Bank of America 2005 Annual Report Download - page 60

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.
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