percent due to increases in Other Noninterest Income and increases in Service Charges, driven by the impact of FleetBoston. Noninterest Expense increased $1.5 billion, or 70 percent, due to the impact of FleetBoston. Net Income rose $1.8 billion, or 85 percent, due to the increases discussed above. Also impacting Net Income was the Provision for Credit Losses which declined $968 million to negative $442 million, driven by a notable improvement in credit quality and a $395 million decrease in net charge-offs. Global Capital Markets and Investment Banking Total Revenue increased $695 million, or eight percent, in 2004 compared to 2003 driven by an increase in Noninterest Income. Net Interest Income decreased $175 million, or four percent, driven by a $196 million, or nine percent decrease in trading-related Net Interest Income. Noninterest Income increased $870 million, or 21 percent, resulting from increases in Trading Account Profits, Investment Banking Income, and Service Charges. In 2004, Net Income increased $174 million, or 10 percent, due to the increase in Noninterest Income and lower Provision for Credit 78 Losses offset by an increase in Noninterest Expense. Provision for Credit Losses declined $753 million to negative $445 million due to a notable improvement in credit quality in the large corporate portfolio and a $312 million reduction in net charge-offs. Noninterest Expense increased by $1.2 billion, or 22 percent, driven by an increase in litigation-related charges, higher incentive compensation for market-based activities, and this segment’s allocation of the mutual fund settlement. Global Wealth and Investment Management Total Revenue increased $1.9 billion, or 47 percent, in 2004. Net Interest Income increased $915 million, or 47 percent, due to growth in Deposits, loan growth and the impact of FleetBoston earning assets to the portfolio. Noninterest Income increased $986 million, or 47 percent, driven by increased Investment and Brokerage Services revenue primarily due to the impact of FleetBoston. Net Income increased $366 million, or 30 percent. This increase was due to the increases in Net Interest Income and Noninterest Income offset by higher Noninterest Expense. Noninterest Expense increased $1.3 billion, or 64 percent, related to the impact of FleetBoston and this segment’s allocation of the mutual fund settlement. All Other In 2004 compared to 2003, Total Revenue decreased $339 million, or 53 percent. Net Interest Income decreased $352 million to negative $695 million primarily due to a reduction of capital in Other as more capital was deployed to the business segments. Offsetting this decrease was a $166 million increase in total revenue associated with the change in the fair value derivatives used as economic hedges of interest and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting. Provision for Credit Losses increased $43 million, or 14 percent. Gains on Sales of Debt Securities increased $675 million to $1.6 billion in 2004 as we continued to reposition the ALM portfolio in response to changes in interest rates and to manage mortgage prepayment risk. Other Noninterest Expense decreased $78 million and included Merger and Restructuring Charges of $618 million in 2004. As a result, Net Income improved $232 million. Total Revenue in Equity Investments increased $704 million in 2004 compared to 2003 due to an improvement in Equity Investment Gains (Losses). Equity Investments had Net Income of $202 million in 2004 compared to a Net Loss of $246 million in 2003. In 2004, Principal Investing revenue increased as a result of increased realized gains compared to the prior year. Noninterest Income primarily consists of Equity Investment Gains. 79 Table I Average Balances and Interest Rates—FTE Basis (Dollars in millions) 2005 Interest Income/ Expense Average Balance 2004 (Restated) 2003 (Restated) Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate Earning assets Time deposits placed and other short-term investments . . . . . . . . . . . $ Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases(1): 169,132 133,502 219,843 5,012 5,883 11,047 2.96 4.41 5.03 Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,773 53,997 56,289 44,981 6,908 9,424 5.42 6,253 11.58 6.06 3,412 5.75 2,589 9.67 667 128,981 104,616 150,171 167,270 43,435 39,400 38,078 7,717 1,940 4,092 7,320 1.50 3.91 4.88 78,857 97,222 70,644 1,266 4,005 3,135 1.61 4.12 4.44 9,056 5.42 4,653 10.71 4.66 1,835 5.50 2,093 7.70 594 127,131 28,210 22,890 32,593 8,865 6,873 5.41 2,886 10.23 4.55 1,040 6.03 1,964 6.63 588 14,286 $ 472 3.30% $ 14,254 $ 362 2.54% $ 9,056 $ 172 1.90% Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335,948 22,345 6.65 295,900 18,231 6.16 219,689 13,351 6.08 Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,034 34,304 20,441 18,491 8,266 2,046 992 1,292 6.46 5.97 4.85 6.99 114,644 28,085 17,483 16,505 6,978 1,263 819 850 6.09 4.50 4.68 5.15 93,458 20,042 10,061 12,970 6,441 862 395 460 6.89 4.30 3.92 3.55 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,270 12,596 6.26 176,717 9,910 5.61 136,531 8,158 5.98 Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537,218 34,941 6.50 472,617 28,141 5.95 356,220 21,509 6.04 Other earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,013 2,103 5.53 34,634 1,815 5.24 37,599 1,729 4.60 Total earning assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111,994 59,458 5.35 905,273 43,670 4.82 649,598 31,816 4.90 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, less allowance for loan and lease losses . . . . . . . . . . . . . 33,199 124,699 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,269,892 28,511 110,847 $1,044,631 22,637 76,869 $749,104 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 . . . . . . . . . . . 36,602 $ 227,722 124,385 6,865 211 2,839 4,091 250 0.58% $ 1.25 3.29 3.65 33,959 $ 214,542 94,770 5,977 119 1,921 2,540 290 0.35% $ 24,538 $ 0.90 2.68 4.85 148,896 70,246 7,627 108 1,236 2,556 130 0.44% 0.83 3.64 1.70 Total domestic interest-bearing deposits . . . . . . . . . . . . . . . . . . . . 395,574 7,391 1.87 349,248 4,870 1.39 251,307 4,030 1.60 Foreign interest-bearing deposits(4): Banks located in foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . Governments and official institutions . . . . . . . . . . . . . . . . . . . . . . . . . Time, savings and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,945 7,418 31,603 1,202 238 661 5.24 3.21 2.09 18,426 5,327 27,739 679 97 275 3.68 1.82 0.99 13,959 2,218 19,027 285 31 216 2.04 1.40 1.14 Total foreign interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . 61,966 2,101 3.39 51,492 1,051 2.04 35,204 532 1.51 Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 457,540 9,492 2.08 400,740 5,921 1.48 286,511 4,562 1.59 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,408 57,689 97,709 11,615 2,364 4,418 3.56 4.10 4.52 227,565 35,326 92,303 4,072 1,317 3,683 1.79 3.73 3.99 140,458 37,176 67,077 1,871 1,286 2,948 1.33 3.46 4.40 Total interest-bearing liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . 939,346 27,889 2.97 755,934 14,993 1.98 531,222 10,667 2.01 Noninterest-bearing sources: Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,892 55,793 99,861 Total liabilities and shareholders’ equity . . . . . . . . . . . . $1,269,892 150,819 53,063 84,815 $1,044,631 119,722 48,069 50,091 $749,104 Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of noninterest-bearing sources . . . . . . . . . . . . . . . . . . . . . . . . . . 2.38 0.46 2.84 0.33 2.89 0.37 Net interest income/yield on earning assets . . . . . . . . . $31,569 2.84% $28,677 3.17% $21,149 3.26% (1) Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis. (2) Includes consumer finance of $3,137 million, $3,735 million and $4,137 million in 2005, 2004 and 2003, respectively; foreign consumer of $3,565 million, $3,020 million and $1,977 million in 2005, 2004 and 2003, respectively; and consumer lease financing of $206 million, $962 million and $2,751 million in 2005, 2004 and 2003, respectively. (3) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $704 million, $2,130 million and $2,581 million in 2005, 2004 and 2003, respectively. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $1,335 million, $1,452 million and $873 million in 2005, 2004 and 2003, respectively. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 69. (4) Primarily consists of time deposits in denominations of $100,000 or more. 80 Table II Analysis of Changes in Net Interest Income—FTE Basis (Dollars in millions) Increase (decrease) in interest income Time deposits placed and other short-term investments . . . . . . . . . Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases: Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . From 2004 to 2005 From 2003 to 2004 (Restated) (Restated) Due to Change in(1) Volume Rate Net Change Due to Change in(1) Volume Rate Net Change $ 1 $ 109 $ 110 $ 99 $ 91 $ 190 597 1,128 3,408 362 1,130 788 381 (62) 819 281 138 102 2,475 663 319 6 470 789 115 135 469 502 35 340 3,072 1,791 3,727 368 1,600 1,577 496 73 4,114 1,288 783 173 442 2,686 6,800 288 811 305 3,533 2,176 1,557 753 332 (76) 1,458 346 290 126 (137) (218) 652 7 210 42 (203) 82 (921) 55 134 264 (136) 222 674 87 4,185 2,183 1,767 795 129 6 4,880 537 401 424 390 1,752 6,632 86 Other earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 111 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,788 $11,854 Increase (decrease) in interest expense 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: Banks located in foreign countries . . . . . . . . . . . . . . . . . . Governments and official institutions . . . . . . . . . . . . . . . Time, savings and other . . . . . . . . . . . . . . . . . . . . . . . . . . Total foreign interest-bearing deposits . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . . . . . 9 128 781 43 165 38 38 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,771 835 216 5,772 212 519 Total interest expense . . . . . . . . . . . . . . . . . . . . Net increase in net interest income . . . $ 83 $ 790 770 92 918 1,551 $ 41 545 894 $ (30) $ 140 (910) 11 685 (16) 358 103 348 (83) (40) (28) 188 2,521 523 141 386 1,050 3,571 7,543 1,047 735 12,896 $ 2,892 91 44 100 303 22 (41) 1,156 (64) 1,113 1,045 95 (378) 160 840 394 66 59 519 1,359 2,201 31 735 4,326 $ 7,528 (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 unallocated change in rate or volume variance has been allocated between the rate and volume variances. 81 Table III Selected Loan Maturity Data(1) (Dollars in millions) December 31, 2005 Due in One Year or Less Due After One Year Through Five Years Due After Five Years $ 31,790 3,375 437 Total $140,533 35,181 25,756 Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,186 13,830 20,801 $ 56,557 17,976 4,518 Total selected loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $86,817 $ 79,051 $ 35,602 $201,470 Percent of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1% 39.2% 17.7% 100.0% Sensitivity of loans to changes in interest rates for loans due after one year: Fixed interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating or adjustable interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,927 70,124 $ 14,737 20,865 $79,051 $35,602 (1) Loan maturities are based on the remaining maturities under contractual terms. (2) Loan maturities include other consumer, commercial—foreign and commercial real estate loans. Table IV Short-term Borrowings (Dollars in millions) 2005 2004 2003 (Restated) (Restated) Amount Rate Amount Rate Amount Rate Federal funds purchased At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,715 Average during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,670 Maximum month-end balance during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,964 — 4.06% $ 3,108 2.23% $ 2,356 0.92% 3.09 3,724 1.31 7,852 — 5,736 1.10 7,877 — 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,940 227,081 273,544 — 4.26 3.62 116,633 2.23 161,494 1.86 191,899 — 75,690 1.12 102,074 1.15 124,746 — 24,968 26,335 31,380 — 4.21 3.22 25,379 2.09 21,178 1.45 26,486 — 7,605 1.09 2,976 1.29 9,136 — 91,301 69,322 91,301 — 4.58 3.51 53,219 2.48 41,169 1.73 53,756 — 27,375 1.98 29,672 2.02 46,635 — Table V Non-exchange Traded Commodity Contracts (Dollars in millions) Asset Positions Liability Positions Net fair value of contracts outstanding, January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of legally enforceable master netting agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,195 4,449 $ 1,452 4,449 Gross fair value of contracts outstanding, January 1, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contracts realized or otherwise settled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of new contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross fair value of contracts outstanding, December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of legally enforceable master netting agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,644 (1,990) 1,763 2,240 8,657 (5,636) 5,901 (1,947) 1,887 2,074 7,915 (5,636) Net fair value of contracts outstanding, December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . $3,021 $2,279 82 Table VI Non-exchange Traded Commodity Contract Maturities (Dollars in millions) December 31, 2005 Asset Positions Liability Positions Maturity of less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity of 1-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity of 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity in excess of 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,295 3,798 373 191 Gross fair value of contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effects of legally enforceable master netting agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,657 (5,636) $ 4,190 3,196 441 88 7,915 (5,636) Net fair value of contracts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,021 $2,279 83 Table VII Selected Quarterly Financial Data (Dollars in millions, except per share information) Fourth(2) Third (Restated) Second (Restated) First (Restated) Fourth (Restated) Third (Restated) Second (Restated) First (Restated) 2005 Quarters 2004 Quarters Income statement Net interest income . . . . . . . . . . . . . . . . . . $ Noninterest income . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Average common shares issued and 7,859 $ 5,951 13,810 1,400 71 7,320 5,161 1,587 3,574 7,735 $ 6,416 14,151 1,159 29 7,285 5,736 1,895 3,841 7,637 $ 6,955 14,592 875 325 7,019 7,023 2,366 4,657 7,506 $ 6,032 13,538 580 659 7,057 6,560 2,167 4,393 7,550 $ 6,174 13,724 706 101 7,333 5,786 1,931 3,855 7,515 $ 6,012 13,527 650 333 7,021 6,189 2,086 4,103 7,366 $ 4,870 12,236 789 795 7,228 5,014 1,673 3,341 5,529 3,949 9,478 624 495 5,430 3,919 1,271 2,648 outstanding (in thousands) . . . . . . . . . . 3,996,024 4,000,573 4,005,356 4,032,550 4,032,979 4,052,304 4,062,384 2,880,306 Average diluted common shares issued and outstanding (in thousands) . . . . . . 4,053,859 4,054,659 4,065,355 4,099,062 4,106,040 4,121,375 4,131,290 2,933,402 Performance ratios Return on average assets . . . . . . . . . . . . . Return on average common 1.09% 1.18% 1.46% 1.49% 1.33% 1.49% 1.23% 1.28% shareholders’ equity . . . . . . . . . . . . . . . . 14.21 15.09 18.93 17.97 15.57 16.94 14.26 21.58 Return on average tangible common shareholders’ equity(1) . . . . . . . . . . . . . . 29.29 30.71 39.27 37.34 32.95 35.84 31.36 29.37 Total ending equity to total ending assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.86 8.12 8.13 8.16 9.03 9.19 9.37 6.23 Total average equity to total average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout . . . . . . . . . . . . . . . . . . . . . Per common share data Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted earnings . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . 7.64 56.24 7.80 52.60 7.72 38.90 8.25 41.71 8.54 47.36 8.78 44.72 8.59 49.10 0.89 $ 0.88 0.50 25.32 0.96 $ 0.95 0.50 25.28 1.16 $ 1.14 0.45 25.16 1.09 $ 1.07 0.45 24.45 0.95 $ 0.94 0.45 24.70 1.01 $ 0.99 0.45 24.29 0.82 $ 0.81 0.40 23.54 5.92 43.74 0.92 0.90 0.40 17.23 Average balance sheet Total loans and leases . . . . . . . . . . . . . . . . $ 563,589 $ 539,497 $ 520,415 $ 524,921 $ 515,437 $ 503,049 $ 497,129 $ 374,047 833,161 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 1,305,057 1,294,754 1,277,478 1,200,859 1,152,524 1,096,653 1,094,427 425,075 582,305 Total deposits . . . . . . . . . . . . . . . . . . . . . . . 77,751 94,655 Long-term debt . . . . . . . . . . . . . . . . . . . . . . 49,314 94,024 Common shareholders’ equity . . . . . . . . . 49,368 94,347 Total shareholders’ equity . . . . . . . . . . . . 628,922 99,601 99,677 99,948 587,879 98,116 96,268 96,540 627,420 96,167 99,130 99,401 632,771 98,326 100,974 101,246 609,936 98,556 98,452 98,723 640,593 96,697 98,558 98,829 Capital ratios (period end) Risk-based capital: Tier 1 . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25% 8.27% 8.16% 8.26% 8.20% 8.18% 8.26% 7.89% 11.08 5.91 11.19 5.90 11.23 5.66 11.52 5.86 11.73 5.89 11.81 6.00 12.02 5.87 11.62 5.55 Market price per share of common stock Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ High closing . . . . . . . . . . . . . . . . . . . . . . . . Low closing . . . . . . . . . . . . . . . . . . . . . . . . . 46.15 $ 46.99 41.57 42.10 $ 45.98 41.60 45.61 $ 47.08 44.01 44.10 $ 47.08 43.66 46.99 $ 47.44 43.62 43.33 $ 44.98 41.81 42.31 $ 42.72 38.96 40.49 41.38 39.15 (1) Return on average tangible common shareholders’ equity equals net income available to common shareholders plus amortization of intangibles, divided by average common shareholders’ equity less goodwill, core deposit intangibles and other intangibles. (2) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in the current report on Form 8-K filed on January 23, 2006. 84 Table VIII Quarterly Average Balances and Interest Rates—FTE Basis (Dollars in millions) Fourth Quarter 2005(5) Third Quarter 2005 (Restated) Average Balance Interest Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate 14,619 $ 132 3.59% $ 14,498 $ 125 3.43% 1,477 1,648 2,842 2,424 1,747 1,012 703 184 6,070 2,280 597 241 378 3,496 9,566 596 3.55 4.72 5.13 5.42 12.19 6.63 5.91 11.01 6.90 6.59 6.58 4.79 7.45 6.50 6.75 5.83 5.65 176,650 142,287 225,952 171,012 55,271 58,046 47,900 6,715 338,944 127,044 34,663 20,402 18,444 200,553 539,497 38,745 1,382 1,578 2,820 2,298 1,651 910 702 170 5,731 2,095 542 239 349 3,225 8,956 542 1,137,629 15,403 32,969 124,156 $1,294,754 3.12 4.42 4.99 5.37 11.85 6.22 5.81 10.05 6.73 6.54 6.20 4.69 7.51 6.38 6.60 5.57 5.39 Earning assets Time deposits placed and other short-term investments . . . . . . . . . . . . . $ Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases(1): Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other consumer(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,908 139,441 221,411 178,764 56,858 60,571 47,181 6,653 Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,027 Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,224 36,017 20,178 20,143 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,562 Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563,589 Other earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,582 Total earning assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,145,550 16,261 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, less allowance for loan and lease losses . . . . . . . . . . . . . . . 33,693 125,814 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,305,057 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 . . . . . . . . . . . . . 35,535 224,122 120,321 5,085 Total domestic interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . 385,063 Foreign interest-bearing deposits(4): Banks located in foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Governments and official institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . Time, savings and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total foreign interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . 24,451 7,579 32,624 64,654 $ 68 721 1,029 27 1,845 355 73 203 631 Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449,717 2,476 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,140 56,880 99,601 Total interest-bearing liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970,338 3,855 619 1,209 8,159 0.76% $ 1.28 3.39 2.13 1.90 5.77 3.84 2.46 3.87 2.18 4.20 4.32 4.85 3.34 Noninterest-bearing sources: Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,205 55,566 99,948 35,853 224,341 130,975 4,414 395,583 $ 56 743 1,094 47 1,940 0.62% 1.31 3.31 4.23 1.95 19,707 7,317 32,024 59,048 292 62 177 531 454,631 2,471 3,190 707 1,102 7,470 339,980 68,132 98,326 961,069 178,140 54,299 101,246 5.89 3.37 2.19 3.57 2.16 3.72 4.12 4.48 3.09 2.30 0.48 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . $1,305,057 $1,294,754 Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of noninterest-bearing sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.31 0.51 Net interest income/yield on earning assets . . . . . . . . . . . $ 8,102 2.82% $ 7,933 2.78% (1) Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is recognized on a cash basis. (2) Includes consumer finance of $2,916 million, $3,063 million, $3,212 million and $3,362 million in the fourth, third, second and first quarters of 2005, respectively, and $3,473 million in the fourth quarter of 2004; foreign consumer of $3,682 million, $3,541 million, $3,505 million and $3,532 million in the fourth, third, second and first quarters of 2005, respectively, and $3,523 million in the fourth quarter of 2004; and consumer lease financing of $55 million, $111 million, $251 million and $411 million in the fourth, third, second and first quarters of 2005, respectively, and $561 million in the fourth quarter of 2004. 85 (Dollars in millions) Earning assets Time deposits placed and other short-term Second Quarter 2005 (Restated) First Quarter 2005 (Restated) Fourth Quarter 2004 (Restated) Average Balance Interest Income/ Expense Yield/ Rate Interest Average Balance Income/ Expense Yield/ Rate Average Balance Interest Income/ Expense Yield/ Rate investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,696 $ 113 3.31% $ 14,327 $ 101 2.87% $ 15,620 $ 128 3.24% Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases(1): Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . Other consumer(2) . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—domestic . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . Total loans and leases . . . . . . . . . . . . . . . . . . Other earning assets . . . . . . . . . . . . . . . . . . . . . . . . . 185,835 134,196 227,182 167,263 52,474 54,941 43,132 6,968 324,778 123,927 33,484 20,446 17,780 195,637 520,415 37,194 1,249 1,454 2,825 2.69 4.34 4.98 2,285 5.47 1,481 11.32 5.83 5.69 8.96 799 612 155 5,332 1,938 477 252 306 2,973 8,305 512 6.58 6.27 5.72 4.93 6.90 6.09 6.40 5.52 5.18 147,855 117,748 204,574 178,075 51,310 51,477 41,620 7,305 329,787 123,803 33,016 20,745 17,570 195,134 524,921 35,466 904 1,203 2,559 2.46 4.10 5.01 2,415 5.44 1,373 10.85 5.45 5.58 8.75 692 573 158 5,211 1,954 430 260 259 2,903 8,114 455 6.38 6.40 5.29 5.01 5.97 6.03 6.25 5.19 5.14 149,226 110,585 171,173 178,853 49,366 48,336 39,526 7,557 323,638 121,412 31,355 20,204 18,828 191,799 515,437 35,937 699 1,067 2,082 1.87 3.85 4.86 2,447 5.46 1,351 10.88 5.01 5.55 8.07 609 551 153 5,111 1,883 392 254 272 2,801 7,912 457 Total earning assets(3) . . . . . . . . . . . . . . . . . . . . 1,118,518 14,458 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Other assets, less allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,731 124,229 Total assets . . . . . . . . . . . . . . . . . . . . . . . . $1,277,478 1,044,891 13,336 31,382 124,586 $1,200,859 997,978 12,345 31,028 123,518 $1,152,524 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,043 $ 229,174 127,169 52 723 1,004 0.54% $ 1.27 3.17 37,000 $ 233,392 118,989 0.39% $ 1.13 3.29 36,927 $ 234,596 109,243 7,751 82 10,291 Total domestic interest-bearing deposits . . . . 402,137 1,861 Foreign interest-bearing deposits(4): Banks located in foreign countries . . . . . . . . . . . Governments and official institutions . . . . . . . . . Time, savings and other . . . . . . . . . . . . . . . . . . . . Total foreign interest-bearing deposits . . . . . . 25,546 7,936 30,973 64,455 294 59 149 502 Total interest-bearing deposits . . . . . . . . . . . 466,592 2,363 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing liabilities(3) . . . . . . . . . . . . Noninterest-bearing sources: Noninterest-bearing deposits . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . 2,582 611 1,074 6,630 323,916 60,987 96,697 948,192 174,001 56,456 98,829 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,277,478 Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of noninterest-bearing sources . . . . . . . . . . Net interest income/yield on earning assets . . . . . . . . . . . . . . . . . . . . 35 651 965 95 399,672 1,746 22,085 6,831 30,770 59,686 260 43 133 436 459,358 2,182 1,988 427 1,033 5,630 276,483 44,507 96,167 876,515 168,062 56,881 99,401 3.73 1.77 4.77 2.58 1.75 2.96 1.93 2.91 3.89 4.30 2.60 36 589 721 81 7,563 388,329 1,427 17,953 5,843 30,459 54,255 200 33 104 337 442,584 1,764 1,452 352 1,020 4,588 252,413 37,387 98,556 830,940 167,352 55,509 98,723 $1,200,859 $1,152,524 2.54 0.42 4.22 1.86 4.61 2.97 1.94 3.13 2.03 3.20 4.02 4.45 2.80 2.38 0.42 6.29 6.17 4.98 5.01 5.76 5.81 6.12 5.08 4.93 0.39% 1.00 2.63 4.27 1.46 4.43 2.21 1.36 2.47 1.59 2.29 3.74 4.14 2.20 2.73 0.37 $ 7,828 2.80% $ 7,706 2.96% $7,757 3.10% (3) Interest income includes the impact of interest rate risk management contracts, which increased interest income on the underlying assets $29 million, $86 million, $168 million and $421 million in the fourth, third, second and first quarters of 2005, respectively, and $439 million in the fourth quarter of 2004. Interest expense includes the impact of interest rate risk management contracts, which increased interest expense on the underlying liabilities $254 million, $274 million, $303 million and $504 million in the fourth, third, second and first quarters of 2005, respectively, and $295 million in the fourth quarter of 2004. For further information on interest rate contracts, see “Interest Rate Risk Management” beginning on page 69. (4) Primarily consists of time deposits in denominations of $100,000 or more. (5) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. 86 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Market Risk Management” in the MD&A beginning on page 65 which is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Management on Internal Control Over Financial Reporting The management of Bank of America Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2005, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on that assessment, management concluded that, as of December 31, 2005, the Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control—Integrated Framework. Management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2005, has been audited by PricewaterhouseCoopers, LLP, an independent registered public accounting firm, as stated in their report appearing on page 88. Kenneth D. Lewis Chairman, President and Chief Executive Officer Alvaro G. de Molina Chief Financial Officer 87 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Bank of America Corporation: We have completed integrated audits of Bank of America Corporation’s 2005 and 2004 Consolidated Financial Statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 Consolidated Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated Financial Statements In our opinion, the accompanying Consolidated Balance Sheet and the related Consolidated Statement of Income, Consolidated Statement of Changes in Shareholders’ Equity and Consolidated Statement of Cash Flows present fairly, in all material respects, the financial position of Bank of America Corporation and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These Consolidated Financial Statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits. We conducted our audits of these Consolidated Financial Statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 of the Consolidated Financial Statements, the Corporation has restated its 2004 and 2003 Consolidated Financial Statements. Internal Control Over Financial Reporting Also, in our opinion, management’s assessment, included in the Report of Management on Internal Control Over Financial Reporting appearing on page 87 of the Annual Report, that the Corporation maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Corporation’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Charlotte, North Carolina March 14, 2006 88 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Consolidated Statement of Income (Dollars in millions, except per share information) Year Ended December 31 2005 2004 (Restated) 2003 (Restated) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,843 $ 10,937 5,012 5,743 2,091 28,051 $ 7,256 1,940 4,016 1,690 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,626 42,953 Interest expense Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and brokerage services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other general operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,492 11,615 2,364 4,418 27,889 30,737 7,704 4,184 805 1,856 2,040 5,753 1,812 1,200 25,354 56,091 4,014 1,084 15,054 2,588 1,199 1,255 930 809 1,487 827 4,120 412 28,681 24,480 8,015 5,921 4,072 1,317 3,683 14,993 27,960 6,989 3,614 414 1,886 863 4,592 869 1,778 21,005 48,965 2,769 1,724 13,435 2,379 1,214 1,349 836 664 1,330 730 4,457 618 27,012 20,908 6,961 21,381 3,071 1,266 3,947 1,507 31,172 4,562 1,871 1,286 2,948 10,667 20,505 5,618 2,371 1,922 1,736 215 3,052 408 2,007 17,329 37,834 2,839 941 10,446 2,006 1,052 985 844 217 1,104 571 2,930 — 20,155 15,781 5,019 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,465 $ 13,947 $ 10,762 Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,447 $ 13,931 $ 10,758 Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.10 $ 4.04 $ 1.90 $ 3.71 $ 3.64 $ 1.70 $ 3.62 3.55 1.44 Average common shares issued and outstanding (in thousands) . . . . . . . . . . . 4,008,688 3,758,507 2,973,407 Average diluted common shares issued and outstanding (in thousands) . . . 4,068,140 3,823,943 3,030,356 See accompanying Notes to Consolidated Financial Statements. 89 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet (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 $148,299 and $91,243 pledged as collateral) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets (includes $68,223 and $38,929 pledged as collateral) . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: Available-for-sale (includes $116,659 and $45,127 pledged as collateral) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity, at cost (market value—$47 and $329) Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31 2005 2004 (Restated) 36,999 $ 12,800 28,936 12,361 149,785 131,707 23,712 221,556 47 221,603 573,791 (8,045) 91,360 93,587 30,235 194,743 330 195,073 521,813 (8,626) Loans and leases, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565,746 513,187 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposit intangibles and other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,786 2,806 45,354 3,194 90,311 7,517 2,481 45,262 3,887 86,546 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,803 $1,110,432 Liabilities Deposits in domestic offices: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179,571 $ 163,833 396,645 Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,155 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 (includes $395 and $402 of reserve for unfunded lending commitments) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,165 63,779 634,670 240,655 50,890 15,000 116,269 31,938 100,848 6,066 52,026 618,570 119,741 36,654 17,928 78,598 41,590 97,116 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190,270 1,010,197 Commitments and contingencies (Notes 9 and 13) Shareholders’ equity Preferred stock, $0.01 par value; authorized—100,000,000 shares; issued and outstanding—1,090,189 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 271 Common stock and additional paid-in capital, $0.01 par value; authorized—7,500,000,000 shares; issued and outstanding—3,999,688,491 and 4,046,546,212 shares . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,693 67,552 (7,556) (427) 44,236 58,773 (2,764) (281) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,533 100,235 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,803 $1,110,432 See accompanying Notes to Consolidated Financial Statements. 90 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Consolidated Statement of Changes in Shareholders’ Equity (Dollars in millions, shares in thousands) Balance, December 31, 2002 (As previously reported) . . . . . . . . . . . . . . . . Restatement adjustments(3) . . . . . . . . . . . . Balance, December 31, 2002 Common Stock and Additional Paid-in Capital Shares Amount Retained Earnings Accumulated Other Comprehensive Income (Loss)(1,2) Total Share- holders’ Equity Compre- hensive Income Other Preferred Stock $ 58 3,001,382 $ 496 $ 48,517 1,011 $ 1,232 (131) $ 16 $ 50,319 880 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . 58 3,001,382 496 49,528 1,101 16 51,199 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized losses on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . Net unrealized gains on foreign currency translation adjustments . . . . . . . . . . . . . Net losses on derivatives . . . . . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . Common stock repurchased . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2003 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized losses on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . Net unrealized gains on foreign currency translation adjustments . . . . . . . . . . . . . Net losses on derivatives . . . . . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . Stock issued in acquisition(4) . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2004 10,762 10,762 $ 10,762 139,298 (258,686) 294 (4) 4,372 (4,936) 4 93 (4,277) (4) (4,830) (17) (564) 2 (2,959) (564) (564) 2 (2,959) 2 (2,959) (4,277) (4) 4,249 (9,766) (123) (14) (47) 15 (14) 54 2,882,288 29 51,162 (2,434) (154) 48,657 7,227 13,947 13,947 13,947 271 (54) 121,149 1,186,728 (147,859) 4,240 4,066 46,480 (6,375) 54 (18) (6,452) (16) 89 43 (127) 13 (185) (127) 13 (185) (127) 13 (185) (6,452) (16) 3,939 46,751 (6,286) (127) (31) (6) (31) (Restated) . . . . . . . . . . . . . . . . . . . . . . . . 271 4,046,546 44,236 58,773 (2,764) (281) 100,235 13,617 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized losses on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . Net unrealized gains on foreign currency translation adjustments . . . . . . . . . . . . . Net losses on derivatives . . . . . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . Common stock repurchased . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,465 16,465 16,465 (2,781) 32 (2,059) (2,781) (2,781) 32 (2,059) 32 (2,059) (7,665) (18) 79,579 (126,437) 3,222 (5,765) (3) 16 (7,665) (18) 3,077 (5,765) 12 (145) (1) 16 Balance, December 31, 2005 . . . . . . . . . $271 3,999,688 $41,693 $67,552 $(7,556) $(427) $101,533 $11,673 (1) At December 31, 2005, 2004 and 2003, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on Available-for-sale (AFS) Debt and Marketable Equity Securities of $(2,978) million, $(197) million and $(70) million, respectively; Net Unrealized Gains (Losses) on Foreign Currency Translation Adjustments of $(122) million, $(155) million and $(168) million, respectively; Net Gains (Losses) on Derivatives of $(4,338) million, $(2,279) million and $(2,094) million, respectively; and Other of $(118) million, $(133) million and $(102) million, respectively. (2) For additional information on Accumulated OCI, see Note 14 of the Consolidated Financial Statements. (3) For additional information on the restatement adjustments, see Note 1 of the Consolidated Financial Statements. (4) Includes adjustment for the fair value of outstanding FleetBoston Financial Corporation (FleetBoston) stock options of $862 million. See accompanying Notes to Consolidated Financial Statements. 91 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Consolidated Statement of Cash Flows (Dollars in millions) Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of net income to net cash provided by (used in) operating activities: Year Ended December 31 2005 2004 (Restated) 2003 (Restated) $ 16,465 $ 13,947 $ 10,762 Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and premises improvements amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in trading and derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,014 (1,084) 959 809 1,695 (18,911) (104) (8,205) (7,861) 2,769 (1,724) 972 664 (519) (13,944) (11,928) 4,594 1,647 2,839 (941) 890 217 (295) (13,639) 10,647 12,067 439 Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,223) (3,522) 22,986 Investing activities Net increase in time deposits placed and other short-term investments . . . . . . . . . . . . . . . . . . . . . . . Net increase 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 of loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in China Construction Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in Grupo Financiero Santander Serfin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (paid for) acquired in business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439) (58,425) 134,490 39,519 (204,476) 283 14,458 (71,078) (736) (1,228) 132 (3,000) — (49) 104 (1,147) (3,880) 117,672 26,973 (243,573) 153 4,416 (32,350) (1,075) (863) 198 — — 4,936 986 (1,238) (31,614) 171,711 26,953 (195,852) 779 32,672 (74,037) (1,690) (209) 247 — (1,600) (141) 898 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,445) (127,554) (73,121) Financing activities Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in federal funds purchased and securities sold under agreements to repurchase . . . . Net increase in commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,100 120,914 37,671 21,958 (15,107) 2,846 (5,765) (7,683) (117) 64,423 35,752 37,437 21,289 (16,904) 3,712 (6,286) (6,468) (91) Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,817 132,864 Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86) Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,063 28,936 64 1,852 27,084 27,655 12,967 13,917 16,963 (9,282) 3,970 (9,766) (4,281) (72) 52,071 175 2,111 24,973 Cash and cash equivalents at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,999 $ 28,936 $ 27,084 Supplemental cash flow disclosures Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,239 7,049 $ 13,765 6,088 $ 10,214 3,870 Assets and liabilities of a certain multi-seller asset-backed commercial paper conduit that was consolidated amounted to $4,350 million in 2003. Net transfers of Loans and Leases to loans held-for-sale (included in Other Assets) from the loan portfolio for Asset and Liability Management purposes amounted to $73 million in 2005. Net transfers of Loans and Leases from loans held-for-sale to the loan portfolio for Asset and Liability Management purposes amounted to $1,106 million and $9,683 million in 2004 and 2003. In 2004, the fair values of noncash assets acquired and liabilities assumed in the merger with FleetBoston were $224,492 million and $182,862 million. In 2004, approximately 1.2 billion shares of common stock, valued at approximately $45,622 million, were issued in connection with the merger with FleetBoston. See accompanying Notes to Consolidated Financial Statements. 92 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 2005, the Corporation operated its banking activities primarily under two charters: Bank of America, National Association (Bank of America, N.A.) and Bank of America, N.A. (USA). On June 13, 2005, Fleet National Bank merged with and into Bank of America, N.A., with Bank of America, N.A. as the surviving entity. This merger had no impact on the Consolidated Financial Statements of the Corporation. On June 30, 2005, the Corporation announced a definitive agreement to acquire all outstanding shares of MBNA Corporation (MBNA) (the MBNA Merger). The transaction was effective January 1, 2006. On April 1, 2004, the Corporation acquired all of the outstanding stock of FleetBoston Financial Corporation (FleetBoston) (the FleetBoston Merger). Note 1—Summary of Significant Accounting Principles Restatement The Corporation is restating its historical financial statements for the years 2004 and 2003, for the quarters in 2005 and 2004, and other selected financial data for the years 2002 and 2001. These restatements and resulting revisions relate to the accounting treatment for certain derivative transactions under the Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities, as amended” (SFAS 133). As a result of an internal review completed in the first quarter of 2006 of the hedge accounting treatment of certain derivatives, the Corporation concluded that certain hedging relationships did not adhere to the requirements of SFAS 133. The derivatives involved were used as hedges principally against changes in interest rates and foreign currency rates in the Asset and Liability Management (ALM) process. A number of the transactions included in the restatement did not meet the strict requirements of the “shortcut” method of accounting under SFAS 133. Although these hedging relationships would have qualified for hedge accounting if the “long haul” method had been applied, SFAS 133 does not permit the use of the “long haul” method retroactively. Consequently, the restatement assumes hedge accounting was not applied to these derivatives and the related hedged item during the periods under review. A majority of these transactions related to internal interest rate swaps whereby the Corporation used its centralized trading desk to execute these trades to achieve operational effectiveness and cost efficiency. These interest rate swap trades were executed internally between the Corporation’s treasury operations and the centralized trading desk. It has been the Corporation’s long standing policy to lay these internal swaps off to an external party within a three-day period. In almost all cases, cash was exchanged (either paid or received) with the external counterparty to compensate for market rate movements between the time that the internal swap and the matching trade with the external counterparty were executed. Although the overall external trade, including the cash exchanged, was transacted at a fair market value of zero, the cash exchanged offset the fair market value of the external swap which was other than zero. Swaps with a fair market value other than zero at the inception of the hedge cannot qualify for hedge accounting under the shortcut method. Accordingly, the shortcut method was incorrectly applied for such derivative instruments. The Corporation also entered into certain cash flow hedges which utilized the centralized trading desk to lay off the internal trades with an external party. The key attributes, including interest rates and maturity dates, of the internal and external trades were not properly matched. The Corporation performed the effectiveness assessment and measure of ineffectiveness on the internal trades instead of the external trades. As a result, such tests were not performed in accordance with the requirements of SFAS 133. Accordingly, hedge accounting was incorrectly applied for such derivative instruments. The Corporation used various derivatives in other hedging relationships to hedge changes in fair value or cash flows attributable to either interest or foreign currency rates. Although these transactions were documented as hedging relationships at inception of the hedge, the upfront and ongoing effectiveness testing was either not performed, documented or assessed in accordance with SFAS 133. In addition, for one cash flow hedge transaction relating to the anticipated purchase of securities, which impacted the third quarter of 2004 by $399 million, the timing of an amount reclassified from Accumulated OCI to earnings upon the subsequent sale of such securities was adjusted. Adjustments to correct the accounting for those hedging relationships are included in the restated results. We do not believe that these adjustments are material individually or in the aggregate to our financial results for any reported period. 93 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following table sets forth the effects of the adjustments on Net Income for the years 2004 and 2003. Since we could not apply hedge accounting for those transactions, the derivative transactions have been marked to market through the Consolidated Statement of Income with no related offset for hedge accounting. Increase (Decrease) in Net Income (1) (Dollars in millions) Year Ended December 31 2004 2003 As Previously Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,143 $10,810 Internal fair value hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internal cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (190) (281) 275 (196) (144) 104 (9) (49) Restated net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,947 $10,762 (1.4)% (0.5)% (1) For presentation purposes, certain numbers have been rounded. The following tables set forth the effects of the restatement adjustments on affected line items within our previously reported Consolidated Statement of Income for the years 2004 and 2003, Consolidated Balance Sheet as of December 31, 2004, Consolidated Statement of Changes in Shareholders’ Equity for the years 2004 and 2003, and Consolidated Statement of Cash Flows for the years 2004 and 2003. Bank of America Corporation and Subsidiaries Consolidated Statement of Income (Dollars in millions, except per share information) Interest and fees on loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and dividends on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 2004 2003 As Previously Reported Restated As Previously Reported $28,213 7,262 2,043 43,224 6,275 4,434 2,404 14,430 28,794 869 858 20,085 48,879 2,123 21,221 7,078 $14,143 $14,127 $28,051 7,256 1,940 42,953 5,921 4,072 3,683 14,993 27,960 869 1,778 21,005 48,965 1,724 20,908 6,961 $13,947 $13,931 $21,668 3,068 1,373 31,563 4,908 1,871 2,034 10,099 21,464 409 1,127 16,450 37,914 941 15,861 5,051 $10,810 $10,806 Restated $21,381 3,071 1,266 31,172 4,562 1,871 2,948 10,667 20,505 408 2,007 17,329 37,834 941 15,781 5,019 $10,762 $10,758 Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.76 $ 3.69 $ 3.71 $ 3.64 $ 3.63 $ 3.57 $ 3.62 $ 3.55 94 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Bank of America Corporation and Subsidiaries Consolidated Balance Sheet (Dollars in millions) December 31, 2004 As Previously Reported Restated Loans and leases, net of allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 513,211 1,110,457 $ 513,187 1,110,432 Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,243 98,078 1,010,812 41,590 97,116 1,010,197 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,006 (2,587) 99,645 $1,110,457 58,773 (2,764) 100,235 $1,110,432 Bank of America Corporation and Subsidiaries Consolidated Statement of Changes in Shareholders’ Equity Retained Earnings(1) Accumulated Other Comprehensive Income (Loss) Other Total Shareholders’ Equity Comprehensive Income As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated $48,517 10,810 $49,528 10,762 $ 1,232 $ 1,101 $ 16 $ 16 $50,319 10,810 $ 51,199 10,762 $ — $ — 10,810 10,762 (2,803) (2,959) (2,803) (2,959) (2,803) (2,959) 50,198 14,143 51,162 13,947 (2,148) (2,434) (153) (154) 47,980 14,143 48,657 13,947 7,430 14,143 7,227 13,947 (294) (185) (294) (185) (294) (185) $58,006 $58,773 $(2,587) $(2,764) $(281) $(281) $99,645 $100,235 $13,704 $13,617 (Dollars in millions) Balance, December 31, 2002 . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Balance, December 31, 2003 . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Balance, December 31, 2004 . . . . . . . . . . . . . . . . (1) The cumulative effect of the restatement adjustments on Retained Earnings as of December 31, 2002 was approximately $1.0 billion. Bank of America Corporation and Subsidiaries Consolidated Statement of Cash Flows (Dollars in millions) Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in trading and derivative instruments . . . . . . . . . . . . . . . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . Investing activities Proceeds from sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Year Ended December 31 2004 2003 As Previously Reported Restated As Previously Reported Restated $ 14,143 (2,123) (402) (13,180) 564 (3,927) $ 13,947 (1,724) (519) (13,944) 1,647 (3,522) $ 10,810 (941) (263) (13,153) 38 23,151 $ 10,762 (941) (295) (13,639) 439 22,986 $ 107,107 (232,609) (32,344) (127,149) $ 117,672 (243,573) (32,350) (127,554) $ 171,711 (195,852) (74,202) (73,286) $ 171,711 (195,852) (74,037) (73,121) BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Principles of Consolidation and Basis of Presentation The Consolidated Financial Statements include the accounts of the Corporation and its majority-owned subsidiaries, and those variable interest entities (VIEs) where the Corporation is the primary beneficiary. All significant intercompany 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 period presentation. Assets held in an agency or fiduciary capacity are not included in the Consolidated Financial Statements. The Corporation accounts for investments in companies in which it owns a voting interest of 20 percent to 50 percent and for which it has the ability to exercise 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 Other Income and Accumulated Other Comprehensive Income (OCI), where applicable. The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates and assumptions. Recently Issued or Proposed Accounting Pronouncements On February 16, 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, “Accounting for Certain Hybrid Instruments” (SFAS 155), which permits, but does not require, fair value accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS 133. The statement also subjects beneficial interests issued by securitization vehicles to the requirements of SFAS 133. The statement is effective as of January 1, 2007, with earlier adoption permitted. Management is currently evaluating the effect of the statement on the Corporation’s results of operations and financial condition. On August 11, 2005, the FASB issued two exposure drafts which would amend SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125” (SFAS 140). The exposure draft, “Accounting for Transfers of Financial Assets,” would revise and clarify the criteria for derecognition of transferred financial assets. It would also place restrictions on the ability of a qualifying special purpose entity to roll over beneficial interests such as short-term commercial paper. The provisions of this exposure draft are expected to be effective at various dates beginning in 2006. Management is currently evaluating the effect of the provisions of the exposure draft on the Corporation’s results of operations and financial condition. The second exposure draft, “Accounting for Servicing of Financial Assets,” would permit, but not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at fair value, with changes in fair value recorded in income. The exposure draft is expected to be issued during the first quarter of 2006, to be effective as of January 1, 2006. The Corporation expects to utilize the fair value approach for MSRs upon adoption of this standard. The final statement is not expected to have a material impact on the Corporation’s results of operations or financial condition. On July 14, 2005, the FASB issued an exposure draft, FASB Staff Position (FSP) No. FAS 13-a, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (FSP 13-a). The FASB has met recently to discuss modifications to and finalization of FSP 13-a due, in part, to comment letters received in response to the exposure draft. It is anticipated that FSP 13-a will be effective January 1, 2007 and that the impact of adoption should be reflected as a change in the opening balance of retained earnings in the period of adoption. FSP 13-a’s principal provision is the requirement that a lessor recalculate the recognition of lease income when there is a change in the estimated timing of the cash flows relating to income taxes generated by such leveraged lease. This provision is expected to be retained in the final version, which the FASB expects to complete during the first quarter of 2006. Management is considering the potential impact of the Internal Revenue Service’s (IRS) stated position on certain leveraged leases and the impact of such position on the Corporation and its predecessors’ federal income tax returns. Depending on the final provisions of FSP 13-a and the final resolution with the IRS, adoption of FSP 13-a may have a material impact on the Corporation’s current accounting treatment for leveraged leases. Adoption of the FSP would result in both an adjustment to Goodwill for leveraged leases acquired as part of the FleetBoston Merger and a change in the opening balance of retained earnings in the period of adoption. On July 14, 2005, the FASB issued an exposure draft, “Accounting for Uncertain Tax Positions—an interpretation of FASB Statement No. 109.” The exposure draft, as modified by recent FASB deliberations, requires recognition of a tax benefit to the extent of management’s best estimate of the impact of a tax position, provided it is more likely than not that the tax position would be sustained based on its technical merits. The exposure draft is expected to be effective 96 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) January 1, 2007. Management is currently evaluating the effect of the exposure draft, which is required to be reflected as a change in the opening balance of retained earnings in the period of adoption. On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-based Payment” (SFAS 123R) which eliminates the ability to account for share-based compensation transactions, including grants of employee stock options, using Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and generally requires that such transactions be accounted for using a fair value-based method with the resulting compensation cost recognized over the period that the employee is required to provide service in order to receive their compensation. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” requiring the benefits of tax deductions in excess of recognized compensation costs to be reported as financing cash flows, rather than as operating cash flows as currently required. The Corporation adopted the fair value-based method of accounting for stock-based employee compensation prospectively as of January 1, 2003. The Corporation adopted SFAS 123R effective January 1, 2006 under the modified-prospective application. Upon adoption of SFAS 123R and as a result of a recent Securities and Exchange Commission (SEC) Staff (the Staff) interpretation, the Corporation changed its approach for recognizing stock compensation cost for employees who meet certain age and service criteria and thus, are retirement eligible as described in the plan. For any new awards granted, the Corporation will recognize stock compensation cost immediately for awards granted to retirement eligible employees or over the period from the grant date to the date retirement eligibility is achieved. Prior to adoption of SFAS 123R, awards granted to retirement eligible employees were expensed over the stated vesting period. Accordingly, the Corporation expects that earnings per common share will be reduced by approximately $0.05 in the first quarter due to the acceleration of stock-based compensation expense. The incremental impact of the change is approximately $0.04 for the full year when compared to expensing over the stated vesting period. Stock-based Compensation SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123,” (SFAS 148) was adopted prospectively 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. All stock options granted under plans before the adoption date will continue to be accounted for under APB 25 unless these stock options are modified or settled subsequent to adoption. SFAS 148 was effective for all stock option awards granted in 2003 and thereafter. 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. In accordance with SFAS 148, the Corporation provides disclosures as if it had adopted the fair value-based method of measuring all outstanding employee stock options during 2005, 2004 and 2003. The following table presents the effect on Net Income and Earnings per Common Share had the fair value-based method been applied to all outstanding and unvested awards for 2005, 2004 and 2003. (Dollars in millions, except per share data) Year Ended December 31 2005 2004 (Restated) 2003 (Restated) Net income (as reported) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,465 Stock-based employee compensation expense recognized during the year, net of related tax $13,947 $10,762 effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 161 78 Stock-based employee compensation expense determined under fair value-based method, net of related tax effects(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (203) (198) (225) Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,465 $13,910 $10,615 As reported Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.10 Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04 Pro forma Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10 4.04 $ 3.71 3.64 $ 3.62 3.55 3.70 3.63 3.57 3.50 (1) Includes all awards granted, modified or settled for which the fair value was required to be measured under SFAS 123, except restricted stock. Restricted stock expense (net of taxes), included in Net Income for 2005, 2004 and 2003 was $308 million, $187 million and $179 million. 97 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) In determining the pro forma disclosures in the previous table, 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 2005, 2004 and 2003 were based on the assumptions below. See Note 17 of the Consolidated Financial Statements for further discussion. Risk-free Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected Lives (Years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholder Approved Plans 2005 2004 2003 3.94% 4.60% 3.82% 3.36% 4.40% 4.56% 20.53% 22.12% 26.57% 6 5 7 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 2005, 2004 and 2003 may not be indicative of future amounts. 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 financing transactions and are recorded at the amounts at which the securities 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 collateralize the related receivable on agreements to resell, is monitored, including accrued interest. The Corporation may require counterparties to deposit additional collateral or return collateral pledged, when appropriate. Collateral The Corporation has accepted collateral that it is permitted by contract or custom to sell or repledge. At December 31, 2005, the fair value of this collateral was approximately $179.1 billion of which $112.5 billion was sold or repledged. At December 31, 2004, the fair value of this collateral was approximately $152.5 billion of which $117.5 billion was sold or repledged. The primary source of this collateral is reverse repurchase agreements. The Corporation pledges securities as collateral in transactions that consist of repurchase agreements, public and trust deposits, Treasury tax and loan notes, 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 securities and other marketable securities. Based on provisions contained in legal netting agreements, the Corporation has netted cash collateral against the applicable derivative mark-to-market exposures. Accordingly, the Corporation offsets its obligation to return or its right to reclaim cash collateral against the fair value of the derivatives being collateralized. 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 Consolidated Balance Sheet at fair value, taking into consideration the effects of legally enforceable master netting agreements that allow the Corporation to settle positive and negative positions 98 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) and offset cash collateral held 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 recognizes gains and losses at inception of a contract only if the fair value of the contract is evidenced by a quoted market price in an active market, an observable price or other market transaction, or other observable data supporting a valuation model in accordance with EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities”. For those gains and losses not evidenced by the above mentioned market data, the transaction price is used as the fair value of the contract. Any difference between the transaction price and the model fair value is considered an unrecognized gain or loss at inception of the contract. These unrecognized gains and losses are recorded in income using the straight line method of amortization over the contractual life of the derivative contract. Earlier recognition of the full unrecognized gain or loss is permitted if the trade is terminated early, subsequent market activity is observed which supports the model fair value of the contract, or significant inputs used in the valuation model become observable in the market. The Corporation designates at inception whether the derivative contract is considered hedging or non-hedging for SFAS 133 accounting purposes. Non-hedging derivatives held for trading purposes are included in Derivative Assets or Derivative Liabilities with changes in fair value reflected in Trading Account Profits. Other non-hedging derivatives that are considered economic hedges, but not designated in a hedging relationship for accounting purposes, are also included in Derivative Assets or Derivative Liabilities with changes in fair value recorded in Trading Account Profits, Mortgage Banking Income or Other Income on the Consolidated Statement of Income. Credit derivatives used by the Corporation do not qualify for hedge accounting under SFAS 133 despite being effective economic hedges with changes in the fair value of these derivatives included in Trading Account Profits. Changes in the fair value of derivatives that serve as economic hedges of MSRs are recorded in Mortgage Banking Income, after June 1, 2004. Changes in the fair value of derivatives that serve as ALM economic hedges, which do not qualify or were not designated as accounting hedges, are recorded in Other Income. For SFAS 133 hedges, the Corporation formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various accounting hedges. Additionally, the Corporation uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting 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 after termination of the hedge relationship. The Corporation uses its derivatives designated as hedging for accounting purposes as either fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The Corporation manages interest rate and foreign currency exchange rate sensitivity predominantly through the use of derivatives. Fair value hedges are used to limit the Corporation’s exposure to total changes in the fair value of its fixed interest-earning assets or interest-bearing liabilities that are due to interest rate or foreign exchange volatility. Cash flow hedges are used to minimize the variability in cash flows of interest-earning assets or interest-bearing liabilities or forecasted transactions caused by interest rate or foreign exchange fluctuation. The maximum length of time over which forecasted transactions are hedged is 29 years, with a substantial portion of the hedged transactions being less than 10 years. Changes in the fair value of derivatives designated for hedging activities that are highly effective as hedges are recorded in earnings or Accumulated OCI, depending on whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. Hedge ineffectiveness and gains and losses on the excluded component of a derivative in assessing hedge effectiveness are recorded in earnings in the same income statement caption that is used to record hedge effectiveness. SFAS 133 retains certain concepts under SFAS No. 52, “Foreign Currency Translation,” (SFAS 52) for foreign currency exchange hedging. 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 Accumulated OCI, to the extent effective. The Corporation, from time to time, purchases or issues financial instruments containing embedded derivatives. The embedded derivative 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 Consolidated Balance Sheet with changes in fair value reflected in earnings. If a derivative instrument in a fair value hedge is terminated or the hedge designation removed, the previous adjustments of the carrying amount of the hedged asset or liability are subsequently accounted for in the same manner as other components of the carrying amount of that asset or liability. For interest-earning assets and interest- 99 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) bearing liabilities, such adjustments are amortized to earnings over the remaining life of the respective asset or liability. If a derivative instrument in a cash flow hedge is terminated or the hedge designation is removed, related amounts in Accumulated OCI are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. Interest Rate Lock Commitments The Corporation enters into interest rate lock commitments (IRLCs) in connection with its mortgage banking activities to fund residential mortgage loans at specified times in the future. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS 149). As such, these IRLCs are recognized at fair value with changes in fair value recorded in Mortgage Banking Income. Consistent with SEC Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments,” the Corporation does not record any unrealized gain or loss at the inception of the loan commitment, which is the time the commitment is issued to the borrower. The initial value of the loan commitment derivative is based on the consideration exchanged, if any, for entering into the commitment. In estimating the subsequent fair value of an IRLC, the Corporation assigns a probability to the loan commitment based on an expectation that it will be exercised and the loan will be funded. This probability is commonly referred to as the pull through assumption. The fair value of the commitments is derived from the fair value of related mortgage loans, which is based on a highly liquid, readily observable market. Changes to the fair value of IRLCs are recognized based on interest rate changes, changes in the probability that the commitment will be exercised and the passage of time. Changes from the expected future cash flows related to the customer relationship or loan servicing are excluded from the valuation of the IRLCs. Outstanding IRLCs expose the Corporation to the risk that the price of the loans underlying the commitments might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. To protect against this risk, the Corporation utilizes forward loan sales commitments and other derivative instruments, including options, to economically hedge the risk of potential changes in the value of the loans that would result from the commitments. The Corporation expects that the changes in the fair value of these derivative instruments will offset changes in the fair value of the IRLCs. Securities Debt securities are classified based on management’s intention on the date of purchase and recorded on the Consolidated Balance Sheet as Securities 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. Debt securities that are bought and held principally for the purpose of resale in the near term are classified as trading 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 (AFS) and carried at fair value with net unrealized gains and losses included in Accumulated OCI on an after-tax basis. Interest on debt securities, including amortization of premiums and accretion of discounts, are included in Interest Income. Realized gains and losses from the sales of debt securities, which are included in Gains on Sales of Debt Securities, are determined using the specific identification method. Marketable equity securities are classified based on management’s intention on the date of purchase and recorded on the Consolidated Balance Sheet as of the trade date. Marketable equity securities that are bought and held principally for the purpose of resale in the near term are classified as trading instruments and are stated at fair value with unrealized gains and losses included in Trading Account Profits. Other marketable equity securities are classified as AFS and either recorded as AFS Securities, if they are a component of the ALM portfolio, or otherwise recorded as Other Assets. All AFS marketable equity securities are carried at fair value with net unrealized gains and losses included in Accumulated OCI on an after-tax basis. Dividend income on AFS marketable equity securities is included in Interest Income. Dividend income on marketable equity securities recorded in Other Assets is included in Noninterest Income. Realized gains and losses on the sale of all AFS marketable equity securities, which are recorded in Equity Investment Gains, are determined using the weighted average method. Investments in equity securities without readily determinable market values are recorded in Other Assets, are generally accounted for using the cost method and are subject to impairment testing as applicable. Equity investments held by Principal Investing, a diversified equity investor in companies at all stages of their life cycle from startup to buyout, are reported at fair value. Equity investments for which there are active market quotes are 100 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) carried at estimated fair value based on market prices and recorded as Other Assets. Nonpublic and other equity investments for which representative market quotes are not readily available are initially valued at cost. Subsequently, these investments are reviewed semi-annually or on a quarterly basis, where appropriate, and adjusted to reflect changes in value as a result of initial public offerings, market liquidity, the investees’ financial results, sales restrictions, or other than temporary declines in value. Gains and losses on equity investments, both unrealized and realized, are recorded in Equity Investment Gains. 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 carried at the aggregate of lease payments receivable plus estimated residual value of the leased property, less unearned income. Leveraged leases, which are a form of financing lease, are carried net of nonrecourse debt. Unearned income on leveraged and direct financing leases is amortized over the lease terms by methods that approximate the interest method. Allowance for Credit Losses The allowance for credit losses which includes the Allowance for Loan and Lease Losses and the reserve for unfunded lending commitments, represents management’s estimate of probable losses inherent in the Corporation’s lending activities. The Allowance for Loan and Lease Losses represents the estimated probable credit losses in funded consumer and commercial loans and leases while the reserve for unfunded lending commitments, including standby letters of credit (SBLCs) and binding unfunded loan commitments, represents estimated probable credit losses in these off-balance sheet credit instruments based on utilization assumptions. Credit exposures, excluding Derivative Assets and Trading Account Assets, deemed to be uncollectible are charged against these accounts. Cash recovered on previously charged off amounts are credited to these accounts. 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 homogeneous loan portfolios, which generally consist of consumer loans, is based on aggregated portfolio segment evaluations generally by product type. Loss forecast models are utilized for these segments which consider a variety of factors including, but not limited to, loss experience, estimated defaults or foreclosures based on portfolio trends, delinquencies, economic historical conditions and credit scores. These consumer loss forecast models are updated on a quarterly basis in order to incorporate information reflective of the current economic environment. The remaining commercial 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, industry performance trends, geographic or obligor concentrations within each portfolio segment, and any other pertinent information (including individual valuations on nonperforming loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114)) result in the estimation of the allowance for credit losses. The historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic environment. If necessary, a specific Allowance for Loan and Lease Losses is established for individual impaired commercial loans. A loan is considered impaired when, based on current information and events, it is probable 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 market 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 present value of payments expected to be received, a specific allowance is established as a component of the Allowance for Loan and Lease Losses. Two components of the Allowance for Loan and Lease Losses are allocated to cover the estimated probable losses in each loan and lease category based on the results of the Corporation’s detailed review process described above. The first component covers those commercial loans that are either nonperforming or impaired. The second component covers 101 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) consumer loans and leases, and performing commercial loans and leases. Included within this second component of the Allowance for Loan and Lease Losses and determined separately from the procedures outlined above are reserves which are maintained to cover uncertainties that affect the Corporation’s estimate of probable losses including the imprecision inherent in the forecasting methodologies, as well as domestic and global economic uncertainty and large single name defaults or event risk. Management evaluates the adequacy of the Allowance for Loan and Lease Losses based on the combined total of these two components. In addition to the Allowance for Loan and Lease Losses, the Corporation also estimates probable losses related to unfunded lending commitments, such as letters of credit and financial guarantees, and binding unfunded loan commitments. Unfunded lending commitments are subject to individual reviews and 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, performance trends within specific portfolio segments and any other pertinent information, result in the estimation of the reserve for unfunded lending commitments. The allowance for credit losses related to the loan and lease portfolio, and the reserve for unfunded lending commitments are reported on the Consolidated Balance Sheet in the Allowance for Loan and Lease Losses, and Accrued Expenses and Other Liabilities. Provision for Credit Losses related to the loans and leases portfolio and unfunded lending commitments are reported in the Consolidated Statement of Income in the Provision for Credit Losses. Nonperforming Loans and Leases 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 status 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. Consumer loans are generally returned to performing status when principal or interest is less than 90 days past due. 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 collection, including loans that are individually identified as being impaired, are generally classified as nonperforming 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 performing for an adequate period of time under the restructured agreement. In situations where the Corporation does not receive adequate compensation, the restructuring is considered a troubled debt restructuring. Interest accrued but not collected is reversed when a commercial loan is classified as nonperforming. Interest collections on commercial nonperforming loans and leases for which the ultimate collectibility of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. Commercial loans and leases may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection. 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 depreciation and amortization. Depreciation and amortization are recognized 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 Servicing Rights Pursuant to agreements between the Corporation and its counterparties, $2.2 billion of Excess Spread Certificates (the Certificates) were converted into MSRs on June 1, 2004. Prior to the conversion of the Certificates into MSRs, the Certificates were accounted for on a mark-to-market basis (i.e. fair value) and changes in the value were recognized as Trading Account Profits. On the date of the conversion, the Corporation recorded these MSRs at the Certificates’ fair market value, and that value became their new cost basis. Subsequent to the conversion, the Corporation accounts for 102 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) the MSRs at the lower of cost or market with impairment recognized as a reduction of Mortgage Banking Income. Except for Note 9 of the Consolidated Financial Statements, what are now referred to as MSRs include the Certificates for periods prior to the conversion. During 2004, the Corporation discussed with the Staff the accounting treatment for the Certificates and MSRs. As a result of this discussion, the conclusion was reached that the Certificates lacked sufficient separation from the MSRs to be accounted for as described above (i.e. fair value). Accordingly, the Corporation should have continued to account for the Certificates as MSRs (i.e. lower of cost or market). The effect on our previously filed Consolidated Financial Statements of following lower of cost or market accounting for the Certificates compared to fair value accounting (i.e. the prior accounting) was adjusted and was not material. When applying SFAS 133 hedge accounting for derivative financial instruments that have been designated to hedge MSRs, loans underlying the MSRs being hedged are stratified into pools that possess similar interest rate and prepayment risk exposures. The Corporation has designated the hedged risk as the change in the overall fair value of these stratified pools within a daily hedge period. The Corporation performs both prospective and retrospective hedge effectiveness evaluations, using regression analyses. A prospective test is performed to determine whether the hedge is expected to be highly effective at the inception of the hedge. A retrospective test is performed at the end of the daily hedge period to determine whether the hedge was actually effective. Other derivatives are used as economic hedges of the MSRs, but are not designated as hedges under SFAS 133. These derivatives are marked to market and recognized through Mortgage Banking Income. Securities are also used as economic hedges of MSRs, but do not qualify as hedges under SFAS 133 and, therefore, are accounted for as AFS Securities with realized gains recorded in Gains on Sales of Debt Securities and unrealized gains or losses recorded in Accumulated OCI in Shareholders’ Equity. 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 amortized but is reviewed for potential impairment on an annual basis, or if events or circumstances indicate a potential impairment, 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 procedure compares the implied fair value of the reporting unit’s Goodwill (as defined in SFAS No. 142, “Goodwill and Other Intangible Assets” (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 2005, 2004 and 2003, Goodwill was tested for impairment and no impairment charges were recorded. Other intangible assets subject to amortization are evaluated for impairment in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). An impairment loss will be recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value. The carrying amount of the intangible is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. At December 31, 2005, intangible assets included on the Consolidated Balance Sheet consist of core deposit intangibles, purchased credit card relationship intangibles and other customer-related intangibles that are amortized on an accelerated or straight-line basis using an estimated range of anticipated lives of 6 to 10 years. Special Purpose Financing Entities In the ordinary course of business, the Corporation supports its customers’ financing needs by facilitating the customers’ access to different funding sources, assets and risks. In addition, the Corporation utilizes certain financing arrangements to meet its balance sheet management, funding, liquidity, and market or credit risk management needs. These financing entities may be in the form of corporations, partnerships, limited liability companies or trusts, and are generally not consolidated on the Corporation’s Consolidated Balance Sheet. The majority of these activities are basic term or revolving securitization vehicles for mortgages or other types of loans which are generally funded through term- amortizing debt structures. Other special purpose entities finance their activities by issuing short-term commercial paper. Both types of vehicles are designed to be paid off from the underlying cash flows of the assets held in the vehicle. 103 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Securitizations The Corporation securitizes, sells and services interests in residential mortgage loans, and from time to time, consumer finance, commercial and credit card loans. The accounting for these activities are governed by SFAS 140. The securitization vehicles are Qualified Special Purpose Entities (QSPEs) which, in accordance with SFAS 140, are legally isolated, bankruptcy remote and beyond the control of the seller. QSPEs are not included in the consolidated financial statements of the seller. When the Corporation securitizes assets, it may retain interest-only strips, one or more subordinated tranches and, in some cases, a cash reserve account which are generally considered residual interests in the securitized assets. The Corporation may also retain senior tranches in these securitizations. Gains and losses 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 allocated in proportion to the relative fair values of the assets sold and interests retained. Quoted market prices are used to obtain fair values of senior retained interests. Generally, quoted market prices for retained residual interests are not available; 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. See Note 9 of the Consolidated Financial Statements for further discussion. The excess cash flows expected to be received over the amortized cost of the retained interest is recognized as Interest Income using the effective yield method. If the fair value of the retained interest 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 corresponding adjustment to earnings. Other Special Purpose Financing Entities Other special purpose financing entities are generally funded with short-term commercial paper. 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 financial instruments and provide the investors in the transaction protection 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. The Corporation determines whether these entities should be consolidated by evaluating the degree to which it maintains control over the financing entity and will receive the risks and rewards of the assets in the financing entity. In making this determination, the Corporation considers whether the entity is a QSPE, which is generally not required to be consolidated by the seller or investors in the entity. For non-QSPE structures or VIEs, the Corporation assesses whether it is the primary beneficiary of the entity. In accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (FIN 46R), the primary beneficiary is the party that consolidates a VIE based on its assessment that it will absorb a majority of the expected losses or expected residual returns of the entity, or both. For additional information on other special purpose financing entities, see Note 9 of the Consolidated Financial Statements. Income Taxes The Corporation accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (SFAS 109), resulting in two components of Income Tax Expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent decreases or increases in taxes expected to be paid in the future because of future reversals of temporary differences in the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax assets have also been recognized for net operating loss carryforwards and tax credit carryforwards. Valuation allowances are then recorded to reduce deferred tax assets to the amounts management concludes are more likely than not to be realized. 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. 104 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) In addition, the Corporation has established unfunded supplemental benefit plans and supplemental executive retirement plans for selected officers of the Corporation and its subsidiaries that provide benefits that cannot be paid from a qualified retirement plan due to Internal Revenue Code restrictions. These plans 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 has established several postretirement healthcare and life insurance benefit plans. Other Comprehensive Income The Corporation records unrealized gains and losses on AFS Securities, foreign currency translation adjustments, related hedges of net investments in foreign operations and gains and losses on cash flow hedges in Accumulated OCI. Gains and losses on AFS 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 accounted for as hedges are reclassified to Net Income when the hedged transaction 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 dividends. 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, restricted stock units and the dilution resulting from the conversion of the registrant’s convertible preferred stock, if applicable. The effects of convertible preferred stock, restricted stock units 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 consolidation purposes, at current exchange rates from the local currency to the reporting currency, the U.S. dollar. The resulting unrealized gains or losses are reported as a component of Accumulated OCI 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 realized gains or losses are included in Net Income. Co-Branding Credit Card Arrangements The Corporation has co-brand arrangements that entitle a cardholder to receive benefits based on purchases made with the card. These arrangements have remaining terms generally not exceeding five 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 volume 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—FleetBoston Merger and Restructuring Activity Pursuant to the Agreement and Plan of Merger, dated October 27, 2003, by and between the Corporation and FleetBoston (the FleetBoston Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of FleetBoston on April 1, 2004, in a tax-free merger to the Corporation, in order to expand the Corporation’s presence in the Northeast. FleetBoston’s results of operations were included in the Corporation’s results beginning April 1, 2004. As provided by the FleetBoston Merger Agreement, approximately 1.069 billion shares of FleetBoston common stock were exchanged for approximately 1.187 billion shares of the Corporation’s common stock. At the date of the FleetBoston Merger, this represented approximately 29 percent of the Corporation’s outstanding common stock. FleetBoston shareholders also received cash of $4 million in lieu of any fractional shares of the Corporation’s common stock that 105 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) would have otherwise been issued on April 1, 2004. Holders of FleetBoston preferred stock received 1.1 million shares of the Corporation’s preferred stock. The Corporation’s preferred stock that was exchanged was valued using the book value of FleetBoston preferred stock. The depositary shares underlying the FleetBoston preferred stock, each representing a one-fifth interest in the FleetBoston preferred stock prior to the FleetBoston Merger, represent a one-fifth interest in a share of the Corporation’s preferred stock. The purchase price was adjusted to reflect the effect of the 15.7 million shares of FleetBoston common stock that the Corporation already owned. The FleetBoston Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations” (SFAS 141). Accordingly, the final purchase price was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the FleetBoston Merger date as summarized below. (In millions except per share amounts) Purchase price FleetBoston common stock exchanged (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068,635 1.1106 Total shares of the Corporation’s common stock exchanged (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase price per share of the Corporation’s common stock(1) 1,186,826 38.44 $ Total value of the Corporation’s common stock exchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FleetBoston preferred stock converted to the Corporation’s preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of outstanding stock options, direct acquisition costs and the effect of FleetBoston shares already owned by the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocation of the purchase price FleetBoston stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FleetBoston goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reflect assets acquired and liabilities assumed at fair value: Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identified intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets and deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exit and termination liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill resulting from the FleetBoston Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,622 271 1,360 $47,253 $19,329 (4,709) (84) (776) (766) 3,243 312 (313) (313) (641) (1,182) 14,100 $33,153 (1) The value of the shares of common stock exchanged with FleetBoston shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, October 27, 2003, the date of the FleetBoston Merger Agreement. Unaudited Pro Forma Condensed Combined Financial Information The following unaudited pro forma condensed combined financial information presents the Corporation's results of operations had the FleetBoston Merger taken place at the beginning of each year. (Dollars in millions, except per common share information) Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per common share information Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 (Restated) 2003 (Restated) $ $ $ $ 29,747 22,523 2,769 1,773 618 28,507 22,149 14,707 27,249 22,756 3,864 1,069 — 27,319 19,891 13,250 3.62 3.56 $ $ 3.20 3.15 Average common shares issued and outstanding (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,054,322 4,138,139 Average diluted common shares issued and outstanding (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,124,671 4,201,053 106 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Merger and Restructuring Charges Merger and Restructuring Charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate the Corporation’s and FleetBoston’s operations. These charges represent costs associated with these one-time activities and do not represent on-going costs of the fully integrated combined organization. Systems integrations and related charges, and other, as shown in the following table, are expensed as incurred. In addition, Merger and Restructuring Charges include costs related to an infrastructure initiative that was initiated in the third quarter of 2004 to simplify the Corporation’s business model. These costs were solely severance related. The Corporation does not expect to incur additional severance costs related to this initiative. (Dollars in millions) Severance and employee-related charges: 2005 2004 Merger-related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 $138 Infrastructure initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Systems integrations and related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 1 218 155 Total merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $412 $618 Exit Costs and Restructuring Reserves As of December 31, 2004, there were $382 million of exit costs reserves remaining, which included $291 million for severance, relocation and other employee-related costs, $87 million for contract terminations, and $4 million for other charges. During 2005, $17 million of reductions to the exit costs reserves were recorded as a result of revised estimates. Cash payments of $306 million were charged against this liability in 2005, including $239 million of severance, relocation and other employee-related costs, and $67 million of contract terminations reducing the balance in the liability to $59 million at December 31, 2005. As of December 31, 2004, there were $166 million of restructuring reserves remaining related to severance and other employee-related charges. Restructuring reserves in 2005 included an additional charge for the legacy Bank of America associate severance and other employee-related charges of $58 million. These charges included $20 million as a result of revised estimates to complete relocations to the Northeast. During 2005, cash payments of $151 million for severance and other employee-related costs have been charged against this liability reducing the balance to $73 million as of December 31, 2005. Payments under these exit costs and restructuring reserves are expected to be substantially completed in 2006. Exit Costs and Restructuring Reserves Exit Costs Reserves(1) Restructuring Reserves(2) (Dollars in millions) Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FleetBoston exit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infrastructure initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 $ 382 (17) — — (306) 2004 $ — 658 — — (276) Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59 $ 382 2005 $ 166 — 57 1 (151) $ 73 2004 $ — — 138 102 (74) $166 (1) Exit costs reserves were established in purchase accounting resulting in an increase in Goodwill. (2) Restructuring reserves were established by a charge to income. Note 3—MBNA Merger Pursuant to the Agreement and Plan of Merger, dated June 30, 2005, by and between the Corporation and MBNA (the MBNA Merger Agreement), the Corporation acquired 100 percent of the outstanding stock of MBNA on January 1, 2006. The MBNA Merger was a tax-free merger for the Corporation. The acquisition expands the Corporation’s customer base and its opportunity to deepen customer relationships across the full breadth of the company by delivering innovative deposit, lending and investment products and services to MBNA’s customer base. Additionally, the acquisition allows the Corporation to significantly increase its affinity relationships through MBNA’s credit card operations. MBNA’s results of operations will be included in the Corporation’s results beginning January 1, 2006. 107 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Under the terms of the MBNA Merger Agreement, MBNA stockholders received 0.5009 of a share of the Corporation’s common stock plus $4.125 for each MBNA share of common stock. As provided by the MBNA Merger Agreement, approximately 1,260 million shares of MBNA common stock were exchanged for approximately 631 million shares of the Corporation’s common stock. At the date of the MBNA Merger, this represented approximately 16 percent of the Corporation’s outstanding common stock. MBNA shareholders also received cash of $5.2 billion. On November 3, 2005, MBNA redeemed all shares of its 7 1⁄ 2% Series A Cumulative Preferred Stock and Series B Adjustable Rate Cumulative Preferred Stock, in accordance with the terms of the MBNA Merger Agreement. The MBNA Merger will be accounted for under the purchase method of accounting in accordance with SFAS 141. The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the MBNA Merger date as summarized below. This allocation is based on management’s current estimation and could change as the fair value calculations are finalized and more information becomes available. (Unaudited) (In millions, except per share amounts) Purchase price Purchase price per share of the Corporation’s common stock(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchange ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase price per share of the Corporation’s common stock exchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash portion of the MBNA Merger consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Implied value of one share of MBNA common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MBNA common stock exchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total value of the Corporation’s common stock and cash exchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of outstanding stock options and direct acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45.856 0.5009 $22.969 4.125 27.094 1,260 Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocation of the purchase price MBNA stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MBNA goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reflect assets acquired and liabilities assumed at fair value: Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identified intangibles(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exit and termination liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities and deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated goodwill resulting from the MBNA Merger(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,139 440 $34,579 $13,410 (3,564) (270) (588) 8,080 (824) (100) (1,185) (706) (404) 13,849 $20,730 (1) The value of the shares of common stock exchanged with MBNA shareholders was based upon the average of the closing prices of the Corporation’s common stock for the period commencing two trading days before, and ending two trading days after, June 30, 2005, the date of the MBNA Merger Agreement. (2) Includes core deposit intangibles of $204 million, purchased credit card receivables of $5,468 million, affinity relationships of $2,018 million and other intangibles of $390 million. The amortization life for core deposit intangibles is 10 years and purchased credit card receivables and affinity relationships are 15 years. (3) No Goodwill is expected to be deductible for tax purposes. Goodwill will be allocated to Global Consumer and Small Business Banking. 108 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 4—Trading Account Assets and Liabilities The Corporation engages in a variety of trading-related activities that are either for clients or its own account. The following table presents the fair values of the components of Trading Account Assets and Liabilities at December 31, 2005 and 2004. (Dollars in millions) December 31 2005 2004 Trading account assets Corporate securities, trading loans and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,554 $35,227 U.S. government and agency securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,462 Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,504 Mortgage trading loans and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,625 Foreign sovereign debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,769 31,091 31,029 12,290 10,743 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,707 $93,587 Trading account liabilities U.S. government and agency securities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,179 $14,332 Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,952 Foreign sovereign debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,793 Corporate securities and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,538 Mortgage trading loans and asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11,371 8,915 7,407 18 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,890 $36,654 (1) Includes $22.1 billion and $17.3 billion at December 31, 2005 and 2004 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government. (2) Includes $1.4 billion and $1.2 billion at December 31, 2005 and 2004 of government-sponsored enterprise obligations that are not backed by the full faith and credit of the U.S. government. Note 5—Derivatives The Corporation designates a derivative as held for trading, an economic hedge not designated as a SFAS 133 hedge, or a qualifying SFAS 133 hedge when it enters into the derivative contract. The designation may change based upon management’s reassessment or changing circumstances. Derivatives utilized by the Corporation include swaps, financial futures and forward settlement 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 obligation, to buy or sell a quantity of a financial instrument (including another derivative 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 exchanges or directly between parties. The Corporation also provides credit derivatives to customers who wish to increase or decrease credit exposures. In addition, the Corporation utilizes credit derivatives to manage the credit risk associated with the loan portfolio. Credit Risk Associated with Derivative Activities Credit risk associated with derivatives is measured as the net replacement cost in the event the counterparties with contracts in a gain position to the Corporation completely fail to perform under the terms of those contracts. 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. The Corporation’s derivative activities are primarily with financial institutions and corporations. To minimize credit risk, the Corporation enters into legally enforceable master netting agreements, which reduce risk by permitting the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In addition, the Corporation reduces credit risk by obtaining collateral from counterparties. The determination of the need for and the levels of collateral will vary based on an assessment of the credit risk of the counterparty. Generally, the Corporation accepts collateral in the form of cash, U.S. Treasury securities and other marketable securities. The Corporation held $24.9 billion of collateral on derivative positions, of which $17.1 billion could be applied against credit risk at December 31, 2005. 109 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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 margin and security deposit requirements. Management believes the credit risk associated with these types of instruments is minimal. The average fair value of Derivative Assets for 2005 and 2004 was $25.9 billion and $28.0 billion. The average fair value of Derivative Liabilities for 2005 and 2004 was $16.8 billion and $15.7 billion. The following table presents the contract/notional amounts and credit risk amounts at December 31, 2005 and 2004 of all the Corporation’s derivative positions. These derivative positions are primarily executed in the over-the-counter market. The credit risk amounts take into consideration the effects of legally enforceable master netting agreements, and on an aggregate basis have been reduced by the cash collateral applied against Derivative Assets. At December 31, 2005 and 2004, the cash collateral applied against Derivative Assets on the Consolidated Balance Sheet was $9.3 billion and $9.4 billion. In addition, at December 31, 2005 and 2004, the cash collateral placed against Derivative Liabilities was $7.6 billion and $6.0 billion. Derivatives(1) (Dollars in millions) December 31 2005 2004 Contract/ Notional Credit Risk Contract/ Notional Credit Risk — — 3,345 1,833,216 988,253 1,243,809 2,113,717 900,036 869,471 Interest rate contracts Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,401,577 $11,085 $11,597,813 $12,705 Futures and forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332 Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,840 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(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,809 5,533 7,854 3,673 2,017,896 10,480 6,307 9,270 5,535 499,741 333,487 944,321 214,668 229,049 305,999 956,995 167,225 163,243 2,475 — — 546 766 28,287 6,479 69,048 57,693 34,130 4,078 37,080 32,893 3,735 2,481 — 1,214 548 44 — 6,729 1,039 — — 5,741 7,859 3,593 — 679 — 301 430 2,099 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit risk before cash collateral Less: Cash collateral applied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,968 9,256 $23,712 39,624 9,389 $30,235 (1) Includes long and short derivative positions. (2) The increase in credit derivatives notional amounts reflects structured basket transactions and customer-driven activity. ALM Process 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 fluctuations in earnings that are caused by interest rate volatility. The Corporation’s goal is to manage 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 increase or decrease as a result of interest 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. 110 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, options and futures, allow the Corporation to 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 underlying 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 the ALM process 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 currency-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. 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 (fair value hedges). The Corporation also uses these types of contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and other forecasted transactions (cash flow hedges). For cash flow hedges, gains and losses on derivative contracts reclassified from Accumulated OCI 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. During the next 12 months, net losses on derivative instruments included in Accumulated OCI of approximately $632 million (pre-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income or increase expense on the respective hedged items. The following table summarizes certain information related to the Corporation’s hedging activities for 2005 and 2004: (Dollars in millions) 2005 2004 Fair value hedges Hedge ineffectiveness recognized in earnings(1) Net loss excluded from assessment of effectiveness(2) Cash flow hedges Hedge ineffectiveness recognized in earnings(3) Net investment hedges Gains (losses) included in foreign currency translation adjustments within Accumulated OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $166 $ 10 (6) (13) (31) (11) 66 (157) (1) (2) (3) Included $5 million and $(8) million recorded in Net Interest Income, $167 million and $18 million recorded in Mortgage Banking Income, $(5) million and $0 recorded in Investment Banking Income, and $(1) million and $0 recorded in Trading Account Profits in the Consolidated Statement of Income for 2005 and 2004. Included $0 and $(5) million recorded in Net Interest Income and $(15) million and $(1) million recorded in Mortgage Banking Income, and $2 million and $0 recorded in Investment Banking Income in the Consolidated Statement of Income for 2005 and 2004. Included $(17) million and $(13) million recorded in Net Interest Income and $(14) million and $2 million recorded in Mortgage Banking Income from other cash flow hedges in the Consolidated Statement of Income for 2005 and 2004. 111 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 6 – Securities The amortized cost, gross unrealized gains and losses, and fair value of AFS debt and marketable equity securities, and Held-to-maturity securities at December 31, 2005, 2004 and 2003 were: (Dollars in millions) Available-for-sale securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2005 U.S. Treasury securities and agency debentures . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxable securities(1) Total taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 730 197,101 10,944 13,198 221,973 4,693 $226,666 Available-for-sale marketable equity securities(2) . . . . . . . . . $ 4,060 2004 U.S. Treasury securities and agency debentures . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxable securities(1) Total taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 826 173,697 7,437 9,493 191,453 3,662 Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 195,115 Available-for-sale marketable equity securities(2) . . . . . . . . . 2003 U.S. Treasury securities and agency debentures . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxable securities(3) Total taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale marketable equity securities(2) . . . . . . . . . . . . . . . . . Held-to-maturity securities 2005 Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ $ $ $ $ 3,571 710 56,403 2,816 4,765 64,694 2,167 66,861 2,803 4 43 47 41 289 330 96 151 247 $ — 198 1 126 325 31 $356 $305 $ — 174 36 — 210 87 $ 297 $ 32 $ 5 63 23 36 127 79 $ 206 $ 394 $ — — $ — $ $ $ 4 — 4 3 7 $ 10 $ 13 5,268 54 99 5,434 32 $ 717 192,031 10,891 13,225 216,864 4,692 $5,466 $221,556 18 $ 4,347 $ $ $ $ $ $ $ 1 624 26 13 664 5 669 2 2 575 38 69 684 1 685 31 $ — — $ — $ $ $ $ 4 1 5 3 — 3 $ 825 173,247 7,447 9,480 190,999 3,744 $ 194,743 $ $ $ $ $ $ $ $ $ $ 3,601 713 55,891 2,801 4,732 64,137 2,245 66,382 3,166 4 43 47 41 288 329 96 158 254 (1) Includes corporate debt, asset-backed securities and equity instruments. (2) Represents those AFS marketable equity securities that are recorded in Other Assets on the Consolidated Balance Sheet. (3) Includes corporate debt and asset-backed securities. 112 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) At December 31, 2005, accumulated net unrealized losses on AFS debt and marketable equity securities included in Accumulated OCI were $3.0 billion, net of the related income tax benefit of $1.8 billion. At December 31, 2004, accumulated net unrealized losses on these securities were $196 million, net of the related income tax benefit of $146 million. The following table presents the current fair value and the associated unrealized losses only on investments in securities with unrealized losses at December 31, 2005 and 2004. The table also discloses whether these securities have had unrealized losses for less than twelve months, or for twelve months or longer. (Dollars in millions) December 31, 2005 Less than twelve months Twelve months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale securities . . . . . U.S. Treasury securities and agency debentures(1) Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 251 149,979 3,455 3,882 Total taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,567 2,308 $ (9) (3,766) (41) (79) (3,895) (27) $ 163 40,236 852 469 41,720 156 $ (4) (1,502) (13) (20) (1,539) (5) $ 414 190,215 4,307 4,351 199,287 2,464 $ (13) (5,268) (54) (99) (5,434) (32) Total temporarily-impaired available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Temporarily-impaired marketable equity 159,875 (3,922) 41,876 (1,544) 201,751 (5,466) securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 (18) — — 146 (18) Total temporarily-impaired securities . . . . . . $160,021 $(3,940) $41,876 $(1,544) $201,897 $(5,484) (Dollars in millions) Available-for-sale securities U.S. Treasury securities and agency debentures(1) . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total temporarily-impaired available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Temporarily-impaired marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity securities Taxable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total temporarily-impaired held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2004 Less than twelve months Twelve months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 381 52,687 4,964 1,130 59,162 1,088 $ (1) (297) (11) (9) (318) (5) $ 22 17,426 99 37 17,584 21 $ — $ (327) (15) (4) (346) — 403 70,113 5,063 1,167 76,746 1,109 $ (1) (624) (26) (13) (664) (5) 60,250 (323) 17,605 (346) 77,855 (669) 83 41 288 329 (2) (4) (1) (5) — — — — — — — — 83 41 288 329 (2) (4) (1) (5) Total temporarily-impaired securities . . . . . . $ 60,662 $ (330) $ 17,605 $ (346) $ 78,267 $ (676) (1) Unrealized losses less than $500 thousand are shown as zero. The unrealized losses associated with U.S. Treasury securities and agency debentures, mortgage-backed securities, certain foreign securities, other taxable securities and tax-exempt securities are not considered to be other-than- temporary because their unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer. The Corporation has the ability and intent to hold these securities for a period of time sufficient to recover all unrealized losses. Accordingly, the Corporation has not recognized any other-than- temporary impairments for these securities. 113 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The Corporation had investments in securities from the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) that exceeded 10 percent of consolidated Shareholders’ Equity as of December 31, 2005 and 2004. Those investments had market values of $144.1 billion and $46.9 billion at December 31, 2005 and $133.6 billion and $35.8 billion at December 31, 2004. In addition, these investments had total amortized costs of $148.0 billion and $48.3 billion at December 31, 2005 and $132.9 billion and $35.9 billion at December 31, 2004. Pursuant to an agreement dated June 17, 2005, the Corporation committed to purchase approximately nine percent of the stock of China Construction Bank (CCB) for $3.0 billion. Under this agreement, the Corporation made an initial purchase of CCB shares for $2.5 billion in August 2005 and during CCB’s initial public offering in October 2005, made an additional purchase of $500 million. These shares are non-transferable until the third anniversary of the initial public offering. The Corporation also holds an option to increase its ownership interest in CCB to 19.9 percent over the next five years. At December 31, 2005, this $3.0 billion investment in CCB was included in Other Assets. Securities are pledged or assigned to secure borrowed funds, government and trust deposits and for other purposes. The carrying value of pledged securities was $116.7 billion and $45.1 billion at December 31, 2005 and 2004. The expected maturity distribution of the Corporation’s mortgage-backed securities and the contractual maturity distribution of the Corporation’s other securities, and the yields of the Corporation’s securities portfolio at December 31, 2005 are summarized in the following table. 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(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years(1) Total Fair value of available-for-sale securities U.S. Treasury securities and agency debentures . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . Foreign securities . . . . . . . . . . . . . . . . . . Other taxable securities . . . . . . . . . . . . . $ 15 18 891 278 3.24% $ 4.40 4.44 4.86 378 56,130 339 6,245 3.52% $ 4.94 4.41 4.54 324 126,789 9,620 4,712 4.34% $ — 5.09 5.66 4.91 9,094 41 1,990 — % $ 5.23 6.06 5.51 717 192,031 10,891 13,225 3.88% 5.06 5.58 4.73 Total taxable . . . . . . . . . . . . . . . . . . Tax-exempt securities(3) . . . . . . . . . . . . . 1,202 1,255 4.52 4.53 63,092 331 4.89 6.79 141,445 2,767 5.13 5.78 11,125 339 5.28 5.67 216,864 4,692 5.06 5.50 Total available-for-sale securities . . . . . . . . . . . . . . . . . . $2,457 4.53% $63,423 4.90% $144,212 5.14% $11,464 5.26% $221,556 5.07% Amortized cost of available- for-sale securities . . . . . . . . . . . . . . $2,514 $64,885 $147,538 $11,729 $226,666 Amortized cost of held-to- maturity securities Taxable securities . . . . . . . . . . . . . . . . . . Tax-exempt securities(3) . . . . . . . . . . . . . $ 4 10 4.00% $ — 31 3.37 — % $ 3.58 — 2 — % $ — — 5.51 — % $ — 4 43 4.00% 3.61 Total held-to-maturity securities . . . . . . . . . . . . . . . . . . $ 14 3.38% $ 31 3.58% $ Fair value of held-to- maturity securities . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 31 $ 2 2 5.51% $ — — % $ 47 3.65% $ — $ 47 (1) Includes securities with no stated maturity. (2) Yields are calculated based on the amortized cost of the securities. (3) Yield of tax-exempt securities calculated on a FTE basis. The components of realized gains and losses on sales of debt securities for 2005, 2004 and 2003 were: (Dollars in millions) 2005 2004 (Restated) 2003 Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,154 Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) $2,270 (546) $1,246 (305) Net gains on sales of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,084 $ 1,724 $ 941 114 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The Income Tax Expense attributable to realized net gains on debt securities sales was $400 million, $640 million and $329 million in 2005, 2004 and 2003, respectively. Note 7—Outstanding Loans and Leases Outstanding loans and leases at December 31, 2005 and 2004 were: (Dollars in millions) December 31 2005 2004 (Restated) Consumer Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,596 $178,079 Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,726 Home equity lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,126 Direct/Indirect consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,513 Other consumer(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,439 58,548 62,098 45,490 6,725 Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,457 327,883 Commercial Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,533 35,766 20,705 21,330 122,095 32,319 21,115 18,401 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,334 193,930 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $573,791 $521,813 (1) Includes consumer finance of $2,849 million and $3,395 million; foreign consumer of $3,841 million and $3,563 million; and consumer lease financing of $35 million and $481 million at December 31, 2005 and 2004. (2) Includes domestic commercial real estate loans of $35,181 million and $31,879 million; and foreign commercial real estate loans of $585 million and $440 million at December 31, 2005 and 2004. The following table presents the gross recorded investment in specific loans, without consideration to the specific component of the Allowance for Loan and Lease Losses, that were considered individually impaired in accordance with SFAS 114 at December 31, 2005 and 2004. SFAS 114 impairment includes performing troubled debt restructurings, and excludes all commercial leases. (Dollars in millions) December 31 2005 2004 Commercial—domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $613 $ 868 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Commercial—foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 49 34 Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $696 $1,228 The average recorded investment in certain impaired loans for 2005, 2004 and 2003 was approximately $852 million, $1.6 billion and $3.0 billion, respectively. At December 31, 2005 and 2004, the recorded investment in impaired loans requiring an Allowance for Loan and Lease Losses based on individual analysis per SFAS 114 guidelines was $517 million and $926 million, and the related Allowance for Loan and Lease Losses was $55 million and $202 million. For 2005, 2004 and 2003, Interest Income recognized on impaired loans totaled $17 million, $21 million and $105 million, respectively, all of which was recognized on a cash basis. At December 31, 2005 and 2004, nonperforming loans and leases, including impaired loans and nonaccrual consumer loans, totaled $1.5 billion and $2.2 billion. Nonperforming securities amounted to zero and $140 million at December 31, 2005 and 2004. In addition, included in Other Assets were nonperforming loans held for sale and leveraged lease partnership interests of $50 million and $151 million at December 31, 2005 and 2004. Foreclosed properties amounted to $92 million and $102 million at December 31, 2005 and 2004, and are included in Other Assets on the Consolidated Balance Sheet. The cost of carrying foreclosed properties in 2005, 2004 and 2003 amounted to $4 million, $3 million and $3 million, respectively. 115 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 8—Allowance for Credit Losses The following table summarizes the changes in the allowance for credit losses for 2005, 2004 and 2003: (Dollars in millions) 2005 2004 2003 Allowance for loan and lease losses, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,626 $ 6,163 $ 6,358 FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Loans and leases charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,867) Recoveries of loans and leases previously charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761 — (5,794) 1,232 2,763 (4,092) 979 Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,562) (3,113) (3,106) Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,021 (40) 2,868 (55) 2,916 (5) Allowance for loan and lease losses, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,045 8,626 6,163 Reserve for unfunded lending commitments, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for unfunded lending commitments, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402 — (7) 395 416 85 (99) 402 493 — (77) 416 Total Allowance for Credit Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,440 $ 9,028 $ 6,579 Note 9—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. The Corporation also uses other special purpose financing entities to access the commercial paper market and for other lending, leasing and real estate activities. Mortgage-related Securitizations The Corporation securitizes the majority of its residential mortgage loan originations in conjunction with or shortly after loan closing. In addition, the Corporation may, from time to time, securitize commercial mortgages and first residential mortgages that it originates or purchases from other entities. In 2005 and 2004, the Corporation converted a total of $102.6 billion (including $23.3 billion originated by other entities) and $96.9 billion (including $18.0 billion originated by other entities), of residential first mortgages and commercial mortgages into mortgage-backed securities issued through Fannie Mae, Freddie Mac, Government National Mortgage Association, Bank of America, N.A. and Banc of America Mortgage Securities. At December 31, 2005 and 2004, the Corporation retained $7.2 billion (including $2.4 billion issued prior to 2005) and $9.2 billion (including $1.2 billion issued prior to 2004) of securities. At December 31, 2005, these retained interests were valued using quoted market prices. In 2005, the Corporation reported $577 million in gains on loans converted into securities and sold, of which gains of $592 million were from loans originated by the Corporation and losses of $15 million were from loans originated by other entities. In 2004, the Corporation reported $952 million in gains on loans converted into securities and sold, of which gains of $886 million were from loans originated by the Corporation and gains of $66 million were from loans originated by other entities. At December 31, 2005, the Corporation had recourse obligations of $471 million with varying terms up to seven years on loans that had been securitized and sold. In 2005 and 2004, the Corporation purchased $19.6 billion and $31.1 billion of mortgage-backed securities from third parties and resecuritized them. Net gains, which include net interest income earned during the holding period, totaled $13 million and $55 million. The Corporation did not retain any of the securities issued in these transactions. 116 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The Corporation has retained MSRs from the sale or securitization of mortgage loans. Servicing fee and ancillary fee income on all mortgage loans serviced, including securitizations, was $789 million and $568 million in 2005 and 2004. The following table presents activity in MSRs in 2005 and 2004. Effective June 1, 2004, Excess Spread Certificates (the Certificates) were converted to MSRs. (Dollars in millions) 2005 2004 Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,481 $ 479 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of MSRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation adjustment of MSRs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 (637) (176) 228 3,035(1) (360) — (673) Balance, December 31(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,806 $2,481 (1) Includes $2.2 billion of Excess Spread Certificates converted to MSRs on June 1, 2004. (2) For 2005 and 2004, includes $291 million and $(210) million related to change in value attributed to SFAS 133 hedged MSRs and $63 million and $463 million of impairment. (3) Net of impairment allowance of $257 million and $361 million for 2005 and 2004. The estimated fair value of MSRs was $2.8 billion and $2.5 billion at December 31, 2005 and 2004. The key economic assumptions used in valuations of MSRs include modeled prepayment rates and resultant expected weighted average lives of the MSRs and the option adjusted spread (OAS) levels. An OAS model runs multiple interest rate scenarios and projects prepayments specific to each one of those interest rate scenarios. As of December 31, 2005, the modeled weighted average lives of MSRs related to fixed and adjustable rate loans (including hybrid ARMs) were 4.94 years and 3.03 years. A decrease of 10 and 20 percent in modeled prepayments would extend the expected weighted average lives for MSRs related to fixed rate loans to 5.26 years and 5.63 years, and would extend the expected weighted average lives for MSRs related to adjustable rate loans to 3.30 years and 3.63 years. The expected extension of weighted average lives would increase the value of MSRs by a range of $126 million to $269 million. An increase of 10 and 20 percent in modeled prepayments would reduce the expected weighted average lives for MSRs related to fixed rate loans to 4.65 years and 4.40 years, and would reduce the expected weighted average lives for MSRs related to adjustable rate loans to 2.81 years and 2.62 years. The expected reduction of weighted average lives would decrease the value of MSRs by a range of $112 million to $212 million. A decrease of 100 and 200 basis points (bps) in the OAS level would result in an increase in the value of MSRs ranging from $97 million to $202 million, and an increase of 100 and 200 bps in the OAS level would result in a decrease in the value of MSRs ranging from $90 million to $175 million. For purposes of evaluating and measuring impairment, the Corporation stratifies the portfolio based on the predominant risk characteristics of loan type and note rate. Indicated impairment, by risk stratification, is recognized as a reduction in Mortgage Banking Income, through a valuation allowance, for any excess of adjusted carrying value over estimated fair value. Other Securitizations As a result of the FleetBoston Merger in 2004, the Corporation acquired an interest in several credit card, home equity loan and commercial loan securitization vehicles, which had aggregate debt securities outstanding of $4.1 billion as of December 31, 2005. At December 31, 2005 and 2004, the Corporation retained investment grade securities of $4.4 billion (including $2.6 billion issued in 2005) and $2.9 billion, which are valued using quoted market prices, in the AFS securities portfolio. At December 31, 2005 there were no recognized servicing assets associated with these securitization transactions. 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 will only be paid if over-collateralization is not sufficient to absorb losses and certain other conditions are met. The Corporation projects no payments will be due over the remaining life of the contract, which is less than one year. 117 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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(1) Subprime Consumer Finance(2) Automobile Loans Commercial Loans (Dollars in millions) 2005 2004 2005 2004 2005 2004 2005 2004 Carrying amount of residual interests (at fair value)(3) Balance of unamortized securitized loans . . . . . . . . . . . . . . . . . . Weighted average life to call or maturity (in years)(4) . . . . . . . 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(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 $ 349 $ 290 $ 313 $ 93 $ 34 $ 2,237 0.5 12.1% 6,903 1.2 13.7% 2,667 0.8 4,892 1.3 3,996 1.6 1,644 1.4 26.3-28.9% 28.3-32.7% 17.6-25.5% 24.9% 92 $ 130 3,337 1.8 1,904 1.8 25.8% 26.0% 2 $ 3 (2) (3) 1 $ 2 (1) (2) 4.0-4.3% 5.3-9.7% 37.6 — $ — 27.0-40.8 1 $ — — $ — $ — $ — 11 (9) (17) 3.9-5.6% 5.1-11.3% (8) (9) 1 (1) (1) 1.8-1.8% — — (1) 1.6% 1 — (1) 0.4% 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) . . . . . . . . . . . . 3 $ 8 (3) (8) 18 $ 47 (15) (27) 12.0% 6.0-12.0% 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 . . . . . . . . . . . . . . . . — — — — $ — — — 7 $ 18 (7) (18) 30.0% 7 $ 27 $ 71 (27) (68) 30.0% 15.0-20.0% 20.0% 12.3% 12.3% 1 $ 2 (1) (2) 3 $ 6 (2) (6) 15 (6) (15) 5 $ 6 $ 11 (5) (10) 12 (6) (12) 3 $ 5 (2) (5) 1 $ 1 (1) (1) 1 $ 1 (1) (1) 1 2 (1) (2) 2 2 (1) (1) 0.4% 1 2 (1) (2) (1) The impact of changing residual cash flows discount rates is immaterial. (2) Subprime consumer finance includes subprime real estate loan securitizations, which are serviced by third parties. (3) Residual interests include interest-only strips, one or more subordinated tranches, accrued interest receivable, and in some cases, a cash reserve account. (4) Before any optional clean-up calls are executed, economic analysis will be performed. (5) Annual rates of expected credit losses are presented for credit card, home equity lines and commercial securitizations. Cumulative lifetime rates of expected credit losses (incurred plus projected) are presented for subprime consumer finance securitizations and auto securitizations. The sensitivities in the preceding table 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 sensitivities. Additionally, the Corporation has the ability to hedge interest rate risk associated with retained residual positions. The above sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk. Static pool net credit losses are considered in determining the value of retained interests. Static pool net credit losses include actual losses incurred plus projected credit losses divided by the original balance of each securitization pool. For auto loan securitizations, weighted average static pool net credit losses for securitizations entered into in 2005 were 1.77 percent for the year ended December 31, 2005. For securitizations entered into in 2004, the weighted average static pool net credit losses were 1.79 percent for the year ended December 31, 2005, and 1.63 percent for the year ended December 31, 2004. For the subprime consumer finance securitizations, weighted average static pool net credit losses for securitizations entered into in 2001 were 5.50 percent for the year ended December 31, 2005, and 5.93 percent for the year ended December 31, 2004. For securitizations entered into in 1999, the weighted average static pool net credit losses were 9.16 percent for the year ended December 31, 2005, and 12.22 percent for the year ended December 31, 2004. Proceeds from collections reinvested in revolving credit card securitizations were $2.0 billion and $6.8 billion in 2005 and 2004. Credit card servicing fee income totaled $97 million and $134 million in 2005 and 2004. Other cash flows received on retained interests, such as cash flows from interest-only strips, were $206 million and $345 million in 2005 and 2004, loan securitizations were $8.7 billion and $7.5 billion in 2005 and 2004. Servicing fees and other cash flows received on retained interests, such as cash flows from interest-only strips, were $3 million and $34 million in 2005, and $4 million and $11 million in 2004 for commercial loan securitizations. for credit card securitizations. Proceeds from collections reinvested in revolving commercial The Corporation reviews its loans and leases portfolio on a managed basis. Managed loans and leases are defined as on-balance sheet Loans and Leases as well as loans in revolving securitizations, which include credit cards, home equity lines and commercial loans. New advances on accounts for which previous loan balances were sold to the securitization trusts will be recorded on the Corporation’s Consolidated Balance Sheet after the revolving period of the securitization, which has the effect of increasing Loans and Leases on the Corporation’s Consolidated Balance Sheet and increasing Net 118 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Interest Income and charge-offs, with a corresponding reduction in Noninterest Income. Portfolio balances, delinquency and historical loss amounts of the managed loans and leases portfolio for 2005 and 2004 were as follows: December 31, 2005 December 31, 2004 (Restated) (Dollars in millions) Residential mortgage . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . Total Principal Amount of Loans and Leases $182,596 60,785 62,553 45,490 6,725 Total consumer . . . . . . . . . . . . . . . . . . . . 358,149 Commercial—domestic . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . 142,437 35,766 20,705 21,330 Total commercial . . . . . . . . . . . . . . . . . . . 220,238 Total managed loans and Principal Amount of Accruing Loans and Leases Past Due 90 Days or More(1) $ — 1,217 3 75 15 1,310 117 4 15 32 168 Principal Amount of Nonperforming Loans and Leases Total Principal Amount of Loans and Leases Principal Amount of Accruing Loans and Leases Past Due 90 Days or More(1) Principal Amount of Nonperforming Loans and Leases $ 570 — 117 37 61 785 581 49 62 34 726 $178,079 58,629 50,756 40,513 7,439 335,416 125,432 32,319 21,115 18,401 197,267 $ — 1,223 3 58 23 1,307 121 1 14 2 138 $ 554 — 66 33 85 738 855 87 266 267 1,475 leases . . . . . . . . . . . . . . . . . . . . . . . . 578,387 $1,478 $1,511 532,683 $1,445 $2,213 Loans in revolving securitizations . . . . . . (4,596) Total held loans and leases . . . $573,791 (10,870) $521,813 (Dollars in millions) Year Ended December 31, 2005 Year Ended December 31, 2004 (Restated) Average Loans and Leases Outstanding Loans and Leases Net Losses Net Loss Ratio(2) Average Loans and Leases Outstanding Loans and Leases Net Losses Net Loss Ratio(2) Residential mortgage . . . . . . . . . . . . . . . . . Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity lines . . . . . . . . . . . . . . . . . . . . Direct/Indirect consumer . . . . . . . . . . . . . . Other consumer . . . . . . . . . . . . . . . . . . . . . . $173,773 59,048 56,842 44,981 6,908 Total consumer . . . . . . . . . . . . . . . . . . . . 341,552 Commercial—domestic . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . Commercial lease financing . . . . . . . . . . . Commercial—foreign . . . . . . . . . . . . . . . . . 130,870 34,304 20,441 18,491 Total commercial . . . . . . . . . . . . . . . . . . . 204,106 Total managed loans and $ 27 4,086 31 248 275 4,667 157 — 231 (72) 316 0.02% 6.92 0.05 0.55 3.98 1.37 0.12 — 1.13 (0.39) 0.16 $167,270 50,296 39,942 38,078 7,717 303,303 117,422 28,085 17,483 16,505 179,495 $ 36 2,829 15 208 193 3,281 184 (3) 9 173 363 0.02% 5.62 0.04 0.55 2.50 1.08 0.16 (0.01) 0.05 1.05 0.20 leases . . . . . . . . . . . . . . . . . . . . . . . . 545,658 $4,983 0.91% 482,798 $3,644 0.75% Loans in revolving securitizations . . . . . . (8,440) Total held loans and leases . . . . . . . . . . . . . . . . . . . . $537,218 (10,181) $472,617 (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. 119 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Variable Interest Entities At December 31, 2005, the assets and liabilities of the Corporation’s multi-seller asset-backed commercial paper conduits that have been consolidated in accordance with FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” were reflected in AFS Securities, Other Assets, and Commercial Paper and Other Short-term Borrowings in Global Capital Markets and Investment Banking. As of December 31, 2005 and 2004, the Corporation held $6.6 billion and $7.7 billion of assets in these entities while the Corporation’s maximum loss exposure associated with these entities including unfunded lending commitments was approximately $8.0 billion and $9.4 billion. The Corporation also had contractual relationships with other consolidated VIEs that engage in leasing or lending activities or real estate joint ventures. As of December 31, 2005 and 2004, the amount of assets of these entities was $750 million and $560 million, and the Corporation’s maximum possible loss exposure was $212 million and $132 million. Additionally, the Corporation had significant variable interests in other VIEs that it did not consolidate because it was not deemed to be the primary beneficiary. In such cases, the Corporation does not absorb the majority of the entities’ expected losses nor does it receive a majority of the entities’ expected residual returns. These entities typically support the financing needs of the Corporation’s customers by facilitating their access to the commercial paper markets. The Corporation functions as administrator and provides either liquidity and letters of credit, or derivatives to the VIE. The Corporation also provides asset management and related services to other special purpose vehicles that engage in lending, investing, or real estate activities. Total assets of these entities at December 31, 2005 and 2004 were approximately $32.5 billion and $32.9 billion. Revenues associated with administration, liquidity, letters of credit and other services were approximately $121 million and $154 million for the year ended December 31, 2005 and 2004. At December 31, 2005 and 2004, the Corporation’s maximum loss exposure associated with these VIEs was approximately $26.7 billion and $25.0 billion, which is net of amounts syndicated. Management does not believe losses resulting from its involvement with the entities discussed above will be material. See Note 1 of the Consolidated Financial Statements for additional discussion of special purpose financing entities. Note 10—Goodwill and Other Intangibles The following table presents allocated Goodwill at December 31, 2005 and 2004 for each business segment and All Other. The increases from December 31, 2004 were primarily due to the $65 million of goodwill adjustments related to National Processing, Inc. (NPC) and the acquisitions of Works, Inc., which added approximately $49 million to Goodwill. (Dollars in millions) December 31 2005 2004 Global Consumer and Small Business Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,491 $18,453 Global Business and Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,707 Global Capital Markets and Investment Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 Global Wealth and Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,338 All Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 16,750 4,542 5,333 238 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,354 $45,262 The gross carrying value and accumulated amortization related to core deposit intangibles and other intangibles at December 31, 2005 and 2004 are presented below: (Dollars in millions) December 31 2005 2004 Gross Carrying Value Accumulated Amortization Gross Carrying Value Accumulated Amortization Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,661 2,353 $6,014 $1,881 939 $2,820 $3,668 2,256 $5,924 $1,354 683 $2,037 As a result of the FleetBoston Merger, the Corporation recorded $2.2 billion of core deposit intangibles, $660 million of purchased credit card relationship intangibles and $409 million of other customer relationship intangibles. The weighted average amortization period of these intangibles is approximately nine years. As a result of the acquisition of NPC during 2004, the Corporation allocated $479 million to other intangibles with a weighted average amortization period of approximately 10 years. 120 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Amortization expense on core deposit intangibles and other intangibles was $809 million, $664 million and $217 million for 2005, 2004, and 2003, respectively. The increase for the year ended December 31, 2005 was primarily due to the FleetBoston Merger. The Corporation estimates that aggregate amortization expense will be $746 million, $599 million, $486 million, $385 million and $311 million for 2006, 2007, 2008, 2009 and 2010, respectively. Note 11—Deposits The Corporation had domestic certificates of deposit of $100 thousand or more totaling $47.0 billion and $56.2 billion at December 31, 2005 and 2004. The Corporation had other domestic time deposits of $100 thousand or more totaling $1.4 billion and $1.1 billion at December 31, 2005 and 2004. Foreign certificates of deposit and other foreign time deposits of $100 thousand or more totaled $38.8 billion and $28.6 billion at December 31, 2005 and 2004. The following table presents the maturities of domestic and foreign certificates of deposit of $100 thousand or more, and of other domestic time deposits of $100 thousand or more at December 31, 2005. (Dollars in millions) Domestic certificates of deposit of $100 thousand or more . . . . . Domestic other time deposits of $100 thousand or more . . . . . . . Foreign certificates of deposit and other time deposits of $100 Three months or less $19,922 99 Over three months to six months Over six months to twelve months Thereafter $6,023 991 Total $46,978 1,408 $12,271 113 $8,762 205 208 thousand or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,595 1,994 989 38,786 At December 31, 2005, the scheduled maturities for total time deposits were as follows: (Dollars in millions) Domestic Foreign Total Due in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,461 12,103 3,521 2,650 1,856 1,123 $ 60,733 100 245 26 1 1,182 $ 162,194 12,203 3,766 2,676 1,857 2,305 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,714 $62,287 $185,001 Note 12—Short-term Borrowings and Long-term Debt Short-term Borrowings Bank of America Corporation and certain other subsidiaries issue commercial paper in order to meet short-term funding needs. Commercial paper outstanding at December 31, 2005 was $25.0 billion compared to $25.4 billion at December 31, 2004. Bank of America, N.A. maintains a domestic program to offer up to a maximum of $60.0 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 $22.5 billion at December 31, 2005 compared to $9.6 billion at December 31, 2004. 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 Borrowings on the Consolidated Balance Sheet. 121 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Long-term Debt The following table presents Long-term Debt at December 31, 2005 and 2004: (Dollars in millions) Notes issued by Bank of America Corporation(1) Senior notes: December 31 2005 2004 (Restated) Fixed, ranging from 0.73% to 9.25%, due 2006 to 2043 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,357 Floating, ranging from 0.20% to 6.41%, due 2006 to 2041 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,050 34,218 15,452 Subordinated notes: Fixed, ranging from 3.95% to 10.20%, due 2006 to 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating, 4.29%, due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,596 10 22,688 10 Junior subordinated notes (related to trust preferred securities): Fixed, ranging from 5.25% to 11.45%, due 2026 to 2035 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating, ranging from 4.87% to 5.54%, due 2027 to 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total notes issued by Bank of America Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes issued by Bank of America, N.A. and other subsidiaries(1) Senior notes: Fixed, ranging from 0.93% to 17.20%, due 2006 to 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating, ranging from 1.00% to 5.49%, due 2006 to 2051 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes: Fixed, ranging from 5.75% to 7.38%, due 2006 to 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating, 4.54%, due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total notes issued by Bank of America, N.A. and other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . Notes issued by NB Holdings Corporation(1) Junior subordinated notes (related to trust preferred securities): Fixed, ranging from 7.95% to 8.06%, due 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating, 5.16%, due 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total notes issued by NB Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,337 1,922 7,582 1,957 88,272 81,907 1,096 4,985 1,871 8 7,960 515 258 773 927 5,569 2,186 8 8,690 515 258 773 Other debt Advances from the Federal Home Loan Bank of Atlanta Fixed, ranging from 4.16% to 5.87%, due 2006 to 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,750 2,750 Advances from the Federal Home Loan Bank of New York Fixed, ranging from 4.00% to 8.29%, due 2006 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from the Federal Home Loan Bank of Seattle Fixed, ranging from 5.45% to 7.42%, due 2006 to 2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances from the Federal Home Loan Bank of Boston Fixed, ranging from 1.00% to 7.72%, due 2006 to 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 578 178 41 638 2,081 230 47 Total other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,843 5,746 Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,848 $97,116 (1) Rates and maturity dates reflect outstanding debt at December 31, 2005. 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 subordinated notes. The notes may be denominated in U.S. dollars or foreign currencies. At December 31, 2005 and 2004, the amount of foreign currency denominated debt translated into U.S. dollars included in total long-term debt was $23.1 billion and $16.2 billion. Foreign currency contracts are used to convert certain foreign currency denominated debt into U.S. dollars. 122 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) At December 31, 2005 and 2004, Bank of America Corporation was authorized to issue approximately $27.0 billion and $37.1 billion of additional corporate debt and other securities under its existing shelf registration statements. At December 31, 2005 and 2004, Bank of America, N.A. was authorized to issue approximately $9.5 billion and $27.2 billion of bank notes and Euro medium-term notes. 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, 2005) were 5.22 percent, 5.53 percent and 4.31 percent, respectively, at December 31, 2005 and (based on the rates in effect at December 31, 2004) were 4.97 percent, 5.64 percent and 2.69 percent, respectively, at December 31, 2004. These obligations were denominated primarily in U.S. dollars. Aggregate annual maturities of long-term debt obligations (based on final maturity dates) at December 31, 2005 are as follows: (Dollars in millions) 2006 2007 2008 2009 2010 Thereafter Total Bank of America Corporation . . . . . . . . . . . . . . . . . . . . Bank of America, N.A. and other subsidiaries . . . . . . NB Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,834 1,615 — 2,739 $ 5,250 1,839 — 562 $ 13,998 2,345 — 71 $ 8,222 718 — 20 $ 11,442 50 — 237 $ 42,526 1,393 773 214 $ 88,272 7,960 773 3,843 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,188 $7,651 $16,414 $8,960 $11,729 $44,906 $100,848 Trust Preferred Securities Trust preferred securities (Trust Securities) are issued by the trust companies (the Trusts) that were deconsolidated by the Corporation as a result of the adoption of FIN 46R. These Trust 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). The Trusts are 100 percent owned finance subsidiaries of the Corporation. Obligations associated with these securities are included in junior subordinated notes related to Trust Securities in the Long-term Debt table on page 122. See Note 15 of the Consolidated Financial Statements for a discussion regarding the treatment for regulatory capital purposes of the Trust Securities. At December 31, 2005, the Corporation had 32 Trusts which have issued Trust Securities to the public. Certain of the Trust 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 Securities in the Notes. Each issue of the Notes has an interest rate equal to the corresponding Trust 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 provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred, and the Corporation’s ability to pay dividends on its common and preferred stock will be restricted. The Trust Securities are subject to mandatory redemption 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 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 Securities. 123 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following table is a summary of the outstanding Trust Securities and the Notes at December 31, 2005 as originated by Bank of America Corporation and the predecessor banks. (Dollars in millions) Issuer Issuance Date Bank of America Capital Trust I Capital Trust II Capital Trust III Capital Trust IV Capital Trust V Capital Trust VI Capital Trust VII Capital Trust VIII NationsBank Capital Trust II Capital Trust III December 2001 January 2002 August 2002 April 2003 November 2004 February 2005 August 2005 August 2005 December 1996 February 1997 Capital Trust IV April 1997 BankAmerica Institutional Capital A Institutional Capital B Capital II Capital III November 1996 November 1996 December 1996 January 1997 Barnett Capital I Capital II Capital III Fleet Capital Trust II Capital Trust V Capital Trust VII Capital Trust VIII Capital Trust IX BankBoston Capital Trust I Capital Trust II Capital Trust III November 1996 December 1996 January 1997 December 1996 December 1998 September 2001 March 2002 July 2003 November 1996 December 1996 June 1997 Capital Trust IV June 1998 Aggregate Principal Amount of Trust Securities Aggregate Principal Amount of the Notes Stated Maturity of the Notes Per Annum Interest Rate of the Notes Interest Payment Dates Redemption Period $ 575 900 500 375 518 1,000 1,461 530 $ 593 928 516 387 534 1,031 1,507 546 December 2031 February 2032 August 2032 May 2033 November 2034 March 2035 August 2035 August 2035 2/1, 5/1,8/1,11/1 7.00% 3/15,6/15,9/15,12/15 7.00 7.00 5.88 6.00 5.63 5.25 6.00 On or after 12/15/06 On or after 2/01/07 2/15, 5/15,8/15,11/15 On or after 8/15/07 On or after 5/01/08 On or after 11/03/09 Any time Any time On or after 8/25/10 2/1, 5/1,8/1,11/1 2/3, 5/3,8/3,11/3 3/8,9/8 2/10,8/10 2/25,5/25,8/25,11/25 365 494 498 450 300 450 400 300 200 250 250 250 500 534 175 250 250 250 250 376 509 December 2026 January 2027 513 April 2027 December 2026 December 2026 December 2026 January 2027 December 2026 December 2026 February 2027 7.83 3-mo. LIBOR +55 bps 8.25 8.07 7.70 8.00 3-mo. LIBOR +57 bps 8.06 7.95 3-mo. LIBOR +62.5 bps 6/15,12/15 1/15,4/15,7/15,10/15 On or after 12/15/06 On or after 1/15/07 4/15,10/15 On or after 4/15/07 6/30,12/31 6/30,12/31 6/15,12/15 On or after 12/31/06 On or after 12/31/06 On or after 12/15/06 1/15,4/15, 7/15,10/15 On or after 1/15/02 6/1,12/1 6/1,12/1 2/1,5/1,8/1,11/1 On or after 12/01/06 On or after 12/01/06 On or after 2/01/07 December 2026 December 2028 December 2031 March 2032 August 2033 7.92 3-mo. LIBOR +100 bps 7.20 7.20 6.00 6/15,12/15 On or after 12/15/06 3/18, 6/18,9/18, 12/18 On or after 12/18/03 3/15, 6/15,9/15, 12/15 On or after 9/17/06 3/15, 6/15,9/15,12/15 On or after 3/08/07 On or after 7/31/08 2/1, 5/1,8/1,11/1 December 2026 December 2026 June 2027 258 June 2028 8.25 7.75 3-mo. LIBOR +75 bps 3-mo. LIBOR +60 bps 6/15,12/15 6/15,12/15 On or after 12/15/06 On or after 12/15/06 3/15, 6/15,9/15,12/15 On or after 6/15/07 3/8, 6/8,9/8,12/8 On or after 6/08/03 464 309 464 412 309 206 258 258 258 515 551 180 258 258 258 Summit Capital Trust I Progress Capital Trust I Capital Trust II Capital Trust III March 1997 150 155 March 2027 8.40 3/15,9/15 On or after 3/15/07 Capital Trust IV December 2002 June 1997 July 2000 November 2002 9 6 10 5 9 6 10 5 June 2027 July 2030 November 2032 January 2033 10.50 11.45 3-mo. LIBOR +33.5 bps 3-mo. LIBOR +33.5 bps 6/1,12/1 1/19,7/19 2/15,5/15,8/15,11/15 On or after 6/01/07 On or after 7/19/10 On or after 11/15/07 1/7, 4/7,7/7,10/7 On or after 1/07/08 Total $12,455 $12,841 124 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 13—Commitments and Contingencies In the normal course of business, the Corporation enters into a number 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 instruments recorded on the Corporation’s Consolidated Balance Sheet. Credit Extension Commitments The Corporation enters into commitments to extend credit such as loan commitments, SBLCs and commercial letters of credit to meet the financing needs of its customers. The outstanding unfunded lending commitments shown in the following table have been reduced by amounts participated to other financial institutions of $30.4 billion and $23.4 billion at December 31, 2005 and 2004. The carrying amount for these commitments, which represents the liability recorded related to these instruments, at December 31, 2005 and 2004 was $458 million and $520 million. At December 31, 2005, the carrying amount included deferred revenue of $63 million and a reserve for unfunded lending commitments of $395 million. At December 31, 2004, the carrying amount included deferred revenue of $118 million and a reserve for unfunded lending commitments of $402 million. (Dollars in millions) December 31 2005 2004 Loan commitments(1) Home equity lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit and financial guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $277,757 $245,042 60,128 42,850 5,653 78,626 43,095 5,154 Legally binding commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404,632 192,968 353,673 165,694 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $597,600 $519,367 (1) At December 31, 2005 and 2004, there were equity commitments of $1.4 billion and $2.0 billion, related to obligations to further fund Principal Investing equity investments. 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 deterioration in the borrowers’ ability to pay. The Corporation issues SBLCs and financial guarantees to support the obligations of its customers to beneficiaries. 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 creditworthiness of the customer as well as SBLC exposure; however, if the customer fails to perform the specified obligation to the beneficiary, the beneficiary may draw upon the SBLC by presenting documents that are in compliance with the letter of credit terms. In that event, the Corporation either repays the money borrowed 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 contractually permitted, 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 binding. 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 associated with these types of instruments that include 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 requirements. For each of these types of instruments, the Corporation’s maximum exposure to credit loss is represented by the contractual amount of these instruments. Other Commitments At December 31, 2005 and 2004, charge cards (nonrevolving card lines) to individuals and government entities guaranteed by the U.S. government in the amount of $9.4 billion and $10.9 billion were not included in credit card 125 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) line commitments in the previous table. The outstanding balances related to these charge cards were $171 million and $205 million at December 31, 2005 and 2004. At December 31, 2005, the Corporation had whole mortgage loan purchase commitments of $4.0 billion, all of which will settle in the first quarter of 2006. At December 31, 2004, the Corporation had whole mortgage loan purchase commitments of $3.3 billion, all of which settled in the first quarter of 2005. At December 31, 2005 and 2004, 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 $1.3 billion in 2006, $1.1 billion in 2007, $1.1 billion in 2008, $799 million in 2009, $650 million in 2010 and $3.5 billion for all years thereafter. In 2005, the Corporation entered into an agreement for the committed purchase of retail automotive loans over a five-year period, ending June 30, 2010. In 2005, the Corporation purchased $5.0 billion of such loans and at December 31, 2005, the remaining commitment amount was $47.0 billion. Under the agreement, the Corporation is committed to purchase up to $7.0 billion of such loans for the period January 1, 2006 through June 30, 2006 and up to $10.0 billion in each of the agreement’s next four fiscal years. Other Guarantees The Corporation sells products that offer book value protection primarily to plan sponsors of Employee Retirement Income Security Act of 1974 (ERISA) governed pension plans, such as 401(k) plans and 457 plans. 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 manage its exposure, 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 structural protections, are designed to provide adequate buffers and guard against payments even under extreme stress scenarios. These guarantees are booked as derivatives and marked to market in the trading portfolio. At December 31, 2005 and 2004, the notional amount of these guarantees totaled $34.0 billion and $26.3 billion with estimated maturity dates between 2006 and 2035. As of December 31, 2005 and 2004, the Corporation has not 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, 2005 and 2004, the notional amount of these guarantees totaled $6.5 billion and $8.1 billion. These guarantees have various maturities ranging from 2006 to 2016. At December 31, 2005 and 2004, the Corporation had not made a payment under these products, and management believes that the probability of payments under these guarantees is remote. The Corporation also has written put options on highly rated fixed income securities. Its obligation under these agreements is to buy back the assets at predetermined contractual yields in the event of a severe market disruption in the short-term funding market. These agreements have various maturities ranging from two to seven years, and the pre-determined yields are based on the quality of the assets and the structural elements pertaining to the market disruption. The notional amount of these put options was $803 million and $653 million at December 31, 2005 and 2004. Due to the high quality of the assets and various structural protections, management believes that the probability of incurring a loss under these agreements is remote. In the ordinary course of business, the Corporation enters into various agreements that contain indemnifications, such as tax indemnifications, 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 126 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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 agreements, including lease end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, sold risk participation swaps and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $1.8 billion and $2.1 billion at December 31, 2005 and 2004. The estimated maturity dates of these obligations are between 2006 and 2033. The Corporation has made no material payments under these guarantees. The Corporation provides credit and debit card processing services to various merchants, processing credit and debit card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of up to four months after the date a transaction is processed or the delivery of the product or service to present a chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the merchant, it bears the loss for the amount paid to the cardholder. In 2005 and 2004, the Corporation processed $352.9 billion and $143.1 billion of transactions and recorded losses as a result of these chargebacks of $13 million and $6 million. At December 31, 2005 and 2004, the Corporation held as collateral approximately $248 million and $203 million of merchant escrow deposits which the Corporation has the right to set off against amounts due from the individual merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant. Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa and MasterCard for the last four months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of December 31, 2005 and 2004, the maximum potential exposure totaled approximately $118.2 billion and $93.4 billion. Within the Corporation’s brokerage business, the Corporation has contracted with a third party to provide clearing services that include underwriting margin loans to the Corporation’s clients. This contract stipulates that the Corporation will indemnify the third party for any margin loan losses that occur in their issuing margin to the Corporation’s clients. The maximum potential future payment under this indemnification was $1.1 billion and $1.2 billion at December 31, 2005 and 2004. Historically, any payments made under this indemnification have been immaterial. As these margin loans are highly collateralized by the securities held by the brokerage clients, the Corporation has assessed the probability of making such payments in the future as remote. This indemnification would end with the termination of the clearing contract. For additional information on recourse obligations related to residential mortgage loans sold and other guarantees related to securitizations, see Note 9 of the Consolidated Financial Statements. Litigation and Regulatory Matters In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. Certain of these actions and proceedings are based on alleged violations of consumer protection, securities, environmental, banking, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries. In the ordinary course of business, the Corporation and its subsidiaries are also subject to regulatory examinations, information gathering requests, inquiries and investigations. Certain subsidiaries of the Corporation are registered broker/dealers or investment advisors and are subject to regulation by the SEC, the National Association of Securities Dealers, the New York Stock Exchange and state securities regulators. In connection with formal and informal inquiries by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their regulated activities. In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the cases present novel legal theories or involve a large number of parties, the Corporation cannot state with confidence what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. 127 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) In accordance with SFAS No. 5, “Accounting for Contingencies”, the Corporation establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, the Corporation does not establish reserves. In some of the matters described below, including but not limited to the Parmalat Finanziaria, S.p.A. matter, loss contingencies are not both probable and estimable in the view of management, and, accordingly, reserves have not been established for those matters. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending litigation and regulatory matters, including the litigation and regulatory matters described below, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, but may be material to the Corporation’s operating results for any particular reporting period. Adelphia Communications Corporation (Adelphia) Bank of America, N.A. (BANA) and Banc of America Securities LLC (BAS) are defendants, among other defendants, in a putative class action and individual civil actions relating to Adelphia. The first of these actions was filed in June 2002; these actions have been consolidated for pre-trial purposes in the U.S. District Court for the Southern District of New York. BAS was a member of seven underwriting syndicates of securities issued by Adelphia, and BANA was an agent and/or lender in connection with five credit facilities in which Adelphia subsidiaries were borrowers. Fleet National Bank (FNB) and Fleet Securities, Inc. (FSI) are also named as defendants in certain of the actions. FSI was a member of three underwriting syndicates of securities issued by Adelphia, and FNB was a lender in connection with four credit facilities in which Adelphia subsidiaries were borrowers. The complaints allege claims under the Securities Act of 1933, the Securities Exchange Act of 1934, and various state law theories. The complaints seek damages of unspecified amounts. The court has granted the motions of BANA, BAS and other bank defendants to dismiss certain class plaintiffs’ claims on statute of limitations grounds. The court permitted plaintiffs who purchased bonds in a 2001 $750 million bond offering, of which BAS underwrote fifty percent, to assert claims against BAS relating to that offering and certain other offerings made under the same registration statement. The court has also granted in part and denied in part defendants’ motions to dismiss certain of the individual actions. Other motions to dismiss the class action and certain of the individual actions remain pending. BANA, BAS, FNB, and FSI are also defendants in an adversary proceeding brought by the Official Committee of Unsecured Creditors on behalf of Adelphia and Adelphia as co-plaintiffs that had been pending in the U.S. Bankruptcy Court for the Southern District of New York. The lawsuit names over 400 defendants and asserts over 50 claims under federal statutes, including the Bank Holding Company Act, state common law, and various provisions of the Bankruptcy Code. The plaintiffs seek avoidance and recovery of payments, equitable subordination, disallowance and re-characterization of claims, and recovery of damages in an unspecified amount. The Official Committee of Equity Security Holders of Adelphia has intervened in this proceeding and filed its own complaint, which is similar to the unsecured creditors’ committee complaint and also asserts claims under RICO and additional state law theories. BANA, BAS and FSI have filed motions to dismiss both complaints. On February 9, 2006, the U.S. District Court for the Southern District of New York overseeing the Adelphia securities litigation granted the motions of the adversary defendants to withdraw the adversary proceeding from the bankruptcy court, except with respect to the pending motions to dismiss. Data Treasury The Corporation and BANA have been named as defendants in an action filed by Data Treasury Corporation in the U.S. District Court for the Eastern District of Texas. Plaintiff alleges that defendants have “provided, sold, installed, utilized, and assisted others to use and utilize image-based banking and archival solutions” in a manner that infringes United States Patent Nos. 5,910,988 and 6,032,137. Plaintiff seeks unspecified damages and injunctive relief against the alleged infringement. The court has scheduled a trial of this action for October 2, 2007. The Corporation and BANA have been named as defendants, along with 54 other defendants, in an action filed by Data Treasury Corporation in the U.S. District Court for the Eastern District of Texas. Plaintiff alleges that the Corporation and BANA, among other defendants, are “making, using, selling, offering for sale, and/or importing into the United States, directly, contributory, and/or by inducement, without authority, products and services that fall within the scope of the claims of” United States Patent Nos. 5,265,007; 5,583,759; 5,717,868; and 5,930,778. Plaintiff seeks unspecified damages and injunctive relief against the alleged infringement. In re Initial Public Offering Securities Beginning in 2001, Robertson Stephens, Inc. (an investment banking subsidiary of FleetBoston that ceased operations during 2002), BAS, other underwriters, and various issuers and others, were named as defendants in 128 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) purported class action lawsuits alleging violations of federal securities laws in connection with the underwriting of initial public offerings (IPOs) and seeking unspecified damages. Robertson Stephens, Inc. and BAS were named in certain of the 309 purported class actions that have been consolidated in the U.S. District Court for the Southern District of New York as In re Initial Public Offering Securities Litigation. The plaintiffs contend that the defendants failed to make certain required disclosures and manipulated prices of IPO securities through, among other things, alleged agreements with institutional investors receiving allocations to purchase additional shares in the aftermarket, and false and misleading analyst reports. On October 13, 2004, the court granted in part and denied in part plaintiffs’ motions to certify as class actions six of the 309 cases. On June 30, 2005, the U.S. Court of Appeals for the Second Circuit granted the underwriter defendants’ petition for permission to appeal the court’s class certification order. The appeal is pending. The plaintiffs have reached a settlement with 298 of the issuer defendants, in which the issuer defendants guaranteed that the plaintiffs will receive at least $1.0 billion in the settled actions and assigned to the plaintiffs the issuers’ interest in all claims against the underwriters for “excess compensation.” On February 15, 2005, the U.S. District Court for the Southern District of New York conditionally approved the issuer defendants’ settlement. A fairness hearing is scheduled for April 24, 2006. Robertson Stephens, Inc. and other underwriters also have been named as defendants in putative class action lawsuits filed in the U.S. District Court for the Southern District of New York under the federal antitrust laws alleging that the underwriters conspired to manipulate the aftermarkets for IPO securities and to extract anticompetitive fees in connection with IPOs. The complaint seeks declaratory relief and unspecified treble damages. On September 28, 2005, the Court of Appeals for the Second Circuit reversed the district court’s dismissal of the antitrust class actions, remanding the cases to the district court for further proceedings. The defendants have filed a petition for certiorari with the United States Supreme Court, which is pending. Interchange Anti-trust Litigation The Corporation and certain of its subsidiaries are defendants in putative class actions that have been transferred for coordinated pre-trial proceedings to the U.S. District Court for the Eastern District of New York, under the caption In Re Payment Card Interchange Fee and Merchant Discount Anti-Trust Litigation. Defendants include other financial institutions and, among others, Visa and MasterCard. Plaintiffs seek certification of a class of retail merchants and allege, among other claims, that defendants conspired to fix the level of interchange and merchant discount fees and that certain practices that prohibit merchants from charging cardholders for fees the merchant pays to the credit card companies violate the federal antitrust laws. Plaintiffs seek unspecified treble damages and injunctive relief. Miller On August 13, 1998, a predecessor of BANA was named as a defendant in a class action filed in Superior Court of California, County of San Francisco, entitled Paul J. Miller v. Bank of America, N.A., challenging its practice of debiting accounts that received, by direct deposit, governmental benefits to repay fees incurred in those accounts. The action alleges fraud, negligent misrepresentation and violations of certain California laws. On October 16, 2001, a class was certified consisting of more than one million California residents who have, had or will have, at any time after August 13, 1994, a deposit account with BANA into which payments of public benefits are or have been directly deposited by the government. The case proceeded to trial on January 20, 2004. On March 4, 2005, the trial court entered a judgment that awards the plaintiff class restitution in the amount of $284 million, plus attorneys’ fees, and provides that class members whose accounts were assessed an insufficient funds fee in violation of law suffered substantial emotional or economic harm and, therefore, are entitled to an additional $1,000 penalty. The judgment also includes injunctive relief. On May 13, 2005, BANA filed with the California Court of Appeal, First Appellate District, a notice of appeal and, on May 16, 2005, a writ of supersedeas, seeking a stay of the trial court’s judgment pending appeal. On November 22, 2005, the Court of Appeal granted BANA’s writ, staying the judgment, including the injunction, pending appeal. The appeal remains pending. Mutual Fund Operations Matters In early 2005, the Corporation entered into settlement agreements with the New York Attorney General and the SEC relating to late trading and market timing of mutual funds. The Corporation is continuing to respond to inquiries from federal and state regulatory and law enforcement agencies concerning mutual fund related matters. In addition, lawsuits seeking unspecified damages concerning mutual fund trading were brought against the Corporation and its pre-merger FleetBoston subsidiaries, including putative class actions purportedly brought on behalf 129 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) of shareholders in Nations Funds mutual funds, derivative actions brought on behalf of one or more Nations Funds mutual funds by Nations Funds shareholders, putative ERISA class actions brought on behalf of participants in Bank of America Corporation’s 401(k) plan, derivative actions brought against the Corporation’s directors on behalf of the Corporation by shareholders in the Corporation, class actions and derivative actions brought by shareholders in third- party mutual funds alleging that the Corporation or its subsidiaries facilitated improper trading in those funds, and a private attorney general action brought under California law. The lawsuits filed to date with respect to pre-merger FleetBoston subsidiaries include putative class actions purportedly brought on behalf of shareholders in Columbia mutual funds, derivative actions brought on behalf of one or more Columbia mutual funds or trusts by Columbia mutual fund shareholders, and an individual shareholder action. All lawsuits pending in federal courts with respect to alleged late trading or market timing in mutual funds have been transferred to the U.S. District Court for the District of Maryland for coordinated pre-trial proceedings under the caption In re Mutual Funds Investment Litigation, other than a putative class action complaint filed on February 22, 2006 in the U.S. District Court for the Southern District of New York alleging, among other things, market timing in the Nations Funds. Motions to remand to state court remain pending in two of those lawsuits. One lawsuit that originated in state court was removed to the U.S. District Court for the Southern District of Illinois. Pursuant to an order of the U.S. Court of Appeals for the Seventh Circuit, the U.S. District Court for the Southern District of Illinois dismissed that action. On January 6, 2006, the U.S. Supreme Court granted plaintiff’s petition for review on the issue of whether the Court of Appeals for the Seventh Circuit had appellate jurisdiction to review the remand order. On August 25, 2005, the U.S. District Court for the District of Maryland dismissed the state law claims and derivative claims filed by Janus shareholders against the Corporation and certain of its subsidiaries. The claims under Section 10(b) of the Securities Exchange Act of 1934 were not dismissed. On November 3, 2005, the court dismissed the state law claims and derivative claims filed against the Corporation and certain of its subsidiaries by shareholders in various third-party mutual funds. The claims under Section 10(b) of the Securities Exchange Act of 1934 were not dismissed. Also on November 3, 2005, the court dismissed the claims under the Securities Act of 1933, the claims under Sections 34(b) and 36(a) of the Investment Company Act of 1940 (ICA) and the state law claims against the Corporation and certain of its pre-merger FleetBoston subsidiaries. The claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 36(b) of the ICA were not dismissed. On December 15, 2005, the Corporation and its named subsidiaries entered into a settlement of the direct and derivative claims brought on behalf of the Nations Funds shareholders and the ERISA claims brought on behalf of Bank of America Corporation’s 401(k) plan participants. Among other conditions, the settlement is contingent upon a minimum threshold amount being received by the Nations Funds shareholders and/or the Nations Funds mutual funds from the previously established regulatory settlement fund consisting of $250 million in disgorgement and $125 million in civil penalties paid by the Corporation in 2005. The settlement is subject to court approval. If the settlement is approved, the Corporation and its named subsidiaries would pay settlement administration costs and fees to plaintiffs’ counsel as approved by the court. Parmalat Finanziaria S.p.A. On December 24, 2003, Parmalat Finanziaria S.p.A. was admitted into insolvency proceedings in Italy, known as “extraordinary administration.” The Corporation, through certain of its subsidiaries, including BANA, provided financial services and extended credit to Parmalat and its related entities. On June 21, 2004, Extraordinary Commissioner Dr. Enrico Bondi filed with the Italian Ministry of Production Activities a plan of reorganization for the restructuring of the companies of the Parmalat group that are included in the Italian extraordinary administration proceeding. In July 2004, the Italian Ministry of Production Activities approved the Extraordinary Commissioner’s restructuring plan, as amended, for the Parmalat group companies that are included in the Italian extraordinary administration proceeding. This plan was approved by the voting creditors of Parmalat and subsequently, on October 1, 2005, the Court of Parma, Italy issued its decision approving those claimants who would be recognized as creditors in the proceeding. Litigation and investigations relating to Parmalat are pending in both Italy and the United States, and the Corporation is responding to inquiries concerning Parmalat from regulatory and law enforcement authorities in Italy and the United States. Proceedings in Italy On May 26, 2004, the Public Prosecutor’s Office for the Court of Milan, Italy filed criminal charges against Luca Sala, Luis Moncada, and Antonio Luzi, three former employees, alleging the crime of market manipulation in connection with a press release issued by Parmalat. The Public Prosecutor’s Office also filed a related charge against the 130 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Corporation asserting administrative liability based on an alleged failure to maintain an organizational model sufficient to prevent the alleged criminal activities of its former employees. Preliminary hearings began on this charge on February 22, 2006. The main trial of the market manipulation charges against Messrs. Luzi, Moncada, and Sala began in the Court of Milan, Italy on September 28, 2005. Hearing dates in this trial are currently set through June 2006. The Corporation is participating in this trial as a party that has been damaged by the alleged actions of defendants other than its former employees, including former Parmalat officials. Additionally, pursuant to a December 19, 2005 court ruling, other third parties are participating in the trial who claim damages against BANA as a result of the alleged criminal violations of the Corporation’s former employees and other defendants. Separately, The Public Prosecutor’s Office for the Court of Parma, Italy is conducting an investigation into the collapse of Parmalat. The Corporation has cooperated, and continues to cooperate, with The Public Prosecutor’s Office with respect to this investigation. The Public Prosecutor’s Office has given notice of its intention to file charges, including a charge of the crime of fraudulent bankruptcy under Italian criminal in connection with this investigation against the same three former employees of the Corporation who are named in the Milan criminal proceedings, Messrs. Luzi, Moncada and Sala. law, Proceedings in the United States On March 5, 2004, a First Amended Complaint was filed in a putative securities class action pending in the U.S. District Court for the Southern District of New York entitled Southern Alaska Carpenters Pension Fund et al. v. Bonlat Financing Corporation et al., which names the Corporation as a defendant. The action is brought on behalf of a putative class of purchasers of Parmalat securities. The First Amended Complaint alleges causes of action against the Corporation for violations of the federal securities laws based upon the Corporation’s alleged role in the alleged Parmalat accounting fraud. This action was consolidated with several other putative class actions filed against multiple defendants, and on October 18, 2004, an Amended Consolidated Complaint was filed. Unspecified damages are being sought. On July 13, 2005, the court granted in its entirety the motion to dismiss filed by the Corporation, BANA and Banc of America Securities Limited in the consolidated putative class actions. The court granted the plaintiffs a right to file a second amended complaint. After the filing of the second amended complaint and the Corporation’s motion to dismiss such complaint, on February 9, 2006, the court granted the Corporation’s motion to dismiss in part, allowing the plaintiff to proceed on claims with respect to two transactions entered into between the Corporation and Parmalat. On February 27, 2006, the Corporation filed its answer to the second amended complaint. On October 7, 2004, Enrico Bondi filed an action in the U.S. District Court for the Western District of North Carolina on behalf of Parmalat and its shareholders and creditors against the Corporation and various related entities, entitled Dr. Enrico Bondi, Extraordinary Commissioner of Parmalat Finanziaria, S.p.A., et al. v. Bank of America Corporation, et al. (the Bondi Action). The complaint alleges federal and state RICO claims and various state law claims, including fraud. The complaint seeks damages in excess of $10.0 billion. The Bondi Action was transferred to the U.S. District Court for the Southern District of New York for coordinated pre-trial purposes with the putative class actions and other related cases against non-Bank of America defendants under the caption In re Parmalat Securities Litigation. On August 5, 2005, the U.S. District Court for the Southern District of New York granted the Corporation’s motion to dismiss the Bondi Action in part, dismissing ten of the twelve counts. After the plaintiff’s filing of a First Amended Complaint on September 9, 2005, and the Corporation’s motion to dismiss such complaint on January 31, 2006, the court granted the Corporation’s motion to dismiss in part, allowing the plaintiff to proceed on the previously dismissed claims with respect to three transactions entered into between the Corporation and Parmalat. On February 10, 2006, the Corporation filed its answer to the First Amended Complaint and also its request to file counterclaims in the Bondi Action. On November 23, 2005, the Official Liquidators of Food Holdings Limited and Dairy Holdings Limited, two entities in liquidation proceedings in the Cayman Islands, filed a complaint in the U.S. District Court for the Southern District of New York against the Corporation and several related entities, entitled Food Holdings Ltd, et al. v. Bank of America Corp., et al. (the Food Holdings Action). The complaint in the Food Holdings Action alleges that the Corporation and other defendants conspired with Parmalat in carrying out transactions involving the plaintiffs in connection with the funding of Parmalat’s Brazilian entities, and it asserts claims for fraud, negligent misrepresentation, breach of fiduciary duty and other related claims. The complaint seeks damages in excess of $400 million. The Food Holdings Action was consolidated for pretrial purposes with the other pending actions in the In Re Parmalat Securities Litigation matter. On November 23, 2005, the Provisional Liquidators of Parmalat Capital Finance Limited (PCFL) (who are also the Official Liquidators of Food Holdings Ltd. and Dairy Holdings Ltd.) filed a complaint against the Corporation and 131 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) several related entities in North Carolina state court for Mecklenburg County, entitled Parmalat Capital Finance Limited v. Bank of America Corp., et al. (the PCFL Action). PCFL is a Cayman Islands corporation that is in liquidation proceedings in Grand Cayman. The PCFL Action alleges that the Corporation and other defendants conspired with Parmalat insiders to loot and divert monies from PCFL, and it asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty and other related claims. PCFL asserts that it lost hundreds of millions of dollars as a direct result of the Corporation’s activities. The Corporation has filed a notice of removal to the U.S. District Court for the Western District of North Carolina. The PCFL Action has been transferred to the U.S. District Court for the Southern District of New York for coordinated pre-trial purposes with the other Parmalat-related proceedings. On December 15, 2005, certain purchasers of Parmalat-related private placement offerings filed first amended petitions against the Corporation and various related entities in state courts in Iowa, entitled Principal Global Investors, LLC, et al. v. Bank of America Corporation, et al. (Principal Global Investors) and Monumental Life Insurance Company, et al. v. Bank of America Corporation, et al. (Monumental Life Insurance Company). The actions allege violations of Iowa state securities law and various state law claims, and seek rescission and unspecified damages based upon the Corporation’s and related entities’ alleged roles in certain private placement offerings issued by Parmalat-related companies. On January 4 and 5, 2006, respectively, the Principal Global Investors case was removed to the U.S. District Court for the Southern District of Iowa, and the Monumental Life Insurance Company case was removed to the U.S. District Court for the Northern District of Iowa. On February 13, 2006, the Corporation filed its answers to each of these complaints. On February 15, 2006, these cases were consolidated for pretrial purposes with the In Re Parmalat Securities Litigation matter. On January 18, 2006, Gerald K. Smith, in his capacity as Trustee of Farmland Dairies LLC Litigation Trust, filed a complaint against the Corporation, BANA, BAS, BASL, Bank of America National Trust & Savings Association and BankAmerica International Limited, as well as other financial institutions and accounting firms, in the U.S. District Court for the Southern District of New York, entitled Gerald K. Smith, Litigation Trustee v. Bank of America Corporation, et al. (the “Farmland Action”). Prior to bankruptcy restructuring, Farmland Dairies LLC was a wholly- owned subsidiary of Parmalat USA Corporation, which was a wholly-owned subsidiary of Parmalat SpA. The Farmland Action asserts claims of aiding and abetting, breach of fiduciary duty, civil conspiracy and related claims against the Bank of America defendants and other defendants. The plaintiff seeks unspecified damages. On February 23, 2006, the plaintiff filed its first amended complaint. Pension Plan Matters The Corporation is a defendant in a putative class action entitled William L. Pender, et al. v. Bank of America Corporation, et al. (formerly captioned Anita Pothier, et al. v. Bank of America Corporation, et al.), which was initially filed June 2004 in the U.S. District Court for the Southern District of Illinois and subsequently transferred to the U.S. District Court for the Western District of North Carolina. The action is brought on behalf of participants in or beneficiaries of The Bank of America Pension Plan (formerly known as the NationsBank Cash Balance Plan) and The Bank of America 401(k) Plan (formerly known as the NationsBank 401(k) Plan). The Third Amended Complaint names as defendants the Corporation, BANA, The Bank of America Pension Plan, The Bank of America 401(k) Plan, the Bank of America Corporation Corporate Benefits Committee and various members thereof, and PricewaterhouseCoopers LLP. The two named plaintiffs are alleged to be a current and a former participant in The Bank of America Pension Plan and 401(k) Plan. The Third Amended Complaint alleges the defendants violated various provisions of ERISA, including that the design of The Bank of America Pension Plan violated ERISA’s defined benefit pension plan standards and that such plan’s definition of normal retirement age is invalid. In addition, the complaint alleges age discrimination in the design and operation of The Bank of America Pension Plan, unlawful lump sum benefit calculation, violation of ERISA’s “anti- backloading” rule, improper benefit to the Corporation and its predecessor, and various prohibited transactions and fiduciary breaches. The complaint further alleges that certain voluntary transfers of assets by participants in The Bank of America 401(k) Plan to The Bank of America Pension Plan violated ERISA. The complaint alleges that current and former participants in these plans are entitled to greater benefits and seeks declaratory relief, monetary relief in an unspecified amount, equitable relief, including an order reforming The Bank of America Pension Plan, attorneys’ fees and interest. The court has scheduled the case for trial in September 2006. On September 25, 2005, defendants moved to dismiss the Third Amended Complaint. The motion is pending. On December 1, 2005, the named plaintiffs moved to certify classes consisting of, among others, (1) all persons who accrued or who are currently accruing benefits under The Bank of America Pension Plan and (2) all persons who elected 132 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) to have amounts representing their account balances under The Bank of America 401(k) Plan transferred to The Bank of America Pension Plan. The motion for class certification is pending. The IRS is conducting an audit of the 1998 and 1999 tax returns of The Bank of America Pension Plan and The Bank of America 401(k) Plan. This audit includes a review of voluntary transfers by participants of 401(k) Plan assets to The Bank of America Pension Plan and whether such transfers were in accordance with applicable law. In December 2005, the Corporation received a Technical Advice Memorandum from the National Office of the IRS that concludes that the amendments made to The Bank of America 401(k) Plan in 1998 to permit the voluntary transfers to The Bank of America Pension Plan violated the anti-cutback rule of Section 411(d)(6) of the Internal Revenue Code. The Corporation continues to participate in administrative proceedings with the IRS regarding issues raised in the audit. On September 29, 2004, a separate putative class action, entitled Donna C. Richards v. FleetBoston Financial Corp. and the FleetBoston Financial Pension Plan (Fleet Pension Plan), was filed in the U.S. District Court for the District of Connecticut on behalf of all former and current Fleet employees who on December 31, 1996, were not at least age 50 with 15 years of vesting service and who participated in the Fleet Pension Plan before January 1, 1997, and who have participated in the Fleet Pension Plan at any time since January 1, 1997. The complaint alleges that FleetBoston or its predecessor violated ERISA by amending the Fleet Financial Group, Inc. Pension Plan (a predecessor to the Fleet Pension Plan) to add a cash balance benefit formula without notifying participants that the amendment significantly reduced their plan benefits, by conditioning the amount of benefits payable under the Fleet Pension Plan upon the form of benefit elected, by reducing the rate of benefit accruals on account of age, and by failing to inform participants of the correct amount of their pensions and related claims. The complaint also alleges that the Fleet Pension Plan violates the “anti-backloading” rule of ERISA. The complaint seeks equitable and remedial relief, including a declaration that the cash balance amendment to the Fleet Pension Plan was ineffective, additional unspecified benefit payments, attorneys’ fees and interest. On December 28, 2004, plaintiff filed a motion for class certification. On January 25, 2005, the defendants moved to dismiss the action. These motions are pending. Refco Beginning in October 2005, BAS was named as a defendant in several federal class action and derivative lawsuits filed in the U.S. District Court for the Southern District of New York relating to Refco Inc. The lawsuits variously name as other defendants Refco’s outside auditors, certain officers and directors of Refco, other financial services companies (including in two cases the Corporation), and other individuals and companies. The actions allege violations of federal securities laws and state laws in connection with the sale of Refco securities, including the Refco senior subordinated notes offering in August 2004 and the Refco initial public offering in August 2005. Customers of Refco have also named BAS, the Corporation and other underwriters as defendants in a federal class action under the federal securities laws. The complaints seek unspecified damages. BAS is also responding to various regulatory inquiries relating to Refco. Trading and Research Activities The SEC has been conducting a formal investigation with respect to certain trading and research-related activities of BAS. These matters primarily arose during the period 1999-2001 in BAS’ San Francisco operations. In September 2005, the SEC staff advised BAS that it intends to recommend to the SEC an enforcement action against BAS in connection with these matters. This matter remains pending. 133 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 14—Shareholders’ Equity and Earnings Per Common Share The following table presents share repurchase activity for the three months and years ended December 31, 2005, 2004 and 2003, including total common shares repurchased under announced programs, weighted average per share price and the remaining buyback authority under announced programs. (Dollars in millions, except per share information; shares in thousands) Number of Common Shares Repurchased under Announced Programs(1) Weighted Average Per Share Price(1) Three months ended March 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended September 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . October 1-31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1-30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 1-31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . 43,214 40,300 10,673 0 11,550 20,700 32,250 Year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,437 $46.05 45.38 43.32 0.00 45.38 46.42 46.05 45.61 (Dollars in millions, except per share information; shares in thousands) Number of Common Shares Repurchased under Announced Programs(3) Weighted Average Per Share Price(3) Three months ended March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended September 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . October 1-31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1-30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 1-31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 24,306 49,060 40,430 16,102 11,673 6,288 34,063 Year ended December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,859 $40.03 41.07 43.56 44.24 45.84 46.32 45.17 42.52 (Dollars in millions, except per share information; shares in thousands) Three months ended March 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . October 1-31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 1-30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 1-31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three months ended December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Common Shares Repurchased under Announced Programs(5) Weighted Average Per Share Price(5) 36,800 60,600 50,230 13,800 64,212 33,044 111,056 258,686 $34.24 37.62 40.32 40.28 37.68 38.10 38.13 37.88 Remaining Buyback Authority under Announced Programs(2) Dollars $14,688 12,859 11,403 11,403 10,879 9,918 Shares 237,411 197,111 186,438 186,438 174,888 154,188 Remaining Buyback Authority under Announced Programs(4) Dollars $12,378 7,978 6,217 5,505 4,969 4,678 Shares 204,178 155,118 114,688 98,586 86,913 80,625 Remaining Buyback Authority under Announced Programs(6) Dollars $13,930 10,610 8,585 8,029 5,610 4,351 Shares 270,370 209,770 159,540 145,740 81,528 48,484 (1) Reduced Shareholders’ Equity by $5.8 billion and increased diluted earnings per common share by $0.05 in 2005. These repurchases were partially offset by the issuance of approximately 79.6 million shares of common stock under employee plans, which increased Shareholders’ Equity by $3.1 billion, net of $145 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.04 in 2005. (2) On January 28, 2004, the Board authorized a stock repurchase program of up to 180 million shares of the Corporation’s common stock at an aggregate cost not to exceed $9.0 billion. This repurchase plan was completed during the third quarter of 2005. On March 22, 2005, the Board authorized an additional stock repurchase program of up to 200 million shares of the Corporation’s common stock at an aggregate cost not to exceed $12.0 billion and to be completed within a period of 18 months. (3) Reduced Shareholders’ Equity by $6.3 billion and increased diluted earnings per common share by $0.06 in 2004. These repurchases were partially offset by the issuance of approximately 121 million shares of common stock under employee plans, which increased Shareholders’ Equity by $3.9 billion, net of $127 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.06 in 2004. (4) On January 22, 2003, the Board authorized a stock repurchase program of up to 260 million shares of the Corporation’s common stock at an aggregate cost of $12.5 billion. This repurchase plan was completed during the second quarter of 2004. On January 28, 2004, the Board authorized a stock repurchase program of up to 180 million shares of the Corporation’s common stock at an aggregate cost not to exceed $9.0 billion. This repurchase plan was completed during the third quarter of 2005. (5) Reduced Shareholders’ Equity by $9.8 billion and increased diluted earnings per common share by $0.11 in 2003. These repurchases were partially offset by the issuance of approximately 139 million shares of common stock under employee plans, which increased Shareholders’ Equity by $4.2 billion, net of $123 million of deferred compensation related to restricted stock awards, and decreased diluted earnings per common share by $0.08 in 2003. (6) On December 11, 2001, the Board authorized a stock repurchase program of up to 260 million shares of the Corporation’s common stock at an aggregate cost of up to $10.0 billion. This repurchase plan was completed during the second quarter of 2003. On January 22, 2003, the Board authorized a stock repurchase program of up to 260 million shares of the Corporation’s common stock at an aggregate cost of $12.5 billion. This repurchase plan was completed during the second quarter of 2004. 134 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The Corporation will continue to repurchase shares, from time to time, in the open market or in private transactions through the Corporation’s approved repurchase programs. The Corporation expects to continue to repurchase a number of shares of common stock at least equal to any shares issued under the Corporation’s employee stock plans. At December 31, 2005, the Corporation had 690,000 shares authorized and 382,450 shares, or $96 million, outstanding of Bank of America 6.75% Perpetual Preferred Stock with a stated value of $250 per share. Ownership is held in the form of depositary shares paying dividends quarterly at an annual rate of 6.75 percent. On or after April 15, 2006, the Corporation may redeem Bank of America 6.75% Perpetual Preferred Stock, in whole or in part, at its option, at $250 per share, plus accrued and unpaid dividends. The Corporation also had 805,000 shares authorized and 700,000 shares, or $175 million, outstanding of Bank of America Fixed/Adjustable Rate Cumulative Preferred Stock with a stated value of $250 per share. Ownership is held in the form of depositary shares paying dividends quarterly at an annual rate of 6.60 percent through April 1, 2006. After April 1, 2006, the dividend rate on Fixed/Adjustable Rate Cumulative Preferred Stock will be a rate per annum equal to 0.50 percent plus the highest of the Treasury Bill Rate, the Ten Year Constant Maturity Rate, and the Thirty Year Constant Maturity Rate, as each term is defined in BAC’s Amended and Restated Certificate of Designations establishing the Fixed/Adjustable Rate Cumulative Preferred Stock. The applicable rate per annum for any dividend period beginning on or after April 1, 2006 will not be less than 7.00 percent nor greater than 13.00 percent. On or after April 1, 2006, the Corporation may redeem Bank of America Fixed/Adjustable Rate Cumulative Preferred Stock, in whole or in part, at its option, at $250 per share, plus accrued and unpaid dividends. In addition to the preferred stock described above, the Corporation had 35,045 shares authorized and 7,739 shares, or $1 million, outstanding of the Series B Preferred Stock with a stated value of $100 per share paying dividends quarterly at an annual rate of 7.00 percent. The Corporation may redeem the Series B Preferred Stock, in whole or in part, at its option, at $100 per share, plus accrued and unpaid dividends. All preferred stock outstanding has preference over our common stock with respect to the payment of dividends and distribution of our assets in the event of a liquidation or dissolution. Except in certain circumstances, the holders of preferred stock have no voting rights. The following table presents the changes in Accumulated OCI for 2005 and 2004. (Dollars in millions)(1) Balance, December 31, 2003 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in fair value recorded in Accumulated OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net gains (losses) reclassified into earnings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2004 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in fair value recorded in Accumulated OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Net gains (losses) reclassified into earnings(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Derivatives(2) Other Total $ (70) 1,088 1,215 (197) (1,907) 874 $ (2,094) (294) (109) (2,279) (2,225) (166) $ (270) $ (2,434) 776 1,106 (18) — (288) (2,764) 48 — (4,084) 708 Balance, December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,978) $(4,338) $(240) $(7,556) (1) Amounts shown are net-of-tax. (2) The amount included in Accumulated OCI for terminated derivative contracts was a loss of $2.5 billion and a gain of $143 million, net-of-tax, at December 31, 2005 and 2004. (3) Included in this line item are amounts related to derivatives used in cash flow hedge relationships. These amounts are reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. 135 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The calculation of earnings per common share and diluted earnings per common share for 2005, 2004 and 2003 is presented below. See Note 1 of the Consolidated Financial Statements for a discussion on the calculation of earnings per common share. (Dollars in millions, except per share information; shares in thousands) 2005 2004 (Restated) 2003 (Restated) Earnings per common share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,465 $ (18) 13,947 $ (16) 10,762 (4) Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,447 $ 13,931 $ 10,758 Average common shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,008,688 3,758,507 2,973,407 Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.10 $ 3.71 $ 3.62 Diluted earnings per common share Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Convertible preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,447 $ — 13,931 $ 2 10,758 4 Net income available to common shareholders and assumed conversions . . . . . . . . . . . . . . . . . $ 16,447 $ 13,933 $ 10,762 Average common shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dilutive potential common shares(1, 2) 4,008,688 59,452 3,758,507 65,436 2,973,407 56,949 Total diluted average common shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 4,068,140 3,823,943 3,030,356 Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.04 $ 3.64 $ 3.55 (1) For 2005, 2004 and 2003, average options to purchase 39 million, 62 million and 34 million shares, respectively, were outstanding but not included in the computation of earnings per common share because they were antidilutive. (2) Includes incremental shares from assumed conversions of convertible preferred stock, restricted stock units, restricted stock shares and stock options. Effective for the third quarter dividend, the Board increased the quarterly cash dividend 11 percent from $0.45 to $0.50 per common share. In October 2005, the Board declared a fourth quarter cash dividend which was paid on December 23, 2005 to common shareholders of record on December 2, 2005. In January 2006, the Board declared a quarterly cash dividend of $0.50 per common share payable on March 24, 2006 to shareholders of record on March 3, 2006. Note 15—Regulatory Requirements and Restrictions The Board of Governors of the Federal Reserve System (FRB) requires the Corporation’s banking subsidiaries to maintain reserve balances based on a percentage of certain deposits. Average daily reserve balances required by the FRB were $6.4 billion and $6.3 billion for 2005 and 2004. 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 $361 million and $627 million for 2005 and 2004. The primary source of funds for cash distributions by the Corporation to its shareholders is dividends received from its banking subsidiaries. Bank of America, N.A., Bank of America, N.A. (USA) and Fleet National Bank declared and paid dividends of $7.4 billion, $1.9 billion and $750 million, respectively, for 2005 to the parent. On June 13, 2005, Fleet National Bank merged with and into Bank of America, N.A., with Bank of America, N.A. as the surviving entity. In 2006, Bank of America, N.A. and Bank of America, N.A. (USA) can declare and pay dividends to the parent of $12.1 billion and $879 million plus an additional amount equal to its net profits for 2006, as defined by statute, up to the date of any such dividend declaration. The other subsidiary national banks can initiate aggregate dividend payments in 2006 of $44 million plus an additional amount equal to their net profits for 2006, as defined by statute, up to the date of any such dividend declaration. The amount of dividends that each subsidiary bank may declare in a calendar year without approval by the 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 FRB, the OCC and the Federal Deposit Insurance Corporation (collectively, the Agencies) have issued regulatory capital guidelines for U.S. banking organizations. Failure to meet the capital requirements can initiate certain mandatory and discretionary actions by regulators that could have a material effect on the Corporation’s financial statements. At December 31, 2005 and 2004, the Corporation, Bank of America, N.A. and Bank of America, 136 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) N.A. (USA) were classified as well-capitalized under this regulatory framework. There have been no conditions or events since December 31, 2005 that management believes have changed the Corporation’s, Bank of America, N.A.’s and Bank of America, N.A. (USA)’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 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 subordinated debt, other qualifying term debt, the allowance for credit losses up to 1.25 percent of risk-weighted assets and other adjustments. 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 FRB 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, 2005 and 2004, the Corporation had no subordinated debt that qualified as Tier 3 Capital. Certain corporate sponsored trust companies which issue trust preferred securities (Trust Securities) are not consolidated under FIN 46R. As a result, the Trust Securities are not included on our Consolidated Balance Sheets. On March 1, 2005, the FRB issued Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital (the Final Rule) which allows Trust Securities to continue to qualify as Tier 1 Capital with revised quantitative limits that would be effective after a five-year transition period. As a result, Trust Securities are included in Tier 1 Capital. The FRB’s Final Rule limits restricted core capital elements to 15 percent for internationally active bank holding companies. Internationally active bank holding companies are those with consolidated assets greater than $250 billion or on-balance sheet exposure greater than $10 billion. At December 31, 2005, our restricted core capital elements comprised 16.6 percent of total core capital elements. In addition, the FRB revised the qualitative standards for capital instruments included in regulatory capital. We expect to be fully compliant with the revised limits prior to the implementation date of March 31, 2009. On July 28, 2004, the FRB and other regulatory agencies issued the Final Capital Rule for Consolidated Asset- backed Commercial Paper Program Assets (the Final Rule). The Final Rule allows companies to exclude from risk- weighted assets, the assets of consolidated asset-backed commercial paper (ABCP) conduits when calculating Tier 1 and Total Risk-based Capital ratios. The Final Rule also requires that liquidity commitments provided by the Corporation to ABCP conduits, whether consolidated or not, be included in the capital calculations. The Final Rule was effective September 30, 2004. There was no material impact to Tier 1 and Total Risk-based Capital as a result of the adoption of this rule. To meet minimum, adequately-capitalized regulatory requirements, an institution must maintain a Tier 1 Capital ratio of four percent and a Total Capital ratio of eight percent. A well-capitalized institution must generally maintain capital ratios 200 bps 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 adjusted quarterly average Total Assets, after certain adjustments. The leverage ratio guidelines establish a minimum of three percent. Banking organizations must maintain a leverage capital ratio of at least five percent to be classified as well-capitalized. As of December 31, 2005, the Corporation was classified as well-capitalized for regulatory purposes, the highest classification. Net Unrealized Gains (Losses) on AFS Debt Securities, Net Unrealized Gains on AFS Marketable Equity Securities and the Net Unrealized Gains (Losses) on Derivatives included in Shareholders’ Equity at December 31, 2005 and 2004, are excluded from the calculations of Tier 1 Capital and leverage ratios. The Total Capital ratio excludes all of the above with the exception of up to 45 percent of Net Unrealized Gains on AFS Marketable Equity Securities. Regulatory Capital Developments In June 2004, the Basel Committee on Banking Supervision issued a new set of risk-based capital standards (Basel II) with the intent of more closely aligning regulatory capital requirements with underlying risk. In August 2003, the U.S. regulatory agencies drafted the Advanced Notice of Proposed Rulemaking to establish a comparable rule for large U.S. financial institutions. The final rule, which is expected to be issued during the second quarter of 2006, will provide us with clarification as to the requirements under U.S. regulations. Several of our international units will begin implementing Basel II locally during 2006, with full implementation by 2007. U.S. regulatory agencies have delayed implementation of Basel II for the consolidated entity until 2008. During 137 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 2008, we will operate in a parallel testing environment, where current regulatory capital measures will be utilized simultaneously with the new rules. However, in 2009 and until at least 2011, the U.S. is expected to impose floors (limits) on capital reductions when compared to current measures. Regulatory Capital (Dollars in millions) Risk-based capital Tier 1 December 31 2005 2004 (Restated) Actual Ratio Amount Minimum Required(1) Actual Ratio Amount Minimum Required(1) Bank of America Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of America, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fleet National Bank(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of America, N.A. (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.25% $74,375 8.70 69,547 — 8.66 — 5,567 $36,059 31,987 — 2,570 8.20% $65,049 46,546 8.23 14,741 10.10 3,879 8.54 $31,735 22,628 5,837 1,817 Total Bank of America Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.08 Bank of America, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.73 Fleet National Bank(2) — Bank of America, N.A. (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leverage Bank of America Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of America, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fleet National Bank(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of America, N.A. (USA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.91 6.69 — 9.37 99,901 85,773 — 7,361 74,375 69,547 — 5,567 72,118 63,973 — 5,140 37,732 31,192 — 1,783 11.73 10.27 13.32 11.93 5.89 6.22 8.15 9.19 93,034 58,079 19,430 5,418 65,049 46,546 14,741 3,879 63,470 45,255 11,673 3,634 33,141 22,444 5,427 1,266 (1) Dollar amount required to meet guidelines for adequately capitalized institutions. (2) On June 13, 2005, Fleet National Bank merged with and into Bank of America, N.A., with Bank of America, N.A. as the surviving entity. 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 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 allocations on a periodic basis subject to the provisions of the Pension Plan. 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 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. The Corporation sponsors a number of noncontributory, nonqualified 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. As a result of the FleetBoston Merger, the Corporation assumed the obligations related to the plans of former FleetBoston. These plans are substantially similar to the legacy Bank of America plans discussed above, however, the 138 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) FleetBoston Financial Pension Plan does not allow participants to select various earnings measures; rather the earnings rate is based on a benchmark rate. The tables within this Note include the information related to these plans beginning on April 1, 2004. Reflected in these results are key changes to the Postretirement Health and Life Plans and the Nonqualified Pension Plans. On December 8, 2003, the President signed the Medicare Act into law. The Medicare Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. In the third quarter of 2004, the Corporation adopted FSP No. 106-2, which resulted in a reduction of $53 million in the Corporation’s accumulated postretirement benefit obligation. In addition, the Corporation’s net periodic benefit cost for other postretirement benefits was decreased by $15 million for 2004 as a result of the remeasurement. 139 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following table summarizes the changes in the fair value of plan assets, changes in the projected benefit obligation (PBO), the funded status of both the accumulated benefit obligation (ABO) and the PBO, and the weighted average assumptions used to determine benefit obligations for the pension plans and postretirement plans at December 31, 2005 and 2004. Prepaid and accrued benefit costs are reflected in Other Assets, and Accrued Expenses and Other Liabilities on the Consolidated Balance Sheet. The discount rate assumption is based on a cash flow matching technique and this assumption is subject to change each year. This technique utilizes a yield curve based upon Moody’s Aa corporate bonds with cash flows that match estimated benefit payments to produce the discount rate assumption. For the Pension Plan and the FleetBoston Pension Plan (the Qualified Pension Plans), as well as the Postretirement Health and Life Plans, the discount rate at December 31, 2005, was 5.50 percent. For both the Qualified Pension Plans and the Postretirement Health and Life Plans, the expected long-term return on plan assets will be 8.00 percent for 2006. The expected return on plan assets is determined using the calculated market-related value for the Qualified Pension Plans and the fair value for the Postretirement Health and Life Plans. The asset valuation method for the Qualified Pension Plans 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. (Dollars in millions) 2005 2004 2005 2004 2005 2004 Qualified Pension Plans(1) Nonqualified Pension Plans(1) Postretirement Health and Life Plans(1) Change in fair value of plan assets (Primarily listed stocks, fixed income and real estate) Fair value, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Company contributions(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,153 — 803 1,000 — (859) $ 8,975 2,277 1,447 200 — (746) $ 1 — — 118 — (118) $ — 1 — 63 — (63) $ 166 — 11 27 98 (176) $ 156 45 25 40 82 (182) 1 $ 126 $ 166 Fair value, December 31 . . . . . . . . . . . . . . . . . . . . . . . . $13,097 $12,153 $ 1 Change in projected benefit obligation Projected benefit obligation, January 1 . . . . . . . . . . . . . FleetBoston balance, April 1, 2004 . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,461 — 261 643 — (77) 261 (859) $ 8,428 2,045 257 623 — 19 835 (746) $ 1,094 — 11 61 — (1) 61 (118) $ $ 712 377 27 62 — (74) 53 (63) $ 1,352 — 11 78 98 — 57 (176) Projected benefit obligation, December 31 . . . . . . . $11,690 $11,461 $ 1,108 $ 1,094 $ 1,420 Funded status, 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 . . . . . . . . . . . . . . . . . . . . . . . . $11,383 1,714 307 11,690 $ 1,407 2,621 — 209 $11,025 1,128 436 11,461 $ 692 2,364 — 328 $ 1,085 (1,084) 23 1,108 $(1,107) 262 — (52) $ 1,080 (1,079) 14 1,094 $(1,093) 234 — (59) n/a n/a n/a 1,420 $(1,294) 92 221 — Prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . $ 4,237 $ 3,384 $ (897) $ (918) $ (981) $ 1,127 196 9 76 82 (12) 56 (182) $ 1,352 n/a n/a n/a $ 1,352 $(1,186) 112 252 — $ (822) Weighted average assumptions, December 31 Discount rate(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . 5.50% 8.50 4.00 5.75% 8.50 4.00 5.50% n/a 4.00 5.75% n/a 4.00 5.50% 8.50 n/a 5.75% 8.50 n/a (1) The measurement date for the Qualified Pension Plans, Nonqualified Pension Plans, and Postretirement Health and Life Plans was December 31 of each year reported. (2) The Corporation’s best estimate of its contributions to be made to the Qualified Pension Plans, Nonqualified Pension Plans, and Postretirement Health and Life Plans in 2006 is $0 million, $97 million and $37 million. (3) In connection with the FleetBoston Merger, the plans of former FleetBoston were remeasured on April 1, 2004, using a discount rate of 6.00 percent. n/a = not applicable 140 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Amounts recognized in the Consolidated Financial Statements at December 31, 2005 and 2004 were as follows: (Dollars in millions) Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional minimum liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified Pension Plans Nonqualified Pension Plans Postretirement Health and Life Plans 2005 2004 2005 $4,237 $3,384 $ — — — — — — — — — (897) (187) — 187 2004 $ — (918) (161) 1 160 2005 $ — (981) — — — 2004 $ — (822) — — — Net amount recognized at December 31 . . . . . . . . . . . $4,237 $3,384 $(897) $(918) $(981) $(822) Net periodic pension benefit cost for 2005, 2004 and 2003 included the following components: (Dollars in millions) Components of net periodic pension benefit cost Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized loss due to settlements and curtailments . . . . . . . . . . . Net periodic pension benefit cost . . . . . . . . . . . . . . . . . . . . Weighted average assumptions used to determine net cost for years ended December 31 Discount rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified Pension Plans Nonqualified Pension Plans 2005 2004 2003 2005 2004 2003 $ 261 643 (983) 44 182 — $ 147 $ 257 623 (915) 55 92 — $ 112 $ 187 514 (735) 55 47 — $ 68 $ 11 61 — (8) 24 9 $ 27 62 — 3 14 — $ 25 45 — 3 11 — $ 97 $ 106 $ 84 5.75% 8.50 4.00 6.25% 8.50 4.00 6.75% 8.50 4.00 5.75% n/a 4.00 6.25% n/a 4.00 6.75% n/a 4.00 (1) In connection with the FleetBoston Merger, the plans of former FleetBoston were remeasured on April 1, 2004, using a discount rate of 6.00 percent. n/a = not applicable For 2005, 2004 and 2003, net periodic postretirement benefit cost included the following components: (Dollars in millions) 2005 2004(1) 2003 Components of net periodic postretirement benefit cost Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) Amortization of transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Recognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 $ 9 76 (16) 32 1 74 $ 9 68 (15) 32 4 89 Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 186 $ 176 $ 187 Weighted average assumptions used to determine net cost for years ended December 31 Discount rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 6.25% 6.75% 8.50 8.50 8.50 (1) Includes the effect of the adoption of FSP No. 106-2, which reduced net periodic postretirement benefit cost by $15 million. (2) In connection with the FleetBoston Merger, the plans of former FleetBoston were remeasured on April 1, 2004, using a discount rate of 6.00 percent. 141 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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 standard amortization provisions of the applicable 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 Postretirement Health Care Plans. The assumed health care cost trend rate used to measure the expected cost of benefits covered by the Postretirement Health Care Plans was 10 percent for 2006, reducing in steps to 5 percent in 2011 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 $3 million and $51 million in 2005, $4 million and $56 million in 2004, and $4 million and $52 million in 2003. A one-percentage-point decrease in assumed health care cost trend rates would have lowered the service and interest costs and the benefit obligation by $3 million and $43 million in 2005, $3 million and $48 million in 2004, and $3 million and $48 million in 2003. Plan Assets The Qualified Pension Plans have been established as retirement vehicles for participants, and trusts have been established to secure benefits promised under the Qualified Pension Plans. The Corporation’s policy is to invest the trust assets in a prudent manner for the exclusive purpose of providing benefits to participants and defraying reasonable expenses of administration. The Corporation’s investment strategy is designed to provide a total return that, over the long-term, increases the ratio of assets to liabilities. The strategy attempts to maximize the investment return on assets at a level of risk deemed appropriate by the Corporation while complying with ERISA and any subsequent applicable regulations and laws. The investment strategy utilizes asset allocation as a principal determinant for establishing the risk/reward profile of the assets. Asset allocation ranges are established, periodically reviewed, and adjusted as funding levels and liability characteristics change. Active and passive investment managers are employed to help enhance the risk/return profile of the assets. An additional aspect of the investment strategy used to minimize risk (part of the asset allocation plan) includes matching the equity exposure of participant-selected earnings measures. For example, the common stock of the Corporation held in the trust is maintained as an offset to the exposure related to participants who selected to receive an earnings measure based on the return performance of common stock of the Corporation. The Expected Return on Asset Assumption (EROA assumption) was developed through analysis of historical market returns, historical asset class volatility and correlations, current market conditions, anticipated future asset allocations, the funds’ past experience, and expectations on potential future market returns. The EROA assumption represents a long-term average view of the performance of the Qualified Pension Plans and Postretirement Health and Life Plan assets, a return that may or may not be achieved during any one calendar year. In a simplistic analysis of the EROA assumption, the building blocks used to arrive at the long-term return assumption would include an implied return from equity securities of 8.75 percent, debt securities of 5.75 percent, and real estate of 8.75 percent for all pension plans and postretirement health and life plans. The Qualified Pension Plans’ asset allocation at December 31, 2005 and 2004 and target allocation for 2006 by asset category are as follows: Asset Category Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 Target Allocation 65 – 80% 20 – 35 0 – 5 Percentage of Plan Assets at December 31 2005 71% 27 2 100% 2004 75% 23 2 100% Equity securities include common stock of the Corporation in the amounts of $798 million (6.10 percent of total plan assets) and $871 million (7.17 percent of total plan assets) at December 31, 2005 and 2004. 142 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The Postretirement Health and Life Plans’ asset allocation at December 31, 2005 and 2004 and target allocation for 2006 by asset category are as follows: Asset Category Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 Target Allocation 50 – 70% 30 – 50 0 – 5 Percentage of Plan Assets at December 31 2005 57% 41 2 100% 2004 75% 24 1 100% The Bank of America Postretirement Health and Life Plans had no investment in the common stock of the Corporation at December 31, 2005 or 2004. The FleetBoston Postretirement Health and Life Plans included common stock of the Corporation in the amount of $0.3 million (0.27 percent of total plan assets) at December 31, 2005 and $0.3 million (0.20 percent of total plan assets) at December 31, 2004. Projected Benefit Payments Benefit payments projected to be made from the Qualified Pension Plans, the Nonqualified Pension Plans and the Postretirement Health and Life Plans are as follows: (Dollars in millions) 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 – 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Qualified Pension Plans(1) Nonqualified Pension Plans(2) Net Payments(3) Medicare Subsidy $ 867 899 925 940 945 4,885 $ 97 96 109 105 109 554 $ 98 97 97 97 96 447 $ 3 4 4 4 4 18 Postretirement Health and Life Plans (1) Benefit payments expected to be made from the plans’ assets. (2) Benefit payments expected to be made from the Corporation’s assets. (3) Benefit payments (net of retiree contributions) expected to be made from a combination of the plans’ and the Corporation’s assets. Defined Contribution Plans The Corporation maintains qualified defined contribution retirement plans and nonqualified defined contribution retirement plans. As a result of the FleetBoston Merger, beginning on April 1, 2004, the Corporation maintains the defined contribution plans of former FleetBoston. There are two components of the qualified defined contribution plans, the Bank of America 401(k) Plan and the FleetBoston Financial Savings Plan (the 401(k) Plans), an employee stock ownership plan (ESOP) and a profit-sharing plan. The Corporation contributed approximately $274 million, $267 million and $204 million for 2005, 2004 and 2003, in cash and stock. Contributions in 2003 were utilized primarily to purchase the Corporation’s common stock under the terms of the Bank of America 401(k) Plan. At December 31, 2005 and 2004, an aggregate of 106 million shares and 113 million shares of the Corporation’s common stock were held by the 401(k) Plans. During 2004, the Corporation converted the ESOP Preferred Stock held by the Bank of America 401(k) Plan to common stock so that there were no outstanding shares of preferred stock at December 31, 2004 in the 401(k) Plans. Under the terms of the ESOP Preferred Stock provision, payments to the plan for dividends on the ESOP Preferred Stock were $4 million for 2004 and 2003. Payments to the plan for dividends on the ESOP Common Stock were $207 million, $181 million and $128 million during the same years. In addition, certain non-U.S. employees within the Corporation are covered under defined contribution pension plans that are separately administered in accordance with local laws. Rewarding Success Plan In 2005, the Corporation introduced a broad-based cash incentive plan for more than 140,000 associates that meet certain eligibility criteria and are below certain compensation levels. The amount of the cash award is determined based on the Corporation’s operating net income and common stock price performance for the full year. During 2005, the Corporation recorded an expense of $145 million for this plan. 143 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 17—Stock-based Compensation Plans At December 31, 2005, the Corporation had certain stock-based compensation plans that are described below. For all stock-based compensation awards issued prior to January 1, 2003, the Corporation applied the provisions of APB 25 in accounting for its stock option and award plans. Stock-based compensation plans enacted after December 31, 2002, are 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. The following table presents information on equity compensation plans at December 31, 2005: Number of Shares to be Issued Upon Exercise of Outstanding Options(1,4) Weighted Average Exercise Price of Outstanding Options(2) Number of Shares Remaining for Future Issuance Under Equity Compensation Plans(3) Plans approved by shareholders . . . . . . . . . . . . . . . . . . Plans not approved by shareholders . . . . . . . . . . . . . . . 231,465,981 20,032,226 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,498,207 $ 35.91 30.63 $35.47 167,163,952 — 167,163,952 (1) Includes 10,655,618 unvested restricted stock units. (2) Does not take into account unvested restricted stock units. (3) Excludes shares to be issued upon exercise of outstanding options. (4) In addition to the securities presented in the table above, there were outstanding options to purchase 57,290,213 shares of the Corporation’s common stock and 1,275,565 unvested restricted stock units granted to employees of predecessor companies assumed in mergers. The weighted average option price of the assumed options was $33.69 at December 31, 2005. The Corporation has certain stock-based compensation plans that were approved by its shareholders. These plans are the Key Employee Stock Plan and the Key Associate Stock Plan. Descriptions of the material features of these plans follow. 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. Under the plan, ten-year options to purchase approximately 260 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, 2005, approximately 90 million options were outstanding under this plan. No further awards may be granted. 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 200 million shares for grant in addition to the remaining amount under the Key Employee Stock Plan as of December 31, 2002, which was approximately 34 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. Upon the FleetBoston Merger, the shareholders authorized an additional 102 million shares for grant under the Key Associate Stock Plan. At December 31, 2005, approximately 130 million options were outstanding under this plan. Approximately 18 million shares of restricted stock and restricted stock units were granted during 2005. 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 $486 million, $288 million and $276 million in 2005, 2004 and 2003. 144 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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 and Take Ownership!. Descriptions of the material features of these plans follow. 2002 Associates Stock Option Plan The Bank of America Corporation 2002 Associates Stock Option Plan covered 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 nonqualified and have an exercise price equal to the fair market value on the date of grant. Approximately 108 million options were granted on February 1, 2002. The award included two performance-based vesting triggers. During 2003, the first option vesting trigger was achieved. During 2004, the second option vesting trigger was achieved. In addition, the options continue to be exercisable following termination of employment under certain circumstances. At December 31, 2005, approximately 20 million options were outstanding under this plan. The options expire on January 31, 2007. No further awards may be granted. 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 predetermined number of stock options entitling them to purchase shares of the Corporation’s common stock at the fair market value on the grant date. Options were granted on the first business day of 1999, 2000 and 2001. All options are nonqualified. At January 2, 2004, all options issued under this plan were fully vested. These options expire five years after the grant date. In addition, the options continue to be exercisable following termination of employment under certain circumstances. At December 31, 2005, approximately 134 thousand options were outstanding under this plan. No further awards may be granted. All remaining options expired January 2, 2006. Additional stock option plans assumed in connection with various 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, 2005, 2004 and 2003, and changes during the years then ended: 2005 2004 2003 Employee stock options Shares Outstanding at January 1 . . . . . . . . . . . . . . 337,551,559 Options assumed through acquisition . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,615,891 (68,206,402) (6,828,246) — Outstanding at December 31 . . . . . 298,132,802 Options exercisable at December 31 . . . . . 213,326,486 Weighted average fair value of options granted during the year . . . . . . . . . . . . . . Weighted Average Exercise Price $32.93 — 46.58 29.89 38.59 35.13 32.41 $ 6.48 Shares 320,331,380 78,761,708 63,472,170 (111,958,135) (13,055,564) 337,551,559 243,735,846 Weighted Average Exercise Price $30.66 28.68 40.80 27.77 34.15 32.93 30.73 $ 5.59 Weighted Average Exercise Price Shares 411,447,300 $29.10 — 61,336,790 (132,491,842) (19,960,868) 320,331,380 167,786,372 — 35.03 27.72 31.41 30.66 30.02 $ 6.77 Restricted stock/unit awards Shares Outstanding unvested grants at 2005 2004 2003 Weighted Average Grant Price Shares Weighted Average Grant Price Shares Weighted Average Grant Price January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 20,449,565 $37.12 16,170,546 $31.64 15,679,946 $30.37 Share obligations assumed through acquisition . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding unvested grants at — 17,599,740 (9,409,844) (1,361,355) — 46.60 37.48 43.49 7,720,476 10,338,327 (12,031,945) (1,747,839) 31.62 41.03 29.43 38.10 — 8,893,718 (7,697,576) (705,542) — 34.69 32.47 32.85 December 31 . . . . . . . . . . . . . . . . . . 27,278,106 $42.79 20,449,565 $37.12 16,170,546 $31.64 145 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following table summarizes information about stock options outstanding at December 31, 2005: Range of Exercise Prices Outstanding Options Options Exercisable Number Outstanding at December 31, 2005 Weighted Average Remaining Term Weighted Average Exercise Price Number Exercisable at December 31, 2005 Weighted Average Exercise Price $ 5.00 – $15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.01 – $23.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23.26 – $32.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32.76 – $49.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,888 6,181,199 121,675,632 170,215,083 0.2 years 4.7 years 4.2 years 6.7 years $ 12.87 19.09 28.93 40.14 60,888 6,181,199 121,674,932 85,409,467 $ 12.87 19.09 28.93 38.34 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,132,802 5.6 years $35.13 213,326,486 $32.41 Note 18—Income Taxes The components of Income Tax Expense for 2005, 2004 and 2003 were as follows: (Dollars in millions) 2005 2004 (Restated) 2003 (Restated) Current income tax expense Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,229 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 $6,392 683 405 Total current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,320 7,480 Deferred income tax expense (benefit) Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,577 85 33 1,695 (512) (23) 16 (519) $4,642 412 260 5,314 (249) (50) 4 (295) Total income tax expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,015 $6,961 $5,019 (1) Does not reflect the deferred tax effects of Unrealized Gains and Losses on AFS Debt and Marketable Equity Securities, Foreign Currency Translation Adjustments and Derivatives that are included in Accumulated OCI. As a result of these tax effects, Accumulated OCI increased $2,863 million, $303 million and $1,916 million in 2005, 2004 and 2003. Also, does not reflect tax benefits associated with the Corporation’s employee stock plans which increased Common Stock and Additional Paid-in Capital $416 million, $401 million and $443 million in 2005, 2004 and 2003. Goodwill was reduced $22 million and $101 million in 2005 and 2004, reflecting the tax benefits attributable to exercises of employee stock options issued by FleetBoston which had vested prior to the merger date. Income Tax Expense for 2005, 2004 and 2003 varied from the amount computed by applying the statutory income tax rate to Income before Income Taxes. A reconciliation between the expected federal income tax expense using the federal statutory tax rate of 35 percent to the Corporation’s actual Income Tax Expense and resulting effective tax rate for 2005, 2004 and 2003 follows: (Dollars in millions) Expected federal income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in taxes resulting from: Tax-exempt income, including dividends . . . . . . . . . . . . . . . . . . . . . . . State tax expense, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . Goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IRS tax settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low income housing credits/other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax differential Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 (Restated) 2003 (Restated) Amount Percent Amount Percent Amount Percent $8,568 35.0% $7,318 35.0% $5,523 35.0% (605) 495 — — (423) (99) 79 (2.5) 2.0 — — (1.7) (0.4) 0.3 (526) 429 — — (352) (78) 170 (2.5) 2.1 — — (1.7) (0.4) 0.8 (325) 235 12 (84) (212) (50) (80) (2.1) 1.5 0.1 (0.5) (1.3) (0.3) (0.6) Total income tax expense . . . . . . . . . . . . . . . . . . . . . . $8,015 32.7% $6,961 33.3% $5,019 31.8% 146 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) During 2002, the Corporation reached a tax settlement agreement with the IRS. This agreement resolved issues for numerous tax returns of the Corporation and various predecessor companies and finalized all federal income tax liabilities, excluding those relating to FleetBoston, through 1999. As a result of the settlement, a reduction in Income Tax Expense of $84 million in 2003 was recorded representing refunds received. The IRS is currently examining the Corporation’s federal income tax returns for the years 2000 through 2002 as well as the tax returns of FleetBoston and certain other subsidiaries for years ranging from 1997 to 2000. The Corporation’s current estimate of the resolution of these various examinations is reflected in accrued income taxes; however, final settlement of the examinations or changes in the Corporation’s estimate may result in future income tax expense or benefit. Significant components of the Corporation’s net deferred tax liability at December 31, 2005 and 2004 are presented in the following table. (Dollars in millions) December 31 2005 2004 (Restated) Deferred tax liabilities Equipment lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,455 Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,138 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 Loan fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Deferred gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,122 $6,192 803 1,088 222 47 — 251 874 Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,430 9,477 Deferred tax assets Security valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee compensation and retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,822 2,623 1,845 1,235 559 169 — 416 9,669 2,434 2,973 146 533 648 467 241 1,288 8,730 (253) (155) 9,416 8,575 Net deferred tax liabilities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 902 (1) At December 31, 2004, $70 million of the valuation allowance related to gross deferred tax assets was attributable to the FleetBoston Merger. Future recognition of the tax attributes associated with these gross deferred tax assets would result in tax benefits being allocated to reduce Goodwill. (2) The Corporation’s net deferred tax liabilities were adjusted during 2005 and 2004 to include $279 million of net deferred tax liabilities and $2.0 billion of net deferred tax assets related to business combinations accounted for under the purchase method. The valuation allowance at December 31, 2005 and 2004 is attributable to deferred tax assets generated in certain state and foreign jurisdictions. During 2005, deferred tax assets were recognized for certain state temporary differences that had previously not been recognized. The valuation allowance change for 2005 was primarily attributable to these deferred tax assets, as management continues to believe it is more likely than not that realization of these assets will not occur. The foreign tax credit carryforward reflected in the table above represents foreign income taxes paid that are creditable against future U.S. income taxes. If not used, these credits begin to expire after 2012 and could fully expire after 2014. 147 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The American Jobs Creation Act of 2004 (the Act) provides U.S. companies with the ability to elect to apply a special one-time tax deduction equal to 85 percent of certain earnings remitted from foreign subsidiaries, provided certain criteria are met. Management elected to apply the Act for 2005 and recorded a one-time tax benefit of $70 million for the year ended December 31, 2005. At December 31, 2005 and 2004, federal income taxes had not been provided on $1.4 billion and $1.1 billion 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 $249 million and $221 million of tax expense, net of credits for foreign taxes paid on such earnings and for the related foreign withholding taxes, would result in 2005 and 2004. Note 19—Fair Value of Financial Instruments SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” (SFAS 107), requires the disclosure 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 available, 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 instruments 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 franchise, and credit card and trust including intangible assets such as goodwill, instruments, nonfinancial 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 short-term maturities and carry interest rates that approximate market. Financial Instruments Traded in the Secondary Market Held-to-maturity securities, AFS debt and marketable equity securities, trading account instruments and long-term debt traded actively in the secondary market have been valued using quoted market prices. The fair values of trading account instruments and securities are reported in Notes 4 and 6 of the Consolidated Financial Statements. Derivative Financial Instruments All derivatives are recognized on the balance sheet at fair value, net of cash collateral held and taking into consideration the effects of legally enforceable master netting agreements that 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 of the Consolidated Financial Statements. 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 discounting 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 available, 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. 148 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) 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 maturities, 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, 2005 and 2004 were as follows: (Dollars in millions) Financial assets December 31 2005 2004 (Restated) Book Value Fair Value Book Value Fair Value Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $545,238 $542,626 $492,033 $497,614 Financial liabilities Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634,670 100,848 633,928 101,446 618,570 97,116 618,409 101,477 Note 20—Business Segment Information The Corporation reports the results of its operations through four business segments: Global Consumer and Small Business Banking, Global Business and Financial Services, Global Capital Markets and Investment Banking, and Global Wealth and Investment Management. Certain operating segments have been aggregated into a single business segment. The Corporation may periodically reclassify business segment results based on modifications to its management reporting methodologies and changes in organizational alignment. Global Consumer and Small Business Banking provides a diversified range of products and services to individuals and small businesses through multiple delivery channels. Global Business and Financial Services serves domestic and international business clients providing financial services, specialized industry expertise and local delivery through a global team of client managers and a variety of businesses. During the third quarter of 2005, our operations in Mexico were realigned and are now included in the results of Global Business and Financial Services, rather than Global Capital Markets and Investment Banking. Global Capital Markets and Investment Banking provides capital-raising solutions, advisory services, derivatives capabilities, equity and debt sales and trading for the Corporation’s clients as well as traditional bank deposit and loan products, treasury management and payment services to large corporations and institutional clients. Also during the third quarter of 2005, the Corporation announced the future combination of Global Business and Financial Services and Global Capital Markets and Investment Banking that was effective on January 1, 2006. This new segment is called Global Corporate and Investment Banking. Global Wealth and Investment Management offers investment services, estate management, financial planning services, fiduciary management, credit and banking expertise, and diversified asset management products to institutional clients as well as affluent and high-net-worth individuals. All Other consists primarily of Equity Investments, the residual impact of the allowance for credit losses process, Merger and Restructuring Charges, intersegment eliminations, and the results of certain consumer finance and commercial lending businesses that are being liquidated. All Other also includes certain amounts associated with the ALM process, including the impact of funds transfer pricing allocation methodologies, amounts associated with the change in the value of derivatives used as economic hedges of interest rate and foreign exchange rate fluctuations that do not qualify for SFAS 133 hedge accounting treatment, gains or losses on sales of whole mortgage loans, and Gains on Sales of Debt Securities. Total Revenue includes Net Interest Income on a fully taxable-equivalent (FTE) basis and Noninterest Income. The adjustment of Net Interest Income to a FTE basis results in a corresponding increase in Income Tax Expense. 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 of the business segments also includes an allocation of Net Interest Income generated by the Corporation’s ALM process. Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. The most significant of these expenses include data processing costs, item processing costs and certain centralized or shared functions. Data processing costs are allocated to the segments based on equipment usage. Item processing costs are allocated to the segments based on the volume of items processed for each segment. The cost of certain centralized or shared functions are allocated based on methodologies which reflect utilization. 149 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following table presents Total Revenue on a FTE basis and Net Income in 2005, 2004 and 2003, and Total Assets at December 31, 2005 and 2004 for each business segment, as well as All Other. Business Segments At and for the Year Ended December 31 (Dollars in millions) Total Corporation 2005 2004 (Restated) 2003 (Restated) Global Consumer and Small Business Banking(1) 2005 2004 2003 Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . $ Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,569 $ 25,354 Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on sales of debt securities . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,923 4,014 1,084 809 27,872 25,312 8,847 28,677 21,005 49,682 2,769 1,724 664 26,348 21,625 7,678 $21,149 17,329 $ 17,053 $ 15,911 9,245 11,823 $11,052 8,542 38,478 2,839 941 217 19,938 16,425 5,663 28,876 4,271 (2) 551 12,889 11,163 4,007 25,156 3,333 117 441 12,114 9,385 3,414 19,594 1,694 13 139 9,460 8,314 2,985 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,465 $ 13,947 $10,762 $ 7,156 $ 5,971 $ 5,329 Period-end total assets . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,803 $1,110,432 $335,551 $336,902 Global Business and Financial Services(1) Global Capital Markets and Investment Banking(1) (Dollars in millions) 2005 2004 2003 2005 2004 2003 Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . $ Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,788 $ 3,372 Total revenue (FTE basis) . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on sales of debt securities . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,160 (49) 146 132 4,030 7,193 2,631 6,534 2,717 9,251 (442) — 113 3,485 6,095 2,251 $ 4,253 1,613 $ 3,298 $ 4,058 4,988 5,711 $ 4,233 4,118 5,866 526 — 30 2,092 3,218 1,145 9,009 (244) 117 47 6,631 2,692 956 9,046 (445) (10) 43 6,538 2,900 976 8,351 308 (14) 24 5,390 2,615 865 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,562 $ 3,844 $ 2,073 $ 1,736 $ 1,924 $ 1,750 Period-end total assets . . . . . . . . . . . . . . . . . . . $ 237,679 $ 214,045 $395,900 $303,897 (Dollars in millions) 2005 2004 2003 2005 Global Wealth and Investment Management(1) All Other 2004 (Restated) 2003 (Restated) Net interest income (FTE basis) . . . . . . . . . . . . . . . . . . . $ Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,770 $ 3,623 Total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of debt securities . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . 7,393 (5) — 74 3,598 3,726 1,338 2,869 3,064 5,933 (20) — 62 3,369 2,522 917 $ 1,954 2,078 $ (340) $ 825 (695) 991 $ (343) 978 4,032 11 — 20 2,075 1,926 687 485 41 823 5 724 538 (85) 296 343 1,617 5 842 723 120 603 635 300 942 4 921 352 (19) $ 371 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,388 $ 1,605 $ 1,239 $ 623 $ Period-end total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 127,156 $ 122,587 $195,517 $133,001 (1) There were no material intersegment revenues among the segments. 150 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) The following tables present reconciliations of the four business segments’ Total Revenue on a FTE basis and Net Income to the Consolidated Statement of Income, and Total Assets to the Consolidated Balance Sheet. The adjustments presented in the table below include consolidated income and expense amounts not specifically allocated to individual business segments. (Dollars in millions) Segments’ total revenue (FTE basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments: ALM activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidating businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FTE basis adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31 2005 2004 (Restated) 2003 (Restated) $56,438 $49,386 $37,843 (501) 1,372 214 (832) (600) 20 448 282 (717) (454) 421 (256) 324 (644) 146 Consolidated revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,091 $48,965 $37,834 Segments’ net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments, net of taxes: ALM activities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidating businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Litigation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,842 $13,344 $10,391 52 796 109 (275) (33) (26) 869 202 78 (411) 66 (201) 802 (246) (21) — (150) (14) Consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,465 $13,947 $10,762 (1) Includes pre-tax Gains on Sales of Debt Securities of $823 million, $1,612 million and $938 million in 2005, 2004 and 2003, respectively. (Dollars in millions) December 31 2005 2004 (Restated) Segments’ total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,096,286 $ 977,431 Adjustments: ALM activities, including securities portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidating businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elimination of excess earning asset allocations . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365,068 6,712 3,399 (206,940) 27,278 339,423 7,625 4,390 (232,954) 14,517 Consolidated total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,803 $1,110,432 151 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 21—Parent Company Information The following tables present the Parent Company Only financial information: Condensed Statement of Income (Dollars in millions) Income Dividends from subsidiaries: Year Ended December 31 2005 2004 (Restated) 2003 (Restated) Bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,400 Other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 2,581 Interest from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,719 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,100 133 1,085 2,463 $ 8,950 34 610 2,717 Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,763 11,781 12,311 Expense Interest on borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes and equity in undistributed earnings of 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 . . . . . . . . . . . . . . . 3,843 2,636 6,479 8,284 791 9,075 6,518 872 7,390 2,876 2,057 4,933 6,848 360 7,208 6,165 574 6,739 2,153 2,310 4,463 7,848 596 8,444 2,224 94 2,318 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,465 $13,947 $10,762 Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,447 $13,931 $10,758 Condensed Balance Sheet (Dollars in millions) December 31 2005 2004 (Restated) Assets Cash held at bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,670 $ 47,138 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,694 Receivables from subsidiaries: 2,285 Bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,581 18,766 10,531 19,897 Investments in subsidiaries: Bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,210 2,472 13,685 114,334 1,499 14,036 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,669 $210,129 Liabilities and shareholders’ equity Commercial paper and other short-term borrowings Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payables to subsidiaries: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,333 $ 19,611 7,124 7,228 Bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,824 2,479 88,272 101,533 487 765 81,907 100,235 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,669 $210,129 152 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Condensed Statement of Cash Flows (Dollars in millions) Year Ended December 31 2005 2004 (Restated) 2003 (Restated) Operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,465 Reconciliation of net income to net cash provided by operating activities: $13,947 $10,762 Equity in undistributed losses of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities Net (purchases) sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net payments from (to) subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities Net increase (decrease) in commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cash held at bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash held at bank subsidiaries at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,390) (1,035) (6,739) (1,487) 8,040 5,721 403 (3,145) (3,001) (1,348) 821 3,348 (5,743) 2,821 (292) 20,477 (11,053) 3,077 (5,765) (7,683) 1,474 15,937 19,965 (9,220) 3,939 (6,286) (6,468) 293 235 18,160 2,532 47,138 26,702 20,436 (2,318) 295 8,739 (59) (1,160) (1,598) (2,817) 2,482 14,713 (5,928) 4,249 (9,766) (4,281) 201 1,670 7,592 12,844 Cash held at bank subsidiaries at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,670 $47,138 $20,436 153 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 22—Performance by Geographical 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Restated) (Restated) At December 31 Year Ended December 31 Total Assets(1) Total Revenue(2) Income (Loss) Before Income Taxes Net Income (Loss) $1,195,212 1,046,727 $52,714 46,252 36,444 $22,790 19,852 15,859 $15,357 13,246 10,786 Year 2005 2004 2003 Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 Europe, Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 Latin America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 Total Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 2004 2003 28,442 21,658 51,917 27,580 16,232 14,467 96,591 63,705 727 674 416 1,257 1,136 850 1,393 903 124 3,377 2,713 1,390 360 260 57 355 335 25 975 461 (160) 1,690 1,056 (78) 255 192 54 229 224 23 624 285 (101) 1,108 701 (24) Total Consolidated . . . . . . . . . . . . . . . . . . . . . . (Restated) (Restated) 2005 2004 2003 $1,291,803 1,110,432 $56,091 48,965 37,834 $24,480 20,908 15,781 $16,465 13,947 10,762 (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 $4,052 million and $4,849 million at December 31, 2005 and 2004; Total Revenue of $113 million, $88 million, and $96 million; Income before Income Taxes of $66 million, $49 million, and $60 million; and Net Income of $56 million, $41 million, and $12 million for the years ended December 31, 2005, 2004 and 2003. 154 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Note 23—Restatement of Quarterly Financial Statements (unaudited) Consolidated Statement of Income The following tables set forth the effects of the restatement for the quarters in 2005 and 2004. (Dollars in millions, except per share information) As Previously Reported(1) Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Fourth Third Second First 2005 Quarters 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 . . . . . . . . . . . . . . . . $ 9,559 2,819 $ 9,536 2,815 $ 8,956 2,797 $ 8,933 2,793 $ 8,312 2,799 $ 8,294 2,796 $ 8,107 2,534 $ 8,080 2,533 1,462 1,585 605 1,477 1,585 605 1,372 1,550 547 1,382 1,550 547 1,252 1,426 502 1,249 1,426 502 893 1,182 437 904 1,182 437 Total interest income . . . . . . . . . . . . . 16,030 16,018 15,222 15,205 14,291 14,267 13,153 13,136 Interest expense Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . Noninterest income Service charges . . . . . . . . . . . . . . . . . . . . . Investment and brokerage services . . . . Mortgage banking income . . . . . . . . . . . . Investment banking income . . . . . . . . . . . Equity investment gains . . . . . . . . . . . . . . Card income . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . Total revenue . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . Gains on sales of debt securities . . . . Noninterest expense Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . Telecommunications . . . . . . . . . . . . . . . . . Other general operating . . . . . . . . . . . . . . Merger and 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 paid . . . . . . . . . . . . . . . . . . . . . . Average common shares issued and outstanding (in thousands) . . . . . . . Average diluted common shares issued and outstanding (in thousands) . . . . . . . . . . . . . . . . . . . . . . 2,434 3,902 619 1,215 8,170 7,860 1,927 1,062 215 537 481 1,507 253 280 6,262 14,122 1,400 71 3,845 699 305 265 283 196 394 219 1,055 59 7,320 5,473 1,705 3,768 3,764 0.94 0.93 0.50 $ $ $ $ $ 2,476 3,855 619 1,209 8,159 7,859 1,927 1,062 215 537 481 1,507 253 (31) 5,951 13,810 1,400 71 3,845 699 305 265 283 196 394 219 1,055 59 7,320 5,161 1,587 3,574 3,570 0.89 0.88 0.50 $ $ $ $ $ 2,439 3,250 707 1,053 7,449 7,773 2,080 1,060 180 522 668 1,520 514 290 6,834 14,607 1,159 29 3,837 638 300 307 254 201 361 206 1,061 120 7,285 6,192 2,065 4,127 4,122 1.03 1.02 0.50 $ $ $ $ $ 2,471 3,190 707 1,102 7,470 7,735 2,080 1,060 180 522 668 1,520 514 (128) 6,416 14,151 1,159 29 3,837 638 300 307 254 201 361 206 1,061 120 7,285 5,736 1,895 3,841 3,836 0.96 0.95 0.50 2,379 2,677 611 974 6,641 7,650 1,920 1,049 189 431 492 1,437 285 562 6,365 2,363 2,582 611 1,074 6,630 7,637 1,920 1,049 189 431 492 1,437 285 1,152 6,955 2,043 1,969 427 841 5,280 7,873 1,777 1,013 221 366 399 1,289 760 324 6,149 2,182 1,988 427 1,033 5,630 7,506 1,777 1,013 221 366 399 1,289 760 207 6,032 14,015 14,592 14,022 13,538 875 325 3,671 615 297 346 216 204 368 196 985 121 7,019 6,446 2,150 4,296 4,292 1.07 1.06 0.45 $ $ $ $ $ 875 325 3,671 615 297 346 216 204 368 196 985 121 7,019 7,023 2,366 4,657 4,653 1.16 1.14 0.45 $ $ $ $ $ 580 659 3,701 636 297 337 177 208 364 206 1,019 112 7,057 7,044 2,349 4,695 4,690 1.16 1.14 0.45 $ $ $ $ $ 580 659 3,701 636 297 337 177 208 364 206 1,019 112 7,057 6,560 2,167 4,393 4,388 1.09 1.07 0.45 $ $ $ $ $ $ $ $ $ $ 3,996,024 3,996,024 4,000,573 4,000,573 4,005,356 4,005,356 4,032,550 4,032,550 4,053,859 4,053,859 4,054,659 4,054,659 4,065,355 4,065,355 4,099,062 4,099,062 (1) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. 155 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Income 2004 Quarters (Dollars in millions, except per share information) As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Fourth Third Second First $ 7,919 2,065 $ 7,877 2,063 $ 7,508 2,078 $ 7,499 2,076 $ 7,237 1,907 $ 7,183 1,907 $ 5,549 1,212 $ 5,492 1,210 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 . . . . . . . . . . . . . . . . 712 1,035 464 699 1,035 464 484 960 457 464 960 457 413 1,009 424 385 1,009 424 Total interest income . . . . . . . . . . . . . 12,195 12,138 11,487 11,456 10,990 10,908 Interest expense Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . Trading account liabilities . . . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . Noninterest income Service charges . . . . . . . . . . . . . . . . . . . . . Investment and brokerage services . . . . Mortgage banking income . . . . . . . . . . . . Investment banking income . . . . . . . . . . . Equity investment gains . . . . . . . . . . . . . . Card income . . . . . . . . . . . . . . . . . . . . . . . . Trading account profits . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . 1,829 1,543 352 724 4,448 7,747 1,891 1,008 156 497 426 1,380 269 339 5,966 1,764 1,452 352 1,020 4,588 7,550 1,891 1,008 156 497 426 1,380 269 547 6,174 1,711 1,152 333 626 3,822 7,665 1,899 972 (250) 438 220 1,258 184 201 4,922 1,616 1,050 333 942 3,941 7,515 1,899 972 (250) 438 220 1,258 184 1,291 6,012 1,529 1,019 298 563 3,409 7,581 1,783 999 299 547 84 1,159 413 183 5,467 1,427 910 298 907 3,542 7,366 1,783 999 299 547 84 1,159 414 (415) 4,870 Total revenue . . . . . . . . . . . . . . . . . . . . . 13,713 13,724 12,587 13,527 13,048 12,236 706 101 3,520 648 326 337 275 209 371 216 1,159 272 7,333 5,775 1,926 3,849 3,844 0.95 0.94 0.45 $ $ $ $ $ 706 101 3,520 648 326 337 275 209 371 216 1,159 272 7,333 5,786 1,931 3,855 3,850 0.95 0.94 0.45 $ $ $ $ $ 650 732 3,534 622 309 364 207 200 341 180 1,043 221 7,021 5,648 1,884 3,764 3,759 0.93 0.91 0.45 $ $ $ $ $ 650 333 3,534 622 309 364 207 200 341 180 1,043 221 7,021 6,189 2,086 4,103 4,098 1.01 0.99 0.45 $ $ $ $ $ 789 795 3,629 621 318 367 194 201 333 183 1,257 125 7,228 5,826 1,977 3,849 3,844 0.95 0.93 0.40 $ $ $ $ $ 789 795 3,629 621 318 367 194 201 333 183 1,257 125 7,228 5,014 1,673 3,341 3,336 0.82 0.81 0.40 $ $ $ $ $ $ $ $ $ $ Provision for credit losses . . . . . . . . . Gains on sales of debt securities . . . . Noninterest expense Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . Telecommunications . . . . . . . . . . . . . . . . . Other general operating . . . . . . . . . . . . . . Merger and 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 paid . . . . . . . . . . . . . . . . . . . . . . Average common shares issued and outstanding (in thousands) . . . . . . . Average diluted common shares issued and outstanding (in thousands) . . . . . . . . . . . . . . . . . . . . . . 4,032,979 4,032,979 4,052,304 4,052,304 4,062,384 4,062,384 2,880,306 2,880,306 4,106,040 4,106,040 4,121,375 4,121,375 4,131,290 4,131,290 2,933,402 2,933,402 156 434 1,012 345 8,552 1,206 720 334 491 2,751 5,801 1,416 635 209 404 133 795 3 135 3,730 9,531 624 495 2,752 488 261 281 160 54 284 151 999 — 5,430 3,972 1,291 2,681 2,680 0.93 0.91 0.40 $ $ $ $ $ 392 1,012 345 8,451 1,114 660 334 814 2,922 5,529 1,416 635 209 404 133 795 2 355 3,949 9,478 624 495 2,752 488 261 281 160 54 284 151 999 — 5,430 3,919 1,271 2,648 2,647 0.92 0.90 0.40 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (Dollars in millions) Consolidated Balance Sheet 2005 Quarters Fourth Third Second First As Previously Reported(1) Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ Time deposits placed and other short-term 36,999 $ 36,999 $ 32,771 $ 32,771 $ 33,935 $ 33,935 $ 28,698 $ 28,698 investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,800 12,800 11,236 11,236 9,682 9,682 11,223 11,223 Federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities: 149,785 131,707 23,712 149,785 131,707 23,712 135,409 121,256 26,005 135,409 121,256 26,005 149,287 126,658 26,019 149,287 126,658 26,019 139,396 124,960 26,182 139,396 124,960 26,182 Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity, at cost . . . . . . . . . . . . . . . . . . . . . . . 221,556 47 221,556 47 227,349 136 227,349 136 233,412 174 233,412 174 218,675 275 218,675 275 Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,603 221,603 227,485 227,485 233,586 233,586 218,950 218,950 Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses . . . . . . . . . . . . . . . . 573,782 (8,045) 573,791 (8,045) 554,603 (8,326) 554,612 (8,326) 529,418 (8,319) 529,428 (8,319) 529,466 (8,313) 529,457 (8,313) Loans and leases, net of allowance . . . . . . . . . . . . . 565,737 565,746 546,277 546,286 521,099 521,109 521,153 521,144 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposit intangibles and other intangibles . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,786 2,807 45,354 3,194 90,311 7,786 2,806 45,354 3,194 90,311 7,659 2,764 45,298 3,356 92,743 7,659 2,763 45,298 3,356 92,743 7,602 2,366 45,381 3,472 87,243 7,602 2,365 45,381 3,472 87,243 7,531 2,668 45,378 3,679 82,421 7,531 2,667 45,378 3,679 82,421 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,795 $1,291,803 $1,252,259 $1,252,267 $1,246,330 $1,246,339 $1,212,239 $1,212,229 Liabilities Deposits in domestic offices: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179,571 $ 179,571 $ 174,990 $ 174,990 $ 175,427 $ 175,427 $ 166,499 $ 166,499 403,534 Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397,778 390,973 403,534 384,155 384,155 390,973 397,778 Deposits in foreign offices: Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,165 63,779 7,165 63,779 6,750 53,764 6,750 53,764 6,102 56,110 6,102 56,110 5,319 54,635 5,319 54,635 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 634,670 634,670 626,477 626,477 635,417 635,417 629,987 629,987 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,655 50,890 15,000 116,269 31,749 101,338 240,655 50,890 15,000 116,269 31,938 100,848 217,053 51,244 15,711 107,655 32,976 99,885 217,053 51,244 15,711 107,655 33,250 99,149 207,710 61,906 15,630 93,763 34,470 96,894 207,710 61,906 15,630 93,763 34,940 95,638 187,652 53,434 15,363 93,440 35,081 98,763 187,652 53,434 15,363 93,440 35,319 98,107 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190,571 1,190,270 1,151,001 1,150,539 1,145,790 1,145,004 1,113,720 1,113,302 Commitments and contingencies (Note 9) Shareholders’ equity Preferred stock, $0.01 par value; authorized— 100,000,000 shares for all periods; issued and outstanding—1,090,189 shares for all periods . . . . . Common stock and additional paid-in capital, $0.01 par value(2,3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 271 271 271 271 271 271 271 41,693 67,205 (7,518) (427) 41,693 67,552 (7,556) (427) 42,548 65,439 (6,509) (491) 42,548 65,980 (6,580) (491) 42,507 63,328 (4,992) (574) 42,507 64,154 (5,023) (574) 43,589 60,843 (5,559) (625) 43,589 61,309 (5,617) (625) Total shareholders’ equity . . . . . . . . . . . . . . . 101,224 101,533 101,258 101,728 100,540 101,335 98,519 98,927 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,291,795 $1,291,803 $1,252,259 $1,252,267 $1,246,330 $1,246,339 $1,212,239 $1,212,229 (1) The Corporation provided unaudited financial information relating to the fourth quarter of 2005 in its current report on Form 8-K filed on January 23, 2006. (2) Authorized—7,500,000,000 shares for the Fourth, Third, Second and First Quarters (3) Issued and outstanding—3,999,688,491 shares, 4,013,063,444 shares, 4,016,703,839 shares and 4,035,318,509 shares for the Fourth, Third, Second and First Quarters 157 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) (Dollars in millions) Consolidated Balance Sheet 2004 Quarters Fourth Third Second First As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated As Previously Reported Restated Assets Cash and cash equivalents . . . . . . . . . . . . . . . $ Time deposits placed and other short-term under agreements to resell investments . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold and securities purchased . . . . . . . . . . . . . Trading account assets . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . Securities: Available-for-sale . . . . . . . . . . . . . . . . . . . . . Held-to-maturity, at cost . . . . . . . . . . . . . . . 28,936 $ 28,936 $ 29,252 $ 29,252 $ 31,789 31,789 22,296 22,296 12,361 12,361 11,021 11,021 10,418 10,418 8,561 8,561 91,360 93,587 30,235 91,360 93,587 30,235 104,570 102,925 25,398 104,570 102,925 25,398 81,437 85,972 25,908 81,437 85,972 25,908 73,057 75,004 28,481 73,057 75,004 28,481 194,743 330 194,743 330 163,438 420 163,438 420 166,175 478 166,175 478 139,546 242 139,546 242 Total securities . . . . . . . . . . . . . . . . . . . . . 195,073 195,073 163,858 163,858 166,653 166,653 139,788 139,788 Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses . . . . . . . . 521,837 (8,626) 521,813 (8,626) 511,639 (8,723) 511,613 (8,723) 498,481 (8,767) 498,452 (8,767) 375,968 (6,080) 375,938 (6,080) Loans and leases, net of allowance . . . . . 513,211 513,187 502,916 502,890 489,714 489,685 369,888 369,858 Premises and equipment, net . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core deposit intangibles and other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,517 2,482 45,262 3,887 86,546 7,517 2,481 45,262 3,887 86,546 7,884 2,453 44,709 3,726 74,117 7,884 2,452 44,709 3,726 74,117 7,797 3,005 44,672 3,922 73,444 7,797 3,004 44,672 3,922 73,444 6,076 2,184 11,468 854 62,317 6,076 2,182 11,468 854 62,317 Total assets . . . . . . . . . . . . . . . . . . . . . $1,110,457 $1,110,432 $1,072,829 $1,072,802 $1,024,731 1,024,701 799,974 799,942 Liabilities Deposits in domestic offices: Noninterest-bearing . . . . . . . . . . . . . . . . . . . $ 163,833 $ 163,833 $ 155,406 $ 155,406 $ 154,061 369,446 396,645 Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . 380,956 380,956 396,645 154,061 369,446 121,629 267,850 121,629 267,850 Deposits in foreign offices: Noninterest-bearing . . . . . . . . . . . . . . . . . . . Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . 6,066 52,026 6,066 52,026 5,632 49,264 5,632 49,264 5,499 46,407 5,499 46,407 2,805 43,308 2,805 43,308 Total deposits . . . . . . . . . . . . . . . . . . . . . 618,570 618,570 591,258 591,258 575,413 575,413 435,592 435,592 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 . . . . . . . . . . . . . . . . . . . . . . . . . 119,741 36,654 17,928 78,598 41,243 98,078 119,741 36,654 17,928 78,598 41,590 97,116 142,992 36,825 12,721 61,585 28,851 100,586 142,992 36,825 12,721 61,585 29,205 99,582 119,264 29,689 14,381 119,264 29,689 14,381 115,434 27,402 16,290 115,434 27,402 16,290 63,162 28,682 98,319 63,162 28,747 98,082 56,614 18,635 81,231 56,614 19,269 79,474 Total liabilities . . . . . . . . . . . . . . . . . . 1,010,812 1,010,197 974,818 974,168 928,910 928,738 751,198 750,075 Commitments and contingencies (Note 9) Shareholders’ equity Preferred stock, $0.01 par value(1,2) Common stock and additional paid-in . . . . . . . . capital, $0.01 par value(3,4) . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 271 271 271 322 322 53 53 44,236 58,006 44,236 58,773 44,756 55,979 44,756 56,739 45,669 54,030 45,669 54,452 29 51,808 29 52,738 (2,587) (281) (2,764) (281) (2,669) (326) (2,806) (326) (3,862) (338) (4,142) (338) (2,743) (371) (2,582) (371) Total shareholders’ equity . . . . . . . 99,645 100,235 98,011 98,634 95,821 95,963 48,776 49,867 Total liabilities and shareholders’ equity . . . . . . . . . $1,110,457 $1,110,432 $1,072,829 $1,072,802 $1,024,731 1,024,701 799,974 799,942 (1) Authorized—100,000,000 shares for the Fourth, Third, Second and First Quarters (2) Issued and outstanding—1,090,189 shares, 1,090,189 shares, 2,292,013 shares and 1,239,563 shares for the Fourth, Third, Second and First Quarters (3) Authorized—7,500,000,000 shares for the Fourth, Third, Second and First Quarters (4) Issued and outstanding—4,046,546,212 shares, 4,049,062,685 shares, 2,031,328,433 shares and 1,445,487,313 shares for the Fourth, Third, Second and First Quarters 158 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Changes in Shareholders’ Equity, As Previously Reported For the Three, Six and Nine Months in 2005 Common Stock and Additional Paid-in Capital Shares Amount Retained Earnings 4,046,546 $ 44,236 $ 58,006 4,695 Accumulated Other Comprehensive Income (Loss)(1) $ (2,587) Preferred Stock $271 Total Share- holders’ Equity Other Comprehensive Income $ (281) $ 99,645 4,695 $ 4,695 (Dollars in millions, shares in thousands) Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available- for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,987 (43,214) 1,343 (1,990) (1,830) (5) (23) Balance, March 31, 2005 . . . . . . . . . . . . . . . . $271 4,035,319 $43,589 $60,843 $(5,559) $(625) $ 98,519 $ 1,723 $271 4,046,546 $ 44,236 $ 58,006 8,991 $ (2,587) $ (281) $ 99,645 8,991 $ 8,991 Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,672 (83,514) 2,090 (3,819) (3,640) (9) (20) Balance, June 30, 2005 . . . . . . . . . . . . . . . . . $271 4,016,704 $42,507 $63,328 $(4,992) $(574) $100,540 $ 6,586 $271 4,046,546 $ 44,236 $ 58,006 13,118 $ (2,587) $ (281) $ 99,645 13,118 $13,118 (1,541) (5) (1,426) (1,541) (1,541) (5) (1,426) (5) (1,426) (1,830) (5) 999 (1,990) (23) (344) 584 30 (3,019) 584 584 30 (3,019) 30 (3,019) (3,640) (9) 1,798 (3,819) (21) (292) (1) (1,711) 26 (2,237) (1,711) (1,711) 26 (2,237) 26 (2,237) (5,658) (14) 2,382 (4,281) (12) (211) 1 Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,704 (94,187) 2,593 (4,281) (5,658) (14) (13) Balance, September 30, 2005 . . . . . . . . . . . $271 4,013,063 $42,548 $65,439 $(6,509) $(491) $101,258 $ 9,196 (1) At September 30, 2005, June 30, 2005, and March 31, 2005, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on AFS Debt and Marketable Equity Securities of $(1,908) million, $387 million and $(1,738) million, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $(129) million, $(125) million and $(160) million, respectively; Net Unrealized Gains (Losses) on Derivatives of $(4,338) million, $(5,120) million, and $(3,527) million, respectively; and Other of $(134) million, $(134) million and $(134) million, respectively. 159 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Changes in Shareholders’ Equity, As Restated For the Three, Six and Nine Months in 2005 (Dollars in millions, shares in thousands) Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred Stock $271 Common Stock and Additional Paid-in Capital Shares Amount Accumulated Other Comprehensive Income (Loss)(1) Other Total Share- holders’ Equity Retained Earnings Comprehensive Income 4,046,546 $ 44,236 $ 58,773 4,393 $ (2,764) $ (281) $ 100,235 4,393 $ 4,393 (1,541) (5) (1,306) (1,830) (5) 31,987 (43,214) 1,343 (1,990) (344) (22) (1) (1,541) (1,541) (5) (1,306) (1,830) (5) 999 (1,990) (23) (5) (1,306) (1) Balance, March 31, 2005 . . . . . . . . . . . . . . . $271 4,035,319 $43,589 $61,309 $(5,617) $(625) $ 98,927 $ 1,540 $271 4,046,546 $ 44,236 $ 58,773 9,050 $ (2,764) $ (281) $ 100,235 9,050 $ 9,050 Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available- for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: 584 30 (2,873) 584 584 30 (2,873) 30 (2,873) (3,640) (9) 1,798 (3,819) (21) (292) (1) Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,672 (83,514) 2,090 (3,819) (3,640) (9) (20) Balance, June 30, 2005 . . . . . . . . . . . . . . . . . $271 4,016,704 $42,507 $64,154 $(5,023) $(574) $101,335 $ 6,791 Balance, December 31, 2004 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . . . . . . . . . . . Net gains (losses) on derivatives Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $271 4,046,546 $ 44,236 $ 58,773 12,891 $ (2,764) $ (281) $ 100,235 12,891 $12,891 (1,711) 26 (2,130) (5,658) (14) 60,704 (94,187) 2,593 (4,281) (211) (12) (1) 1 (1,711) (1,711) 26 (2,130) (5,658) (14) 2,382 (4,281) (12) 26 (2,130) (1) Balance, September 30, 2005 . . . . . . . . . . . $271 4,013,063 $42,548 $65,980 $(6,580) $(491) $101,728 $ 9,075 (1) At September 30, 2005, June 30, 2005, and March 31, 2005, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on AFS Debt and Marketable Equity Securities of $(1,908) million, $387 million and $(1,738) million, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $(129) million, $(125) million and $(160) million, respectively; Net Unrealized Gains (Losses) on Derivatives of $(4,409) million, $(5,152) million, and $(3,585) million, respectively; and Other of $(134) million, $(134) million and $(134) million, respectively. 160 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Changes in Shareholders’ Equity, As Previously Reported For the Three, Six and Nine Months in 2004 (Dollars in millions, shares in thousands) Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . . Common Stock and Additional Paid-in Capital Shares Amount Accumulated Other Comprehensive Income (Loss)(1) Other Total Share- holders’ Equity Retained Earnings Preferred Stock Comprehensive Income $ 54 2,882,288 $ 29 $ 50,198 2,681 $ (2,148) $ (153) $ 47,980 2,681 $ 2,681 661 3 (1,259) 661 661 3 (1,259) 3 (1,259) (1,158) (1) 842 (973) (218) (1,158) (1) 88 32,892 (24,306) 100 1,060 (1,061) 1 (1) Balance, March 31, 2004 . . . . . . . . . . . . . . . $ 53 2,890,974 $ 29 $51,808 $(2,743) $(371) $48,776 $ 2,086 Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available- for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Stock issued in acquisition . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 2,882,288 $ 29 $ 50,198 6,530 $ (2,148) $ (153) $ 47,980 6,530 $ 6,530 271 (3) 66,804 1,186,728 (73,366) 202 2,280 46,480 (3,076) 1 (45) (2,796) (6) 88 16 (2,025) (2,025) (2,025) (18) 329 (18) 329 (18) 329 (2,796) (6) 2,097 46,751 (2,988) (2) (31) (183) (2) Balance, June 30, 2004 . . . . . . . . . . . . . . . . $322 4,062,656 $45,669 $54,030 $(3,862) $(338) $95,821 $ 4,816 Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . . Stocks issued in acquisition . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 2,882,288 $ 29 $ 50,198 10,294 $ (2,148) $ (153) $ 47,980 10,294 $10,294 271 (54) 89,603 1,186,728 (113,796) 4,240 3,037 46,480 (4,837) 54 (7) (4,629) (11) 88 39 (390) (9) (122) (390) (9) (122) (390) (9) (122) (4,629) (11) 2,865 46,751 (4,749) — 31 (172) (1) Balance, September 30, 2004 . . . . . . . . . . . $271 4,049,063 $44,756 $55,979 $(2,669) $(326) $98,011 $ 9,773 (1) At September 30, 2004, June 30, 2004, and March 31, 2004, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on AFS Debt and Marketable Equity Securities of $(460) million, $(2,095) million and $591 million, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $(175) million, $(184) million and $(163) million, respectively; Net Unrealized Gains (Losses) on Derivatives of $(1,930) million, $(1,479) million, and $(3,067) million, respectively; and Other of $(104) million, $(104) million and $(104) million, respectively. 161 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Changes in Shareholders’ Equity, As Restated For the Three, Six and Nine Months in 2004 (Dollars in millions, shares in thousands) Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common Stock and Additional Paid-in Capital Shares Amount Accumulated Other Comprehensive Income (Loss)(1) Other Total Share- holders’ Equity Retained Earnings Preferred Stock Comprehensive Income $ 54 2,882,288 $ 29 $ 51,162 2,648 $ (2,434) $ (154) $ 48,657 2,648 $ 2,648 661 3 (812) 32,892 (24,306) 100 1,060 (1,061) 1 (1) (1,158) (1) 88 (1) (218) — 1 661 3 (812) 661 3 (812) (1,158) (1) 842 (973) — — Balance, March 31, 2004 . . . . . . . . . . . . . . . $ 53 2,890,974 $ 29 $52,738 $(2,582) $(371) $49,867 $ 2,500 Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available- for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . Stocks issued in acquisition . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 2,882,288 $ 29 $ 51,162 5,989 $ (2,434) $ (154) $ 48,657 5,989 $ 5,989 271 (3) 66,804 1,186,728 (73,366) 202 2,280 46,480 (3,076) 1 (45) (2,796) (6) 88 15 (2,025) (2,025) (2,025) (18) 335 (18) 335 (183) — (1) (18) 335 (2,796) (6) 2,097 46,751 (2,988) (2) (31) Balance, June 30, 2004 . . . . . . . . . . . . . . . . $322 4,062,656 $45,669 $54,452 $(4,142) $(338) $95,963 $ 4,281 Balance, December 31, 2003 . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on available-for-sale debt and marketable equity securities . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains (losses) on foreign currency translation adjustments . . . . . . . Net gains (losses) on derivatives . . . . . . . . . . Cash dividends paid: Common . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock issued under employee plans and related tax benefits . . . . . . . . . . . . . . . Stocks issued in acquisition . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . Conversion of preferred stock . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 2,882,288 $ 29 $ 51,162 10,092 $ (2,434) $ (154) $ 48,657 10,092 $10,092 271 (54) 89,603 1,186,728 (113,796) 4,240 3,037 46,480 (4,837) 54 (7) (4,629) (11) 88 37 (390) (9) 27 (172) — — (390) (390) (9) 27 (9) 27 (4,629) (11) 2,865 46,751 (4,749) — 30 Balance, September 30, 2004 . . . . . . . . . . . $271 4,049,063 $44,756 $56,739 $(2,806) $(326) $98,634 $ 9,720 (1) At September 30, 2004, June 30, 2004, and March 31, 2004, Accumulated Other Comprehensive Income (Loss) includes Net Unrealized Gains (Losses) on AFS Debt and Marketable Equity Securities of $(460) million, $(2,095) million and $591 million, respectively; Net Unrealized Losses on Foreign Currency Translation Adjustments of $(175) million, $(184) million and $(163) million, respectively; Net Unrealized Gains (Losses) on Derivatives of $(2,067) million, $(1,759) million, and $(2,906) million, respectively; and Other of $(104) million, $(104) million and $(104) million, respectively. 162 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Cash Flows (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 debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and premises improvements amortization . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in trading and derivative instruments . . . . . . . . . . . Net (increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . Net decrease in accrued expenses and other liabilities . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Three Months Ended March 31 2005 2004 As Previously Reported Restated As Previously Reported Restated $ 4,695 $ 4,393 $ 2,681 $ 2,648 580 (659) 240 208 (85) (13,041) 4,283 (4,489) (3,707) 580 (659) 240 208 (267) (12,697) 4,283 (4,489) (3,669) 624 (495) 209 54 (66) (8,528) (5,063) (8,252) 3,275 624 (495) 209 54 (86) (7,475) (5,063) (8,252) 2,275 Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . (11,975) (12,077) (15,561) (15,561) Investing activities Net (increase) decrease in time deposits placed and other short- term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,138 1,138 (510) (510) 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 of loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . . . Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of foreclosed properties . . . . . . . . . . . . . . . . . . . . . Net cash paid for business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,036) 38,451 10,181 (74,552) 55 1,113 (9,560) (168) (254) 26 (116) (72) (48,036) 38,451 10,181 (74,552) 55 1,113 (9,574) (168) (254) 26 — (72) 3,435 11,090 1,848 (84,567) 5 876 (6,133) (249) (249) 49 (15) 800 3,435 11,090 1,848 (84,567) 5 876 (6,133) (249) (249) 49 (15) 800 Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (81,794) (81,692) (73,620) (73,620) Financing activities Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in federal funds purchased and securities sold under 11,417 11,417 21,479 21,479 agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,911 67,911 37,388 37,388 Net increase in commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . . . . . . . 14,842 4,768 (2,702) 1,180 (1,990) (1,835) (37) 93,554 (23) (238) 28,936 14,842 4,768 (2,702) 1,180 (1,990) (1,835) (37) 93,554 (23) (238) 28,936 21,634 7,558 (2,507) 1,000 (973) (1,159) (23) 84,397 (4) (4,788) 27,084 21,634 7,558 (2,507) 1,000 (973) (1,159) (23) 84,397 (4) (4,788) 27,084 Cash and cash equivalents at March 31 . . . . . . . . . . $ 28,698 $ 28,698 $ 22,296 $ 22,296 163 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Cash Flows (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 debt securities . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and premises improvements amortization . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . Net increase in trading and derivative instruments . . . . . . . . Net increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in accrued expenses and other liabilities . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in operating activities . . . . . . . . . . . . . . . . . . Investing activities Net decrease in time deposits placed and other short-term Six Months Ended June 30 2005 2004 As Previously Reported Restated As Previously Reported Restated $ 8,991 $ 9,050 $ 6,530 $ 5,989 1,455 (984) 478 412 391 (7,014) (299) (5,869) (4,858) (7,297) 1,455 (984) 478 412 425 (6,897) (299) (5,869) (5,150) (7,379) 1,413 (1,290) 477 255 (11) (9,799) (281) (7,800) (669) (11,175) 1,413 (1,290) 477 255 (335) (10,444) (281) (7,800) 842 (11,174) investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,679 2,679 796 796 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 of loans and leases . . . . . . . . . . . . . . . . . . . . . . . Other changes in loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . Additions to mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . Proceeds from sales of foreclosed properties . . . . . . . . . . . . . . . . . . . Net cash (paid for) acquired in business acquisitions . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57,927) 140,666 14,794 (192,401) 156 12,221 (21,540) (407) (563) 58 (116) 306 (57,927) 132,006 21,808 (190,755) 156 12,221 (21,574) (407) (563) 58 — 306 6,043 37,729 12,215 (123,771) 5 2,002 (3,497) (662) (585) 97 5,608 (138) 6,043 37,729 12,215 (123,771) 5 2,002 (3,498) (662) (585) 97 5,608 (138) Net cash used in investing activities . . . . . . . . . . . . . . . . . . (102,074) (101,992) (64,158) (64,159) Financing activities Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,847 16,847 21,266 21,266 87,969 87,969 35,275 35,275 15,165 7,806 (7,714) 1,927 (3,819) (3,649) (58) 15,165 7,806 (7,714) 1,927 (3,819) (3,649) (58) 22,000 12,648 (7,385) 2,052 (2,988) (2,802) (9) 80,057 (19) 4,705 27,084 22,000 12,648 (7,385) 2,052 (2,988) (2,802) (9) 80,057 (19) 4,705 27,084 Net cash provided by financing activities . . . . . . . . . . . . . . 114,474 114,474 Effect of exchange rate changes on cash and cash equivalents . . . (104) (104) Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . . . . . 4,999 28,936 4,999 28,936 Cash and cash equivalents at June 30 . . . . . . . . . $ 33,935 $ 33,935 $ 31,789 $ 31,789 164 BANK OF AMERICA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements—(Continued) Consolidated Statement of Cash Flows (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 debt securities . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and premises improvements amortization . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . Net increase in trading and derivative instruments . . . . . . . . Net increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in accrued expenses and other liabilities . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in operating activities . . . . . . . . . . . . . . . . . . Investing activities Net decrease in time deposits placed and other short-term agreements to resell investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in federal funds sold and securities purchased under . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 of loans and leases . . . . . . . . . . . . . . . . . . . . . . . Other changes in loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . Additions to mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . Proceeds from sales of foreclosed properties . . . . . . . . . . . . . . . . . . . Investment in China Construction Bank . . . . . . . . . . . . . . . . . . . . . . Net cash (paid in) acquired in business acquisitions . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nine Months Ended September 30 2005 2004 As Previously Reported Restated As Previously Reported Restated $ 13,118 $ 12,891 $ 10,294 $ 10,092 2,614 (1,013) 716 613 262 (10,305) (3,330) (6,015) (6,994) (10,334) 2,614 (1,013) 716 613 126 (10,503) (3,130) (6,015) (6,718) (10,419) 2,063 (2,022) 723 455 (402) (21,396) (590) (7,919) (1,043) (19,837) 2,063 (1,623) 723 455 (524) (22,153) (590) (7,919) 20 (19,456) 1,125 1,125 193 193 (44,049) 143,079 24,378 (202,053) 194 13,059 (48,730) (663) (858) 101 (2,500) (118) 83 (44,049) 143,079 24,378 (202,053) 194 13,059 (48,763) (663) (858) 101 (2,500) — 83 (17,090) 77,860 19,710 (165,359) 63 3,192 (18,938) (841) (970) 145 — 5,593 788 (17,090) 88,425 19,710 (176,323) 63 3,192 (18,942) (841) (970) 145 — 5,615 788 Net cash used in investing activities . . . . . . . . . . . . . . . . . . (116,952) (116,867) (95,654) (96,035) Financing activities Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in commercial paper and other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,907 7,907 37,111 37,111 97,312 97,312 59,003 59,003 29,057 17,813 (13,076) 2,215 (4,281) (5,672) (104) 29,057 17,813 (13,076) 2,215 (4,281) (5,672) (104) 20,424 19,080 (11,286) 2,729 (4,749) (4,640) (41) 20,424 19,080 (11,286) 2,729 (4,749) (4,640) (41) Net cash provided by financing activities . . . . . . . . . . . . . . 131,171 131,171 117,631 117,631 Effect of exchange rate changes on cash and cash equivalents . . . Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . . . . . (50) 3,835 28,936 (50) 3,835 28,936 28 2,168 27,084 28 2,168 27,084 Cash and cash equivalents at September 30 . . . $ 32,771 $ 32,771 $ 29,252 $ 29,252 165 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosure. Item 9A. CONTROLS AND PROCEDURES (a) Restatement As a result of a recent interpretation on the “short cut” method of accounting for derivatives as hedges under of SFAS 133, the Corporation undertook additional review and testing related to the remediation of a significant deficiency outstanding at December 31, 2004 which had been previously reported to the Audit Committee. As a result of that review and testing, management identified additional deficiencies in the Corporation’s processes and procedures related to the accounting treatment of derivative transactions used as hedges against changes in interest rates and foreign currency values. After initial discussions with the Audit Committee Chair, the Audit Committee held a meeting on February 15, 2006 to review with management the potential impact of these matters. After completing further analysis, management recommended to the Audit Committee, at a follow-up meeting held on February 21, 2006, that previously reported financial results be restated to eliminate hedge accounting for certain transactions. The Audit Committee agreed with management’s recommendation. In light of the restatement, the previously reported financial statements for the full year 2002 as well as the quarterly and annual periods in 2003, 2004, and 2005 should no longer be relied upon. (b) Evaluation of Disclosure Controls and Procedures In connection with the restatement, under the direction of our Chief Executive Officer and Chief Financial Officer, we reevaluated our disclosure controls and procedures. As a result we determined that a deficiency in processes and procedures over financial reporting of derivatives and hedging originally classified as a significant deficiency at December 31, 2004 should have been classified as a material weakness at December 31, 2004. Solely as a result of this material weakness, we concluded that our disclosure controls and procedures were not effective as of March 31, 2005, June 30, 2005, and September 30, 2005. (c) Remediation of Material Weakness in Internal Control We believe that we have fully remediated the material weakness in our internal control over financial reporting with respect to accounting for derivative transactions used as hedges as of December 31, 2005. The remedial actions included: • • • implementing additional management and oversight controls to review and approve hedging strategies and related documentation to ensure hedge accounting is appropriately applied with respect to SFAS 133; discontinuing practices and processes where sustainable controls did not exist and automating other critical functions within the process; and retesting our internal financial controls with respect to the deficiencies related to the material weakness to ensure they are operating effectively to ensure compliance with SFAS 133. In connection with this report, under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated our disclosure controls and procedures currently in effect, including the remedial actions discussed above, and we have concluded that, as of December 31, 2005, our disclosure controls and procedures are effective. See Report of Management on page 87 for management’s report on the Corporation’s internal control over financial reporting which is incorporated herein by reference. Except for the remediation of the material weakness discussed above, there was no change in our internal control over financial reporting during the quarter ended December 31, 2005, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION None 166 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT PART III Information included under the following captions in the Corporation’s proxy statement relating to its 2006 annual meeting of stockholders (the “2006 Proxy Statement”) is incorporated herein by reference: • • • • “The Nominees”; “Section 16(a) Beneficial Ownership Reporting Compliance”; “Agreements with Certain Executive Officers”; and “Corporate Governance.” Additional information required by Item 10 with respect to executive officers is set forth in Part I, Item 4A hereof. Information regarding the Corporation’s directors is set forth in the Proxy Statement on pages 11 through 14 under “The Nominees.” The most recent certifications by the Corporation’s Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31(a) and 31(b) to this report. The Corporation also has submitted to the New York Stock Exchange (the “NYSE”) its most recent annual certification by its Chief Executive Officer confirming that the Corporation has complied with the NYSE corporate governance standards, as required by Section 303A.12(a) of the NYSE-Listed Company Manual. Item 11. EXECUTIVE COMPENSATION Information included under the following captions in the 2006 Proxy Statement is incorporated herein by reference: • • • • • • “Director Compensation”; “Executive Compensation”; “Retirement Plans for Executive Officers”; “Agreements with Certain Executive Officers”; “Compensation Committee Interlocks and Insider Participation”; and “Certain Transactions.” Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information included under the following caption in the 2006 Proxy Statement is incorporated herein by reference: • “Stock Ownership.” See also Note 17 of the Consolidated Financial Statements for information on the Corporation’s equity compensation plans. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information included under the following captions in the 2006 Proxy Statement is incorporated herein by reference: • • “Compensation Committee Interlocks and Insider Participation”; and “Certain Transactions.” Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information included under the following captions in the 2006 Proxy Statement is incorporated herein by reference: • “Ratification of Independent Public Accountants.” 167 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Statement of Income for the years ended December 31, 2005, 2004 and 2003 Consolidated Balance Sheet at December 31, 2005 and 2004 Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 Consolidated Statement of Cash Flows for the years ended December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements (2) Schedules: None (3) The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index to Exhibits to this Annual Report on Form 10-K (pages E-1 through E-7, including executive compensation plans and arrangements which are identified separately by asterisk). With the exception of the information expressly incorporated herein by reference, the 2006 Proxy Statement is not to be deemed filed as part of this Annual Report on Form 10-K. 168 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES Date: March 16, 2006 BANK OF AMERICA CORPORATION By: */s/ KENNETH D. LEWIS Kenneth D. Lewis Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date */s/ KENNETH D. LEWIS Kenneth D. Lewis Chairman, Chief Executive Officer and President and Director (Principal Executive Officer) March 16, 2006 */s/ ALVARO G. DE MOLINA Chief Financial Officer (Principal March 16, 2006 Alvaro G. de Molina */s/ NEIL A. COTTY Neil A. Cotty Financial Officer) Senior Vice President and Chief March 16, 2006 Accounting Officer (Principal Accounting Officer) */s/ WILLIAM BARNET, III Director March 16, 2006 William Barnet, III */s/ FRANK P. BRAMBLE, SR. Director March 16, 2006 Frank P. Bramble, Sr. */s/ CHARLES W. COKER Director March 16, 2006 Charles W. Coker */s/ JOHN T. COLLINS John T. Collins Director March 16, 2006 */s/ GARY L. COUNTRYMAN Director March 16, 2006 Gary L. Countryman */s/ TOMMY R. FRANKS Tommy R. Franks */s/ PAUL FULTON Paul Fulton Director Director March 16, 2006 March 16, 2006 */s/ CHARLES K. GIFFORD Director March 16, 2006 Charles K. Gifford */s/ W. STEVEN JONES Director March 16, 2006 W. Steven Jones */s/ WALTER E. MASSEY Director March 16, 2006 Walter E. Massey 169 Signature Title Date */s/ THOMAS J. MAY Thomas J. May Director March 16, 2006 */s/ PATRICIA E. MITCHELL Director March 16, 2006 Patricia E. Mitchell */s/ EDWARD L. ROMERO Director March 16, 2006 Edward L. Romero */s/ THOMAS M. RYAN Thomas M. Ryan Director March 16, 2006 */s/ O. TEMPLE SLOAN, JR. Director March 16, 2006 O. Temple Sloan, Jr. */s/ MEREDITH R. SPANGLER Director March 16, 2006 Meredith R. Spangler */s/ JACKIE M. WARD Jackie M. Ward *By: /s/ WILLIAM J. MOSTYN III William J. Mostyn III Attorney-in-Fact Director March 16, 2006 170 Exhibit No. Description INDEX TO EXHIBITS 2 3(a) (b) (c) 4(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Agreement and Plan of Merger dated as of June 30, 2005, between the registrant and MBNA Corporation, incorporated by reference to Exhibit 2.1 of registrant’s Current Report on Form 8-K filed July 6, 2005. Amended and Restated Certificate of Incorporation of registrant, as in effect on the date hereof, incorporated by reference to Exhibit 99.1 of registrant’s Current Report on Form 8-K filed May 7, 1999. Certificate of Amendment of Amended and Restated Certificate of Incorporation of registrant, as in effect on the date hereof, incorporated by reference to Exhibit 3.1 of registrant’s Current Report on Form 8-K filed March 30, 2004. Amended and Restated Bylaws of registrant, as in effect on the date hereof, incorporated by reference to Exhibit 3.1 of registrant’s Current Report on Form 8-K filed December 14, 2005. Specimen certificate of registrant’s Common Stock, Registration No. 333-83503. incorporated by reference to Exhibit 4.13 of registrant’s Specimen certificate of registrant’s 7% Cumulative Redeemable Preferred Stock, Series B, incorporated by reference to Exhibit 4(c) of registrant’s 1998 Annual Report on Form 10-K (the “1998 10-K”). Amended Certificate of Designation of registrant’s 6.75 % Perpetual Preferred Stock, incorporated by reference to Exhibit 4.1 of registrant’s Current Report on Form 8-K filed March 30, 2004. Amended Certificate of Designation of registrant’s Fixed/Adjustable Rate Cumulative Preferred Stock, incorporated by reference to Exhibit 4.2 of registrant’s Current Report on Form 8-K filed March 30, 2004. Deposit Agreement relating to registrant’s Series VI 6.75% Perpetual Preferred Stock of Fleet Financial Group, Inc., dated as of February 21, 1996, by and among Fleet Financial Group, Inc., Fleet National Bank, as depositary, and the holders from time to time of the Depositary Shares, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K filed March 30, 2004. Amendment to the Deposit Agreement relating to registrant’s Series VI 6.75% Perpetual Preferred Stock of Fleet Financial Group, Inc. and dated as of February 21, 1996, effective as of April 1, 2004, by and between Bank of America Corporation and EquiServe, Inc., incorporated by reference to Exhibit 4.4 of registrant’s Current Report on Form 8-K filed March 30, 2004. Deposit Agreement relating to registrant’s Series VII Fixed/Adjustable Rate Cumulative Preferred Stock of Fleet Financial Group, Inc., dated as of April 1, 1996, by and among Fleet Financial Group, Inc., Fleet National Bank, as depositary, and the holders from time to time of the Depositary Shares, incorporated by reference to Exhibit 4.5 of registrant’s Current Report on Form 8-K filed March 30, 2004. Amendment to the Deposit Agreement relating to registrant’s Series VII Fixed/Adjustable Rate Cumulative Preferred Stock of Fleet Financial Group, Inc. and dated as of February 21, 1996, effective as of April 1, 2004, by and between Bank of America Corporation and EquiServe, Inc., incorporated by reference to Exhibit 4.6 of registrant’s Current Report on Form 8-K filed March 30, 2004. Indenture dated as of September 1, 1989 between registrant (successor to NationsBank Corporation, formerly known as NCNB Corporation) and The Bank of New York, pursuant to which registrant issued its 9 3⁄8% Subordinated Notes, due 2009; and its 10.20% Subordinated Notes, due 2015, incorporated by reference to Exhibit 4.1 of registrant’s Registration No. 33-30717; and First Supplemental Indenture thereto dated as of August 28, 1998, incorporated by reference to Exhibit 4(f) of the 1998 10-K. Indenture dated as of January 1, 1995 between registrant (successor to NationsBank Corporation) and U.S. Bank Trust National Association (successor to BankAmerica National Trust Company), pursuant to which registrant issued its 5 7⁄8% Senior Notes, due 2009; its 7 1⁄8% Senior Notes, due 2006; its 4 3⁄4% Senior Notes, due 2006; its 5 1⁄4% Senior Notes, due 2007; its 6 1⁄4% Senior Notes, due 2012; its 4 7⁄8% Senior Notes due 2012; its 5 1⁄8% Senior Notes, due 2014; its 3.761% Senior Notes, due 2007; its 3 7⁄8% Senior Notes, due 2008; its 4 7⁄8% Senior Notes, due 2013; its 3 5⁄8% Senior Notes, due 2008; its 3 1⁄4% Senior Notes, due 2008; its 4¼% Senior Notes, due 2010; its 4 3⁄8% Senior Notes, due 2010; its 3 3⁄8% Senior Notes, due 2009; its 4 5⁄8% Senior Notes, due 2014; its 5 3⁄8% Senior Notes, due June 2014; its 4¼% Senior Notes, due October 2010; its 4% Senior Notes, due 2015; its Floating Rate Callable Senior Notes, due 2008; its Floating Rate Callable Senior Notes, due 2010; its 4 3⁄4% Senior Notes, due 2015; its 4 1⁄2% Senior Notes, due 2010; its Floating Rate Callable Senior Notes, due August 2008; its Three-Month LIBOR Floating Rate Senior Notes, due November 2008; its One-Month LIBOR Floating Rate Senior Notes, due November 2008; and its Senior Medium-Term Notes, Series E, F, G, H, I, J and K, incorporated by reference to Exhibit 4.1 of registrant’s Registration No. 33-57533; First Supplemental Indenture thereto dated as of September 18, 1998, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K filed November 18, 1998; and Second Supplemental Indenture thereto dated as of May 7, 2001 between registrant, U.S. Bank Trust National Association, as Prior Trustee, and the Bank of New York, as Successor Trustee, incorporated by reference to Exhibit 4.4 of registrant’s Current Report on Form 8-K dated June 5, 2001. Indenture dated as of January 1, 1995 between registrant (successor to NationsBank Corporation) and The Bank of New York, pursuant to which registrant issued its 7 3⁄4% Subordinated Notes, due 2015; its 7 1⁄4% Subordinated Notes, due 2025; its 6 1⁄2% Subordinated Notes, due 2006; its 7 1⁄2% Subordinated Notes, due 2006; its 7.80% Subordinated Notes, due 2016; its 6 3⁄8% Subordinated Notes, due 2008; its 6.80% Subordinated Notes, due 2028; its 6.60% Subordinated Notes, due 2010; its 7.80% Subordinated Notes due 2010; its 7.40% Subordinated Notes, due 2011; its 4 3⁄4% Subordinated Notes, due 2013; its 5 1⁄4% Subordinated Notes, due 2015; its 4 3⁄4% Fixed/Floating Rate Callable E-1 Exhibit No. Description (l) (m) (n) (o) (p) (q) (r) (s) (t) (u) (v) (w) (x) (y) (z) Subordinated Notes, due 2019 and its Subordinated Medium-Term Notes, Series F incorporated by reference to Exhibit 4.8 of registrant’s Registration No. 33-57533; and First Supplemental Indenture thereto dated as of August 28, 1998, incorporated by reference to Exhibit 4.8 of registrant’s Current Report on Form 8-K filed November 18, 1998. Amended and Restated Program Agreement dated as of August 4, 2005 among registrant, Banc of America Securities Limited and others. Amended and Restated Issuing Paying Agency Agreement dated as of January 15, 2004 between Bank of America, N.A., as Issuer, and Deutsche Bank Trust Company Americas, as Issuing and Paying Agent, incorporated by reference to Exhibit 4(n) for the fiscal year ended December 31, 2004. Indenture dated as of November 27, 1996 between registrant (successor to NationsBank Corporation) and The Bank of New York, incorporated by reference to Exhibit 4.10 of registrant’s Registration No. 333-15375. Second Supplemental Indenture dated as of December 17, 1996 to the Indenture dated as of November 27, 1996 between registrant (successor to NationsBank Corporation) and The Bank of New York pursuant to which registrant issued its 7.83% Junior Subordinated Deferrable Interest Notes due 2026, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated December 10, 1996. Third Supplemental Indenture dated as of February 3, 1997 to the Indenture dated as of November 27, 1996 between registrant (successor to NationsBank Corporation) and The Bank of New York pursuant to which registrant issued its Floating Rate Junior Subordinated Deferrable Interest Notes due 2027, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated January 22, 1997. Fourth Supplemental Indenture dated as of April 22, 1997 to the Indenture dated as of November 27, 1996 between registrant (successor to NationsBank Corporation) and The Bank of New York pursuant to which registrant issued its 8 1⁄4% Junior Subordinated Deferrable Interest Notes, due 2027, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated April 15, 1997. Fifth Supplemental Indenture dated as of August 28, 1998 to the Indenture dated as of November 27, 1996 between registrant and The Bank of New York, incorporated by reference to Exhibit 4(t) of the 1998 10-K. Indenture dated as of November 27, 1996, between Barnett Banks, Inc. and Bank One (successor to The First National Bank of Chicago), as Trustee, and First Supplemental Indenture dated as of January 9, 1998, among NationsBank Corporation, NB Holdings Corporation, Barnett Banks, Inc. and The First National Bank of Chicago (predecessor to Bank One), as Trustee, pursuant to which registrant (as successor to NationsBank Corporation) issued its 8.06% Junior Subordinated Debentures, due 2026, incorporated by reference to Exhibit 4(u) of registrant’s 1997 Annual Report on Form 10-K (the “1997 10-K”). Indenture dated as of November 1, 1991 between the former BankAmerica Corporation and J.P. Morgan Trust Company, National Association, as successor trustee to the former Manufacturers Hanover Trust Company of California, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 7.20% Subordinated Notes due 2006; its 6.20% Subordinated Notes due 2006; its 7 1⁄8% Subordinated Notes due 2006; its 6 5⁄8% Subordinated Notes due 2007; its 6 5⁄8% Subordinated Notes due August 2007; its 7 1⁄8% Subordinated Notes due 2009; its 7 1⁄8% Subordinated Notes due 2011; its 6 5⁄8% Subordinated Notes, due October, 2007; and its 6 1⁄4% Subordinated Notes due 2008; First Supplemental Indenture thereto dated as of September 8, 1992; and Second Supplemental Indenture thereto dated as of September 15, 1998, incorporated by reference to Exhibit 4(w) of the 1998 10-K. Junior Subordinated Indenture dated as of November 27, 1996 between the former BankAmerica Corporation and Deutsche Bank Trust Company Americas, as successor trustee to Bankers Trust Company, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 8.07% Junior Subordinated Debentures Series A due 2026; and its 7.70% Junior Subordinated Debentures Series B due 2026; and First Supplemental Indenture thereto dated as of September 15, 1998, incorporated by reference to Exhibit 4(z) of the 1998 10-K. Junior Subordinated Indenture dated as of December 20, 1996 between the former BankAmerica Corporation and Deutsche Bank Trust Company Americas, as successor trustee to Bankers Trust Company, pursuant to which registrant (as successor to the former BankAmerica Corporation) issued its 8.00% Junior Subordinated Deferrable Interest Debentures, Series 2 due 2026 and its Floating Rate Junior Subordinated Deferrable Interest Debentures, Series 3 due 2027; and First Supplemental Indenture thereto dated as of September 15, 1998, incorporated by reference to Exhibit 4(aa) of the 1998 10-K. Restated Senior Indenture dated as of January 1, 2001 between registrant and The Bank of New York, pursuant to which registrant issued its Senior InterNotesSM, incorporated by reference to Exhibit 4.1 of registrant’s Registration No. 333-47222. Restated Subordinated Indenture dated as of January 1, 2001 between registrant and The Bank of New York, pursuant to which registrant issued its Subordinated InterNotesSM, incorporated by reference to Exhibit 4.2 of registrant’s Registration No. 333-47222. Amended and Restated Senior Indenture dated as of July 1, 2001 between registrant and The Bank of New York, pursuant to which registrant issued its Senior InterNotesSM, incorporated by reference to Exhibit 4.1 of registrant’s Registration No. 333-65750. Amended and Restated Subordinated Indenture dated as of July 1, 2001 between registrant and The Bank of New York, pursuant to which registrant issued its Subordinated InterNotesSM, incorporated by reference to Exhibit 4.2 of registrant’s Registration No. 333-65750. E-2 Exhibit No. Description (aa) (bb) (cc) (dd) (ee) (ff) (gg) (hh) (ii) (jj) (kk) (ll) (mm) (nn) Restated Indenture dated as of November 1, 2001 between registrant and The Bank of New York, incorporated by reference to Exhibit 4.10 of registrant’s Registration No. 333-70984. First Supplemental Indenture dated as of December 14, 2001 to the Restated Indenture dated as of November 1, 2001 between registrant and The Bank of New York pursuant to which registrant issued its 7% Junior Subordinated Notes due 2031, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated December 6, 2001. Second Supplemental Indenture dated as of January 31, 2002 to the Restated Indenture dated as of November 1, 2001 between registrant and The Bank of New York pursuant to which registrant issued its 7% Junior Subordinated Notes due 2032, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated January 24, 2002. Third Supplemental Indenture dated as of August 9, 2002 to the Restated Indenture dated as of November 1, 2001 between registrant and The Bank of New York pursuant to which registrant issued its 7% Junior Subordinated Notes due 2032, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated August 2, 2002. Fourth Supplemental Indenture dated as of April 30, 2003 between registrant and The Bank of New York pursuant to which registrant issued its 5 7⁄8% Junior Subordinated Notes due 2033, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated April 23, 2003. Fifth Supplemental Indenture dated as of November 3, 2004 between registrant and The Bank of New York pursuant to which registrant issued its 6% Junior Subordinated Notes due 2034, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated October 21, 2004. Sixth Supplemental Indenture dated as of March 8, 2005 between the registrant and The Bank of New York pursuant to which registrant issued its 5 5⁄8% Junior Subordinated Notes due 2035, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated February 24, 2005. Seventh Supplemental Indenture dated as of August 9, 2005 between the registrant and The Bank of New York pursuant to which registrant issued its 5 1⁄4% Junior Subordinated Notes due 2035, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated August 4, 2005. Eighth Supplemental Indenture dated as of August 25, 2005 between the registrant and The Bank of New York pursuant to which registrant issued its 6% Junior Subordinated Notes due 2035, incorporated by reference to Exhibit 4.3 of registrant’s Current Report on Form 8-K dated August 17, 2005. Indenture dated as of November 26, 1996 between registrant (successor to Bank of Boston Corporation) and The Bank of New York, as Debenture Trustee, pursuant to which registrant issued its 8.25% Junior Subordinated Deferrable Interest Debentures due 2026, incorporated by reference to Exhibit 4.1 to BankBoston Corporation’s Registration Statement on Form S-4 (File No. 333-19083); First Supplemental Indenture thereto dated as of October 1, 1999 and Second Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4(hh) of registrant’s 2004 Annual Report on Form 10-K dated March 1, 2005 (the “2004 10-K”). Indenture dated as of December 10, 1996 between registrant (successor to Bank of Boston Corporation) and The Bank of New York, as Trustee, pursuant to which registrant issued its 7 3⁄4% Junior Subordinated Deferrable Interest Debentures due 2026, incorporated by reference to Exhibit 4.1 to BankBoston Corporation’s Registration Statement on Form S-4 (File No. 333-19111); First Supplemental Indenture thereto dated as of October 1, 1999 and Second Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4(ii) of the 2004 10-K. Indenture dated as of June 4, 1997 between registrant (successor to BankBoston Corporation) and The Bank of New York, as Trustee, pursuant to which registrant issued its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2027, incorporated by reference to Exhibit 4.1 to BankBoston Corporation’s Registration Statement on Form S-3 (File No. 333-27229); First Supplemental Indenture thereto dated as of October 1, 1999 and Second Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4(jj) of the 2004 10-K. Indenture dated as of December 11, 1996 between registrant (successor to Fleet Financial Group, Inc.) and The First National Bank of Chicago (predecessor to Bank One), as Trustee, incorporated by reference to Exhibit 4(b) of Fleet Financial Group, Inc.’s Current Report on Form 8-K (File No. 1-6366) dated December 20, 1996; First Supplemental Indenture thereto dated as of December 11, 1996 pursuant to which registrant issued its 7.92% Junior Subordinated Deferrable Interest Debentures due 2026, incorporated by reference to Exhibit 4(c) of Fleet Financial Group, Inc.’s Current Report on Form 8-K (File No. 1-6366) dated December 20, 1996 and Third Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4(kk) of the 2004 10-K. Indenture dated as of December 18, 1998 between registrant (successor to Fleet Financial Group, Inc.) and The First National Bank of Chicago (predecessor to Bank One), as Trustee, incorporated by reference to Exhibit 4(b) of Fleet Financial Group, Inc.’s Current Report on Form 8-K (File No. 1-6366) dated December 18, 1998; First Supplemental Indenture thereto dated as of December 18, 1998 pursuant to which registrant issued its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2028, incorporated by reference to Exhibit 4(c) to Fleet Financial Group, Inc.’s Current Report on Form 8-K (File No. 1-6366) dated December 18, 1998 and Second Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4(ll) of the 2004 10-K. E-3 Exhibit No. Description (oo) (pp) (qq) (rr) (ss) (tt) (uu) Indenture dated as of June 30, 2000 between registrant (successor to FleetBoston Financial Corporation) and The Bank of New York, as Trustee, incorporated by reference to Exhibit 4(b) of FleetBoston Financial Corporation’s Current Report on Form 8-K dated (File No. 1-6366) June 30, 2000. Second Supplemental Indenture dated as of September 17, 2001 to the Indenture dated as of June 30, 2000 between registrant (successor to FleetBoston Financial Corporation) and The Bank of New York pursuant to which registrant issued its 7.20% Junior Subordinated Deferrable Interest Debentures due 2031, incorporated by reference to Exhibit 2.6 to FleetBoston Financial Corporation’s Registration Statement on Form 8-A (File No. 1-6366) filed on September 21, 2001. Third Supplemental Indenture dated as of March 8, 2002 to the Indenture dated as of June 30, 2000 between registrant (successor to FleetBoston Financial Corporation) and The Bank of New York pursuant to which registrant issued its 7.20% Junior Subordinated Deferrable Interest Debentures due 2032, incorporated by reference to Exhibit 2.7 to FleetBoston Financial Corporation’s Registration Statement on Form 8-A (File No. 1-6366) filed on March 8, 2002. Fourth Supplemental Indenture dated as of July 31, 2003 to the Indenture dated as of June 30, 2000 between registrant (successor to FleetBoston Financial Corporation) and The Bank of New York pursuant to which registrant issued its 6.00% Junior subordinated Deferrable Interest Debentures due 2033, incorporated by reference to Exhibit 2.8 to FleetBoston Financial Corporation’s Registration Statement on Form 8-A (File No. 1-6366) filed on July 31, 2003. Fifth Supplemental Indenture dated as of March 18, 2004 to the Indenture dated as of June 30, 2000 between the registrant (successor to FleetBoston Financial Corporation) and The Bank of New York, incorporated by reference to Exhibit 4(rr) of the 2004 10-K. Indenture dated December 6, 1999 between registrant (successor to Fleet Boston Corporation) and the Bank of New York, as Trustee, pursuant to which registrant issued its 4 7⁄8% Senior Notes, due 2006; its 3.85% Senior Notes, due 2008; and its Senior Medium-Term Notes, Series T, incorporated by reference to Exhibit 4(a) to FleetBoston Financial Corporation’s Registration Statement on Form S-3 (File No. 333-72912); and First Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4.61 of registrant’s Registration Statement on Form S-3/A (File No. 333-112708). Indenture dated October 1, 1992 between registrant (successor to Fleet Financial Group, Inc.) and The First National Bank of Chicago (predecessor to J.P. Morgan Trust Company, N.A.), as Trustee, incorporated by reference to Exhibit 4(d) to Fleet Financial Group, Inc.’s Registration Statement on Form S-3/A (File No. 33-50216) pursuant to which registrant issued its 7 1⁄8% Subordinated Notes, due 2006; its 6½% Subordinated Notes, due 2008; its 6 3⁄8% Subordinated Notes, due 2008; its 6.70% Subordinated Notes, due 2028; and its 7 3⁄8% Subordinated Notes, due 2009; First Supplemental Indenture thereto dated as of November 30, 1992, incorporated by reference to Exhibit 4 of Fleet Financial Group, Inc.’s Current Report on Form 8-K (File No. 1-06366) filed December 2, 1992; and Second Supplemental Indenture thereto dated as of March 18, 2004, incorporated by reference to Exhibit 4.59 of registrant’s Registration Statement on Form S-3/A (File No. 333-112708). its 6 7⁄8% Subordinated Notes, due 2028; The registrant has other long-term debt agreements, but these are not material in amount. Copies of these agreements will be furnished to the Commission on request. 10(a) (b) (c) NationsBank Corporation and Designated Subsidiaries Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(j) of the 1994 10-K; Amendment thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(g) of registrant’s 1989 Annual Report on Form 10-K (the “1989 10-K”); Amendment thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(g) of registrant’s 1990 Annual Report on Form 10-K (the “1990 10-K”); Amendment thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of the 1991 10-K; Amendments thereto dated as of December 3, 1992 and December 15, 1992, incorporated by reference to Exhibit 10(l) of registrant’s 1992 Annual Report on Form 10-K (the “1992 10-K”); Amendment thereto dated as of September 28, 1994, incorporated by reference to Exhibit 10(j) of registrant’s 1994 Annual Report on Form 10-K (the “1994 Form 10- K”); Amendments thereto dated March 27, 1996 and June 25, 1997, incorporated by reference to Exhibit 10(c) of the 1997 10-K; Amendments thereto dated April 10, 1998, June 24, 1998 and October 1, 1998, incorporated by reference to Exhibit 10(b) of the 1998 10-K; Amendment thereto dated December 14, 1999, incorporated by reference to Exhibit 10(b) of registrant’s 1999 Annual Report on Form 10-K (the “1999 10-K”); and Amendment thereto dated as of March 28, 2001, incorporated by reference to Exhibit 10(b) of registrant’s 2001 Annual Report on Form 10-K (the “2001 10- K”); and Amendment thereto dated December 10, 2002, incorporated by reference to Exhibit 10(b) of registrant’s 2002 Annual Report on Form 10-K (the “2002 10-K”). NationsBank Corporation and Designated Subsidiaries Deferred Compensation Plan for Key Employees, incorporated by reference to Exhibit 10(k) of the 1994 10-K; Amendment thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(h) of the 1989 10-K; Amendment thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(h) of the 1990 10-K; Amendment thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of the 1991 10-K; Amendment thereto dated as of December 3, 1992, incorporated by reference to Exhibit 10(m) of the 1992 10-K; and Amendments thereto dated April 10, 1998 and October 1, 1998, incorporated by reference to Exhibit 10(b) of the 1998 10-K. Bank of America Pension Restoration Plan, as amended and restated effective January 1, 2005, incorporated by reference to Exhibit 10(c) of the 2004 10-K. E-4 Exhibit No. Description (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) (t) (u) NationsBank Corporation Benefit Security Trust dated as of June 27, 1990, incorporated by reference to Exhibit 10(t) of the 1990 10-K; First Supplement thereto dated as of November 30, 1992, incorporated by reference to Exhibit 10(v) of the 1992 10-K; and Trustee Removal/Appointment Agreement dated as of December 19, 1995, incorporated by reference to Exhibit 10(o) of registrant’s 1995 Annual Report on Form 10-K. Bank of America 401(k) Restoration Plan, as amended and restated effective January 1, 2005. Bank of America Executive Incentive Compensation Plan, as amended and restated effective December 10, 2002, incorporated by reference to Exhibit 10(g) of the 2002 10-K. Bank of America Director Deferral Plan, as amended and restated effective January 27, 1999, incorporated by reference to Exhibit 10(i) of the 1998 10-K; Amendment thereto dated April 24, 2002, incorporated by reference to Exhibit 10(h) of the 2002 10-K; and Bank of America Corporation Director Deferral Plan, as amended and restated, effective December 10, 2002, incorporated by reference to Exhibit 10(h) of the 2002 10-K. Bank of America Corporation Directors’ Stock Plan, as amended and restated effective January 1, 2002, incorporated by reference to Exhibit 10(j) of the 2001 10-K; Amendment thereto dated April 24, 2002, incorporated by reference to Exhibit 10(i) of the 2002 10-K; Bank of America Corporation Directors’ Stock Plan, as amended and restated effective December 10, 2002, incorporated by reference to Exhibit 10(i) of the 2002 10-K; form of Restricted Stock Award agreement, incorporated by reference to Exhibit 10(h) of the 2004 10-K; and Bank of America Corporation Directors’ Stock Plan as amended and restated effective April 26, 2006, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on December 14, 2005. Bank of America Corporation 2003 Key Associate Stock Plan, effective January 1, 2003, as amended and restated effective April 1, 2004, incorporated by reference to Exhibit 10(f) of registrant’s Registration Statement on Form S-4 (File No. 333-110924); form of Restricted Stock Units Award Agreement; and form of Stock Option Award Agreement. Split Dollar Life Insurance Agreement dated as of October 16, 1998 between registrant and NationsBank, N. A., as Trustee under that certain Irrevocable Trust Agreement No. 2 dated October 1, 1998, by and between James H. Hance, Jr., as Grantor, and NationsBank, N. A., as Trustee, incorporated by reference to Exhibit 10(dd) of the 1998 10-K; and Amendment thereto dated January 24, 2002, incorporated by reference to Exhibit 10(o) of the 2001 10-K. Split Dollar Life Insurance Agreement dated as of September 28, 1998 between registrant and J. Steele Alphin, as Trustee under that certain Irrevocable Trust Agreement dated June 23, 1998, by and between Kenneth D. Lewis, as Grantor, and J. Steele Alphin, as Trustee, incorporated by reference to Exhibit 10(ee) of the 1998 10-K; and Amendment thereto dated January 24, 2002, incorporated by reference to Exhibit 10(p) of the 2001 10-K. Bank of America Corporation 2002 Associates Stock Option Plan, effective February 1, 2002, incorporated be reference to Exhibit 10(s) of the 2002 10-K. Take Ownership!, The BankAmerica Global Associate Stock Option Program, effective October 1, 1998, incorporated by reference to Exhibit 10(t) of the 2002 10-K. Amendment to various plans in connection with FleetBoston Financial Corporation merger, incorporated by reference to Exhibit 10(v) of registrant’s 2003 Annual Report on Form 10-K (the “2003 10-K”). FleetBoston Supplemental Executive Retirement Plan, as amended by Amendment One thereto effective January 1, 1997, Amendment Two thereto effective October 15, 1997, Amendment Three thereto effective July 1, 1998, Amendment Four thereto effective August 15, 1999, Amendment Five thereto effective January 1, 2000, Amendment Six thereto effective October 10, 2001, Amendment Seven thereto effective February 19, 2002, Amendment Eight thereto effective October 15, 2002, Amendment Nine thereto effective January 1, 2003, Amendment Ten thereto effective October 21, 2003, and Amendment Eleven thereto effective December 31, 2004, incorporated by reference to Exhibit 10(r) of the 2004 10-K. FleetBoston Amended and Restated 1992 Stock Option and Restricted Stock Plan, incorporated by reference to Exhibit 10(s) of the 2004 10-K. FleetBoston Executive Deferred Compensation Plan No. 2, as amended by Amendment One thereto effective February 1, 1999, Amendment Two thereto effective January 1, 2000, Amendment Three thereto effective January 1, 2002, Amendment Four thereto effective October 15, 2002, Amendment Five thereto effective January 1, 2003, and Amendment Six thereto effective December 16, 2003, incorporated by reference to Exhibit 10(u) of the 2004 10-K. FleetBoston Executive Supplemental Plan, as amended by Amendment One thereto effective January 1, 2000, Amendment Two thereto effective January 1, 2002, Amendment Three thereto effective January 1, 2003, Amendment Four thereto effective January 1, 2003, and Amendment Five thereto effective December 31, 2004, incorporated by reference to Exhibit 10(v) of the 2004 10-K. FleetBoston Retirement Income Assurance Plan, as amended by Amendment One thereto effective January 1, 1997, Amendment Two thereto effective January 1, 2000, Amendment Three thereto effective November 1, 2001, Amendment Four thereto effective January 1, 2003, Amendment Five thereto effective December 16, 2003, and Amendment Six thereto effective December 31, 2004, incorporated by reference to Exhibit 10(w) of the 2004 10-K; and Amendment Seven thereto dated December 20, 2005. Trust Agreement for the FleetBoston Executive Deferred Compensation Plans No. 1 and 2, incorporated by reference to Exhibit 10(x) of the 2004 10-K. Trust Agreement for the FleetBoston Executive Supplemental Plan, incorporated by reference to Exhibit 10(y) of the 2004 10-K. E-5 Exhibit No. Description (v) (w) (x) (y) (z) (aa) (bb) (cc) (dd) (ee) (ff) (gg) (hh) (ii) (jj) (kk) (ll) (nn) (oo) (pp) (qq) 12 21 23 24(a) (b) Trust Agreement for the FleetBoston Retirement Income Assurance Plan and the FleetBoston Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(z) of the 2004 10-K. FleetBoston Directors Deferred Compensation and Stock Unit Plan, as amended by an amendment thereto effective as of July 1, 2000, a Second Amendment thereto effective as of January 1, 2003, a Third Amendment thereto dated April 14, 2003, and a Fourth Amendment thereto effective January 1, 2004, incorporated by reference to Exhibit 10(aa) of the 2004 10-K. FleetBoston 1996 Long-Term Incentive Plan, 10-K. incorporated by reference to Exhibit 10(bb) of the 2004 BankBoston Corporation and its Subsidiaries Deferred Compensation Plan, as amended by a First Amendment thereto, a Second Amendment thereto, a Third Amendment thereto, an Instrument thereto (providing for the cessation of accruals effective December 31, 2000) and an Amendment thereto dated December 24, 2001, incorporated by reference to Exhibit 10(cc) of the 2004 10-K. BankBoston, N.A. Bonus Supplemental Employee Retirement Plan, as amended by a First Amendment, a Second Amendment, a Third Amendment and a Fourth Amendment thereto, incorporated by reference to Exhibit 10(dd) of the 2004 10-K. Description of BankBoston Supplemental Life Insurance Plan, incorporated by reference to Exhibit 10(ee) of the 2004 10-K. BankBoston, N.A. Excess Benefit Supplemental Employee Retirement Plan, as amended by a First Amendment, a Second Amendment, a Third Amendment thereto (assumed by FleetBoston on October 1, 1999) and an Instrument thereto, incorporated by reference to Exhibit 10(ff) of the 2004 10-K. Description of BankBoston Supplemental Long-Term Disability Plan, incorporated by reference to Exhibit 10(gg) of the 2004 10-K. BankBoston Director Stock Award Plan, incorporated by reference to Exhibit 10(hh) of the 2004 10-K. BankBoston Directors Deferred Compensation Plan, as amended by a First Amendment and a Second Amendment thereto, incorporated by reference to Exhibit 10(ii) of the 2004 10-K. BankBoston, N.A. Directors’ Deferred Compensation Plan, as amended by a First Amendment and a Second Amendment thereto, incorporated by reference to Exhibit 10(jj) of the 2004 10-K. BankBoston 1997 Stock Option Plan for Non-Employee Directors, as amended by an amendment thereto dated as of October 16, 2001, incorporated by reference to Exhibit 10(kk) of the 2004 10-K. Description of BankBoston Director Retirement Benefits Exchange Program, incorporated by reference to Exhibit 10(ll) of the 2004 10-K. Employment Agreement, dated as of March 14, 1999, between FleetBoston and Charles K. Gifford, as amended by an amendment thereto effective as of February 7, 2000, a Second Amendment thereto effective as of April 22, 2002, and a Third Amendment thereto effective as of October 1, 2002, incorporated by reference to Exhibit 10(mm) of the 2004 10-K. Form of Change in Control Agreement entered into with Charles K. Gifford, incorporated by reference to Exhibit 10(nn) of the 2004 10-K. Global amendment to definition of “change in control” or “change of control,” together with a list of plans affective by such amendment, incorporated by reference to Exhibit 10(oo) of the 2004 10-K. Employment Agreement dated October 27, 2003 between Bank of America Corporation and Brian T. Moynihan, incorporated by reference to Exhibit 10(d) of registrant’s Registration Statement on Form S-4 (File No. 333-110924). Retirement Agreement dated January 26, 2005 between Bank of America Corporation and Charles K. Gifford, incorporated by reference to Exhibit 10.1 to the registrant’s Form 8-K filed on January 26, 2005. Amendment to various FleetBoston stock option awards, dated March 25, 2004, incorporated by reference to Exhibit 10(ss) of the 2004 10-K. Cancellation Agreement dated October 26, 2005 between Bank of America Corporation and Brian T. Moynihan, incorporated by reference to Exhibit 10.1 of registrant’s Form 8-K filed October 26, 2005. Agreement Regarding Participation in the FleetBoston Supplemental Executive Retirement Plan dated October 26, 2005 between Bank of America Corporation and Brian T. Moynihan, incorporated by reference to Exhibit 10.2 of registrant’s Form 8-K filed October 26, 2005. Ratio of Earnings to Fixed Charges. Ratio of Earnings to Fixed Charges and Preferred Dividends. List of Subsidiaries. Consent of PricewaterhouseCoopers LLP. Power of Attorney. Corporate Resolution. E-6 Exhibit No. Description 31(a) (b) 32(a) (b) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Denotes executive compensation plan or arrangement. E-7