BAC

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, for Bank of America Corporation. The reporting period is significantly impacted by the completion of the merger with FleetBoston Financial Corporation on April 1, 2004. Consequently, the results for the three and six months ended June 30, 2004, include three months of combined operations, whereas the prior year periods excluded FleetBoston. The Corporation operates through four primary segments: Consumer and Small Business, Commercial Banking, Global Corporate and Investment Banking, and Wealth and Investment Management.

Key Financial Metrics

Cash Flow: Net cash used in operating activities was $10.1 billion, and net cash used in investing activities was $64.2 billion. Net cash provided by financing activities was $79.0 billion, resulting in a net increase in cash and cash equivalents of $4.7 billion.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 22% year-over-year, driven primarily by the FleetBoston merger, higher asset and liability management (ALM) portfolio levels, and growth in consumer loans (particularly credit cards).
• Profitability: Net income rose 27% to $6.5 billion. Diluted EPS increased 9% to $3.70. The increase in net income was partially offset by higher capital levels due to the merger, resulting in a Return on Average Common Shareholders' Equity of 18.53% compared to 20.90% in the prior year.
• Expense Increases: Noninterest expense increased $2.8 billion (29%), largely due to $1.2 billion in higher personnel costs (salaries, benefits, and incentives from FleetBoston) and $868 million in other general operating expenses (including $300 million in legal expenses and a $285 million net mutual fund settlement expense).
• Asset Quality: The provision for credit losses decreased $192 million to $1.4 billion, reflecting improved credit quality in large corporate and commercial portfolios. However, on-balance sheet credit card net charge-offs increased $327 million due to portfolio growth and the addition of the FleetBoston card portfolio.
• Balance Sheet Expansion: Total assets grew by approximately $300 billion to over $1 trillion, and total deposits increased by $161 billion, primarily attributable to the acquisition of FleetBoston.

Guidance, Outlook, and Risks

• Merger Integration: The Corporation incurred $125 million in merger and restructuring charges for the quarter. Integration activities are ongoing, with payments under exit cost reserves expected to be substantially completed by the end of 2005.
• Capital Actions: The Board approved a 2-for-1 stock split (effective August 27, 2004) and a 12.5% increase in quarterly cash dividends to $0.45 per post-split share.
• Acquisition: On July 12, 2004, the Corporation agreed to acquire National Processing, Inc. for $1.4 billion in cash, expected to close in the fourth quarter of 2004.
• Regulatory and Accounting Risks:
  • Mortgage Servicing Rights (MSRs): The SEC Staff has expressed concerns regarding the prior accounting treatment of Excess Spread Certificates converted to MSRs. The Corporation is in discussion with the Staff regarding this matter.
  • FIN 46R: The adoption of FASB Interpretation No. 46(R) regarding Variable Interest Entities (VIEs) did not have a material impact on results, though it required consolidation of certain commercial paper conduits.
• Legal Proceedings: Significant litigation includes matters related to Parmalat (Italian court proceedings and U.S. class action) and WorldCom (settlement offers extended to underwriters). The Corporation also settled a mutual fund matter for a net expense of $285 million.
• Market Risk: The Corporation manages interest rate risk through an ALM process. At June 30, 2004, the portfolio was positioned to benefit from rising long-term interest rates. Trading-related revenue increased 15% year-over-year, driven by reduced costs on credit portfolio hedges and improved foreign exchange results.

Key Facts for Investor Verification

• Merger Impact: Verify the extent to which revenue and expense growth is organic versus attributable to the FleetBoston acquisition (which contributed approximately $47 billion in purchase price and significant asset/deposit balances).
• Credit Card Charge-offs: Monitor the trend in on-balance sheet credit card net charge-offs, which increased significantly due to the addition of the FleetBoston portfolio and portfolio seasoning.
• MSR Accounting: Track the status of discussions with the SEC Staff regarding the accounting treatment of Excess Spread Certificates and potential restatements or adjustments to future earnings.
• Legal Settlements: Assess the potential for additional costs related to the Parmalat and WorldCom litigation, as well as the impact of the mutual fund settlement on future quarters.
• Capital Ratios: Confirm that the Corporation remains "well-capitalized" under regulatory standards despite the significant increase in risk-weighted assets from the merger.