How did Bank of America's earnings change in 1999 compared with 1998?

Reported net income rose to $7.88 billion ($4.48 diluted EPS) from $5.17 billion ($2.90) in 1998. Excluding merger-related charges, operating net income was $8.24 billion ($4.68 diluted EPS), up from $6.49 billion ($3.64). The 1998 comparison is distorted by larger merger charges ($1.8 billion) and a $1.0 billion securities gain.

Is the company's credit quality deteriorating?

Mixed. Net charge-offs and the provision for credit losses both declined, and the provision fell by about $1.1 billion, largely because of reduced emerging-markets exposure and a shift toward residential mortgages. However, nonperforming assets rose to $3.2 billion from $2.8 billion, with increases in commercial domestic loans (healthcare and sub-prime finance) and consumer finance. The allowance covered nonperforming loans 224% versus 287% a year earlier.

Why did net interest margin decline, and why was it flat overall?

The net interest yield fell to 3.47% from 3.69%. Management cited higher holdings of lower-yielding investment securities, a shift toward lower-yielding residential mortgages, spread compression on loans and deposits, and the cost of the share repurchase program funded with debt. Net interest income held at about $18.5 billion because loan growth and core deposits offset the margin pressure, although securitizations and divestitures reduced the balance.

What is the company's capital position and how is it returning capital to shareholders?

Capital remained well above regulatory requirements, with a Tier 1 risk-based ratio of 7.35%, a total capital ratio of 10.88%, and a leverage ratio of 6.26%, all classified as well capitalized. The company repurchased 78 million shares for $4.9 billion in 1999 and paid $1.85 per share in dividends, with $5.1 billion of buyback authority remaining. Common dividends were raised 11% to $0.50 per quarter in the fourth quarter.

What legal or regulatory risks should investors be aware of?

The main legal risk is a set of consolidated class actions in federal and California state courts alleging that the 1998 BankAmerica and NationsBank merger proxy statement misrepresented the deal as a merger of equals and failed to disclose BankAmerica's losses related to D.E. Shaw. Discovery is underway and the amount of exposure cannot be determined, but management believes the claims lack merit and are not expected to be material. On the regulatory side, the company became a financial holding company on March 11, 2000, which broadens permitted activities under Gramm-Leach-Bliley.

BAC 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 20, 2000. Cited figures are marked; the original filing is the authoritative source.

Bank of America Corporation's 10-K for fiscal 1999 shows a company that delivered solid operating results despite a flat revenue base, with operating net income of $8.24 billion^a (diluted operating EPS of $4.68) versus $6.49 billion in 1998.

Reported net income, after $525 million^b of merger-related charges tied to the NationsBank/BankAmerica merger, was $7.88 billion, or $4.48 diluted EPS, up from $2.90 in 1998 when charges were far larger. Improved efficiency (operating efficiency ratio of 55.30%, down from 61.15%), a sharply lower provision for credit losses ($1.8 billion versus $2.9 billion), and a $1.3 billion rise in trading and noninterest income drove the earnings improvement, while net interest income was essentially flat at about $18.5 billion. The balance sheet grew modestly, with total assets of $632.6 billion and loans of $370.7 billion, but asset quality showed some pressure: nonperforming assets rose to $3.2 billion (0.86% of loans and foreclosed properties) from $2.8 billion, driven by consumer finance and commercial credits in healthcare and sub-prime finance.

Shareholders' equity declined to $44.4 billion^c because of $4.9 billion in share repurchases and a $2.8 billion after-tax hit from unrealized securities losses as interest rates rose. Capital remained well above regulatory minimums, with a Tier 1 ratio of 7.35% and a leverage ratio of 6.26%. Investors should also note the company's management commentary on its strategy: it became a financial holding company effective March 11, 2000, shrank its emerging-markets exposure (total exposure to select countries down $8.9 billion), and used debt issuance to fund earning-asset growth and buybacks, which lifted long-term debt to $55.5 billion.

Net interest yield compressed to 3.47%^d from 3.69%, a trend management attributed to lower-yielding securities, mortgage mix shifts and spread compression. The filing also discloses a pending class-action litigation tied to the 1998 merger, which management believes lacks merit and will not be material in aggregate.

02—Key points

Key Highlights

Operating net income rose 27% to $8.24 billion ($4.68 diluted EPS) from $6.49 billion; reported net income of $7.88 billion ($4.48 diluted EPS) after $525 million in merger charges.
Operating efficiency ratio improved to 55.30% from 61.15%, reflecting merger-related cost savings and a 4% decline in other noninterest expense to $18.0 billion.
Provision for credit losses fell to $1.8 billion from $2.9 billion, though net charge-offs declined only modestly to $2.0 billion (0.55% of average loans).
Noninterest income increased 15.4% to $14.1 billion, led by trading account profits ($1.5 billion vs. $171 million) and credit card and mortgage servicing income.
Net interest yield compressed to 3.47% from 3.69%, leaving net interest income flat at about $18.5 billion despite 9% managed loan growth.
Nonperforming assets increased to $3.2 billion (0.86% of loans and foreclosed properties) from $2.8 billion, driven by consumer finance and commercial credits.
Shareholders' equity fell to $44.4 billion after repurchasing 78 million shares for $4.9 billion and a $2.8 billion after-tax unrealized securities loss; Tier 1 capital ratio was 7.35%.

03—Questions

Frequently Asked Questions

How did Bank of America's earnings change in 1999 compared with 1998?
Reported net income rose to $7.88 billion ($4.48 diluted EPS) from $5.17 billion ($2.90) in 1998. Excluding merger-related charges, operating net income was $8.24 billion ($4.68 diluted EPS), up from $6.49 billion ($3.64). The 1998 comparison is distorted by larger merger charges ($1.8 billion) and a $1.0 billion securities gain.
Is the company's credit quality deteriorating?
Mixed. Net charge-offs and the provision for credit losses both declined, and the provision fell by about $1.1 billion, largely because of reduced emerging-markets exposure and a shift toward residential mortgages. However, nonperforming assets rose to $3.2 billion from $2.8 billion, with increases in commercial domestic loans (healthcare and sub-prime finance) and consumer finance. The allowance covered nonperforming loans 224% versus 287% a year earlier.
Why did net interest margin decline, and why was it flat overall?
The net interest yield fell to 3.47% from 3.69%. Management cited higher holdings of lower-yielding investment securities, a shift toward lower-yielding residential mortgages, spread compression on loans and deposits, and the cost of the share repurchase program funded with debt. Net interest income held at about $18.5 billion because loan growth and core deposits offset the margin pressure, although securitizations and divestitures reduced the balance.
What is the company's capital position and how is it returning capital to shareholders?
Capital remained well above regulatory requirements, with a Tier 1 risk-based ratio of 7.35%, a total capital ratio of 10.88%, and a leverage ratio of 6.26%, all classified as well capitalized. The company repurchased 78 million shares for $4.9 billion in 1999 and paid $1.85 per share in dividends, with $5.1 billion of buyback authority remaining. Common dividends were raised 11% to $0.50 per quarter in the fourth quarter.
What legal or regulatory risks should investors be aware of?
The main legal risk is a set of consolidated class actions in federal and California state courts alleging that the 1998 BankAmerica and NationsBank merger proxy statement misrepresented the deal as a merger of equals and failed to disclose BankAmerica's losses related to D.E. Shaw. Discovery is underway and the amount of exposure cannot be determined, but management believes the claims lack merit and are not expected to be material. On the regulatory side, the company became a financial holding company on March 11, 2000, which broadens permitted activities under Gramm-Leach-Bliley.

04—Continue

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