01—Abstract
Summary
Summary of the 10-K filed March 3, 2003. Cited figures are marked; the original filing is the authoritative source.
Bank of America's 2002 Form 10-K shows a company that rebounded strongly in earnings while facing pressure in its market-sensitive and large-corporate businesses.
Net income rose 36% to $9.2 billiona, or $5.91 per diluted share, versus $6.8 billion ($4.18) in 2001, which was depressed by $1.7 billion of exit charges and $662 million of goodwill amortization. Return on average common equity improved to 19.44% from 13.96%. Excluding 2001 charges, the comparison is more modest, with operating EPS of $4.95 in 2001 versus $5.91 in 2002 (about 19% growth).
The growth was driven by Consumer and Commercial Banking, which earned $6.1 billionb, up 23%, on higher card, mortgage and service-charge income and a 528,000 net increase in checking accounts. Global Corporate and Investment Banking, by contrast, saw trading-related revenue fall and net income drop 12%, while Asset Management and Equity Investments both weakened with market declines. Credit quality is a key watch item: nonperforming assets rose to $5.3 billion (1.53% of loans and foreclosed properties), concentrated in large corporate and foreign commercial loans, although net charge-offs fell to $3.7 billion (1.10% of average loans).
Capital and liquidity appear sound. The Tier 1 risk-based ratio was 8.22%c, total risk-based 12.43%, and leverage 6.29%, with all banks classified well capitalized.
The loan-to-domestic-deposit ratio improved to 97% from 126% two years earlier. Investors should note a pending FASB rule that will require consolidating about $25 billiond of multi-seller conduit assets from the third quarter of 2003, expected to add 25-30 basis points of capital-ratio pressure, along with the planned $1.6 billion purchase of a 24.9% stake in Mexico's Grupo Financiero Santander Serfin and ongoing Enron and WorldCom securities litigation.
02—Key points
Key Highlights
- Net income of $9.2 billion ($5.91 diluted EPS) in 2002, up from $6.8 billion ($4.18) in 2001, which included $1.7 billion in exit charges and $662 million of goodwill amortization.
- Return on average common shareholders' equity of 19.44%, up from 13.96%, while return on average assets rose to 1.40% from 1.05%.
- Consumer and Commercial Banking net income rose 23% to $6.1 billion, offsetting weaker Global Corporate and Investment Banking (net income down 12% to $1.7 billion) and Asset Management (down 23%).
- Nonperforming assets rose $354 million to $5.3 billion (1.53% of loans and foreclosed properties), led by large corporate and foreign commercial loans, while net charge-offs fell 13% to $3.7 billion.
- Capital ratios remained strong: Tier 1 risk-based 8.22%, total risk-based 12.43%, leverage 6.29%, with the corporation classified as well capitalized.
- Returned $4.8 billion to shareholders in 2002 through 109 million shares repurchased and dividends raised to $0.64 per quarter ($2.44 annual).
- Pending FASB consolidation rule could bring about $25.0 billion of multi-seller conduit assets onto the balance sheet from Q3 2003, with an estimated 25-30 basis point capital-ratio impact.
03—Questions
Frequently Asked Questions
How did Bank of America's 2002 earnings compare with 2001, and what drove the change?
Net income rose 36% to $9.2 billion ($5.91 diluted EPS) from $6.8 billion ($4.18). Much of the improvement reflects 2001 charges of $1.7 billion for exiting auto leasing and subprime real estate lending and $662 million of goodwill amortization, which ended in 2002 under SFAS 142. Excluding 2001 charges, operating EPS grew about 19%, supported by consumer fee income, mortgage banking, and lower provisions, partly offset by weaker trading and investment banking revenue.
Which business segments are performing well and which are under pressure?
Consumer and Commercial Banking is the strongest segment, with net income up 23% to $6.1 billion, driven by card income, service charges, debit card growth and mortgage banking. Global Corporate and Investment Banking declined, with trading-related revenue down about $627 million and net income down 12% to $1.7 billion. Asset Management net income fell 23% to $404 million on weaker equity markets, and Equity Investments posted a $329 million loss from impairments.
Is credit quality improving or deteriorating?
Mixed. Net charge-offs declined to $3.7 billion (1.10% of average loans) from $4.2 billion, and the provision fell $590 million. However, nonperforming assets rose to $5.3 billion (1.53%), with commercial foreign nonperforming loans jumping to 6.83% of the portfolio, concentrated in telecommunications and media firms in Western Europe and Latin America, and in Argentina and Brazil. The allowance for credit losses was $6.9 billion, or 2.00% of loans.
How strong is the company's capital and liquidity position?
Capital is solid, with Tier 1 risk-based capital of 8.22%, total risk-based of 12.43%, and a leverage ratio of 6.29%, all above well-capitalized thresholds. Liquidity improved, with the loan-to-domestic-deposit ratio at 97% versus 126% two years earlier, and core deposits up 7%. Investors should watch the pending consolidation of conduit assets and the $1.6 billion Santander Serfin stake purchase, which could pressure capital ratios.
What legal and off-balance-sheet risks should investors monitor?
The company faces ongoing securities litigation tied to Enron (a Section 11 claim remains after a partial dismissal) and WorldCom bond offerings, where Banc of America Securities is a defendant in a consolidated class action and about eighteen individual suits. Management believes these will not be materially adverse. Off-balance-sheet liquidity and letter-of-credit commitments to commercial paper conduits total $34.2 billion, and the company expects to consolidate roughly $25 billion of conduit assets from Q3 2003 under FIN 46.
04—Continue