Bank of America 2003 Annual Report Download - page 44

BANK OF AMERICA 2003 85
Note 4 Securities
The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt and marketable equity securities and held-to-
maturity debt securities at December 31, 2003, 2002 and 2001 were:
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 con-
sists of several components of net pension cost based on various
actuarial assumptions regarding future experience under the plans.
In addition, the Corporation has established unfunded supple-
mental 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 postretire-
ment healthcare and life insurance benefit plans.
Other Comprehensive Income
The Corporation records unrealized gains and losses on available-for-
sale debt and marketable equity securities, foreign currency translation
adjustments, related hedges of net investments in foreign operations
and gains and losses on cash flow hedges in other comprehensive
income (OCI) in shareholders’ equity. Gains and losses on available-for-
sale debt and marketable equity securities are reclassified to net
income as the gains or losses are realized upon sale of the securities.
Other-than-temporary impairment charges are reclassified to net
income at the time of the charge. Translation gains or losses on foreign
currency translation adjustments are reclassified to net income upon
the sale or liquidation of investments in foreign operations. Gains or
losses on derivatives are reclassified to net income as the hedged item
affects earnings.
Earnings Per Common Share
Earnings per common share is computed by dividing net income avail-
able 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 associ-
ated 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 trans-
lated, 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 accumu-
lated OCI within shareholders’ equity on an after-tax basis. When the
foreign entity is not a free-standing operation or is in a hyperinflation-
ary 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 income.
Co-Branding Credit Card Arrangements
The Corporation has co-brand arrangements that entitle a cardholder
to receive benefits, such as airline frequent-flyer points, based on
purchases made with the card. These arrangements have remaining
terms not exceeding six years. The Corporation may pay one-time
fees which would be deferred ratably over the term of the arrange-
ment. The Corporation makes monthly payments to the co-brand part-
ners 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 Merger-related Activity
On October 27, 2003, the Corporation and FleetBoston Financial
Corporation (FleetBoston) announced a definitive agreement to
merge. The merger will be a stock-for-stock transaction currently esti-
mated to be approximately $46.0 billion. The acquisition will be
accounted for using the purchase method of accounting and each
share of FleetBoston common stock will be exchanged for 0.5553 of
a share of the Corporation’s common stock, resulting in the issuance
of approximately 600 million shares of the Corporation’s common
stock. FleetBoston shareholders will receive cash instead of any frac-
tional shares of the Corporation’s common stock that would have oth-
erwise been issued at the completion of the merger. Also,
substantially all of the FleetBoston stock options vest upon comple-
tion of the merger and will be converted into the Corporation’s stock
options. Additionally, each share of FleetBoston preferred stock will
be exchanged for one share of the Corporation’s preferred stock. The
agreement has been approved by both boards of directors and is sub-
ject to customary regulatory and shareholder approvals. The closing
is expected in April of 2004.
Note 3 Exit Charges
On August 15, 2001, the Corporation announced that it was exiting
its auto leasing and subprime real estate lending businesses. As a
result of this strategic decision, the Corporation recorded pre-tax exit
charges in the third quarter of 2001 of $1.7 billion ($1.3 billion after-
tax) consisting of provision for credit losses of $395 million and non-
interest expense of $1.3 billion. Business exit costs within
noninterest expense consisted of the write-off of goodwill of $685
million, auto lease residual charges of $400 million, real estate serv-
icing asset charges of $145 million and other transaction costs of
$75 million.
The subprime real estate loan portfolio was securitized in the
fourth quarter of 2001. Approximately $42 million and $82 million of
subprime real estate loans remained in loans held for sale in other
assets at December 31, 2003 and 2002, respectively. At the exit
date, the auto lease portfolio consisted of approximately 495,000
units with total residual exposure of $6.8 billion. At December 31,
2003, approximately 112,000 units remained with a residual expo-
sure of $1.5 billion compared to approximately 227,000 units with a
residual exposure of $3.0 billion at December 31, 2002.
84 BANK OF AMERICA 2003
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
Available-for-sale securities
2003
Available-for-sale debt securities
U.S. Treasury securities and agency debentures
$710 $ 5 $ 2 $ 713
Mortgage-backed securities 56,405 63 575 55,893
Foreign sovereign securities 2,815 24 38 2,801
Other taxable securities 6,375 35 69 6,341
Total taxable 66,305 127 684 65,748
Tax-exempt securities 2,167 79 1 2,245
Total available-for-sale debt securities $68,472 $ 206 $ 685 $ 67,993
Available-for-sale marketable equity securities(1) $1,192 $ 394 $ 31 $ 1,555
2002
Available-for-sale debt securities
U.S. Treasury securities and agency debentures
$691 $ 20 $ – $ 711
Mortgage-backed securities 58,813 847 5 59,655
Foreign sovereign securities 2,235 30 103 2,162
Other taxable securities 2,691 25 38 2,678
Total taxable 64,430 922 146 65,206
Tax-exempt securities 2,824 96 4 2,916
Total available-for-sale debt securities $67,254 $1,018 $ 150 $68,122
Available-for-sale marketable equity securities(1) $1,165 $ 19 $ 127 $ 1,057
2001
Available-for-sale debt securities
U.S. Treasury securities and agency debentures
$1,271 $ 17 $ 8 $ 1,280
Mortgage-backed securities 73,546 381 826 73,101
Foreign sovereign securities 3,213 54 123 3,144
Other taxable securities 4,739 11 108 4,642
Total taxable 82,769 463 1,065 82,167
Tax-exempt securities 2,324 5 46 2,283
Total available-for-sale debt securities $85,093 $ 468 $ 1,111 $ 84,450
Available-for-sale marketable equity securities(1) $648 $ 45 $ 157 $ 536
Held-to-maturity debt securities
2003
Mortgage-backed securities $1 $– $– $1
Foreign sovereign securities 49 – 3 46
Other taxable securities 46 3 – 49
Total taxable 96 3 3 96
Tax-exempt securities 151 7 – 158
Total held-to-maturity debt securities $247 $ 10 $ 3 $ 254
2002
Mortgage-backed securities $3 $– $– $3
Foreign sovereign securities 788 10 49 749
Other taxable securities 45 4 – 49
Total taxable 836 14 49 801
Tax-exempt securities 190 10 – 200
Total held-to-maturity debt securities $1,026 $ 24 $ 49 $ 1,001
2001
U.S. Treasury securities and agency debentures $5 $– $– $5
Mortgage-backed securities 5––5
Foreign sovereign securities 797 5 54 748
Other taxable securities 26 1 – 27
Total taxable 833 6 54 785
Tax-exempt securities 216 9 1 224
Total held-to-maturity debt securities $1,049 $ 15 $ 55 $ 1,009
(1) Available-for-sale marketable equity securities are recorded in other assets on the Consolidated Balance Sheet
.