Bank of America 2006 Annual Report Download - page 86

the undiscounted cash flows expected to result from it. An Intangible
Asset subject to amortization shall be tested for recoverability whenever
events or changes in circumstances, such as a significant or adverse
change in the business climate that could affect the value of the Intangible
Asset, indicate that its carrying amount may not be recoverable. An
impairment loss is recorded to the extent the carrying amount of the
Intangible Asset exceeds its fair value.
The fair values of the reporting units were determined using a combi-
nation of valuation techniques consistent with the income approach and
the market approach and the fair values of the Intangible Assets were
determined using the income approach. For purposes of the income
approach, discounted cash flows were calculated by taking the net present
value of estimated cash flows using a combination of historical results,
estimated future cash flows and an appropriate price to earnings multiple.
We use our internal forecasts to estimate future cash flows and actual
results may differ from forecasted results. However, these differences
have not been material and we believe that this methodology provides a
reasonable means to determine fair values. Cash flows were discounted
using a discount rate based on expected equity return rates, which was 11
percent for 2006. Expected rates of equity returns were estimated based
on historical market returns and risk/return rates for similar industries of
the reporting unit. For purposes of the market approach, valuations of
reporting units were based on actual comparable market transactions and
market earnings multiples for similar industries of the reporting unit.
Our evaluations for the year ended December 31, 2006 indicated
there was no impairment of Goodwill or Intangible Assets.
2005 Compared to 2004
The following discussion and analysis provides a comparison of our results
of operations for 2005 and 2004. This discussion should be read in con-
junction with the Consolidated Financial Statements and related Notes.
Tables 5 and 6 contain financial data to supplement this discussion.
Overview
Net Income
Net Income totaled $16.5 billion, or $4.04 per diluted common share, in
2005 compared to $13.9 billion, or $3.64 per diluted common share, in
2004. The return on average common shareholders’ equity was 16.51
percent in 2005 compared to 16.47 percent in 2004. These earnings
provided sufficient cash flow to allow us to return $10.6 billion and $9.0
billion in 2005 and 2004, in capital to shareholders in the form of divi-
dends and share repurchases, net of employee stock options exercised.
Net Interest Income
Net Interest Income on a FTE basis increased $2.9 billion to $31.6 billion
in 2005 compared to 2004. The primary drivers of the increase were the
impact of FleetBoston, organic growth in consumer (primarily credit card
and home equity) and commercial loans, higher domestic deposit levels
and a larger ALM portfolio (primarily securities). Partially offsetting these
increases was the adverse impact of spread compression due to the flat-
tening of the yield curve, which contributed to lower Net Interest Income.
The net interest yield on a FTE basis declined 33 bps to 2.84 percent in
2005, primarily due to the adverse impact of an increase in lower-yielding,
trading-related balances and spread compression, which was partially
offset by growth in core deposit and consumer loans.
Noninterest Income
Noninterest Income increased $4.3 billion to $25.4 billion in 2005, due
primarily to increases in Card Income of $1.2 billion, Equity Investment
Gains of $1.2 billion, Trading Account Profits of $750 million, Service
Charges of $715 million, Investment and Brokerage Services of $570 mil-
lion and Mortgage Banking Income of $391 million. Card Income
increased due to increased interchange income and merchant discount
fees driven by growth in debit and credit purchase volumes and the acquis-
ition of National Processing, Inc. (NPC). Equity Investment Gains increased
as liquidity in the private equity markets increased. Trading Account Profits
increased due to increased customer activity and the absence of a write-
down of the Excess Spread Certificates that occurred in 2004. Service
Charges grew driven by organic account growth. Investment and Brokerage
Services increased due to higher asset management fees and mutual fund
fees. Mortgage Banking Income grew due to lower MSR impairment charg-
es, partially offset by lower production income. Offsetting these increases
was lower Other Income of $396 million primarily related to losses on
derivative instruments designated as economic hedges in ALM activities
that did not qualify for SFAS 133 hedge accounting treatment.
Provision for Credit Losses
The Provision for Credit Losses increased $1.2 billion to $4.0 billion in
2005. Domestic consumer credit card drove the increase, the result of
higher bankruptcy related credit costs resulting from bankruptcy reform,
portfolio seasoning, the impact of the FleetBoston portfolio and new
advances on accounts for which previous loan balances were sold to the
securitization trusts. The provision also increased as the rate of credit
quality improvement slowed in the commercial portfolio and a reserve was
established for estimated losses associated with Hurricane Katrina. Parti-
ally offsetting these increases were reductions in the reserves due to an
improved risk profile in Latin America as well as reduced uncertainties
associated with the FleetBoston credit integration.
Gains on Sales of Debt Securities
Gains on Sales of Debt Securities in 2005 and 2004, were $1.1 billion
and $1.7 billion. The decrease was primarily due to lower gains realized on
mortgage-backed securities and corporate bonds.
Noninterest Expense
Noninterest Expense increased $1.7 billion in 2005 from 2004, primarily
due to the impact of FleetBoston and increases in personnel-related costs.
Income Tax Expense
Income Tax Expense was $8.0 billion in 2005 compared to $7.0 billion in
2004, resulting in an effective tax rate of 32.7 percent in 2005 and 33.3
percent in 2004. The difference in the effective tax rate between years
resulted primarily from a tax benefit of $70 million related to the special
one-time deduction associated with the repatriation of certain foreign earn-
ings under the American Jobs Creation Act of 2004.
Business Segment Operations
Global Consumer and Small Business Banking
Net Income increased $1.3 billion, or 22 percent, to $7.0 billion in 2005
compared to 2004. Total Revenue rose $3.6 billion, or 15 percent, in
2005 compared to 2004, driven by increases in Net Interest Income and
Noninterest Income. Growth in Average Deposits and Average Loans and
Leases contributed to the $1.1 billion, or seven percent, increase in Net
Interest Income. Increases in Card Income of $1.0 billion, Service Charges
of $665 million and Mortgage Banking Income of $423 million drove the
$2.5 billion, or 28 percent, increase in Noninterest Income. These
increases were offset by increases in the Provision for Credit Losses and
84 Bank of America 2006