4th QUARTER 2000 EARNINGS REVIEW EXHIBIT 99.2
FINAL DRAFT
JANUARY 16, 2001
NEW YORK CITY
I. Thanks Susan. Good morning everyone and welcome to our review of fourth
quarter earnings
A. As always, I appreciate your presence given the number of earnings
announcements today
B. My remarks will be brief and cover three areas:
1. A review of fourth quarter results
2. Some comments about full year results with attention to momentum
we are seeing in our various business segments as we enter the
new year
3. And, finally, our outlook for 2001
II. Before I begin, let me say that we have grown earnings per share each year
over the past couple of years
A. And, economy willing, earnings in 2001 will be higher than in 2000
B. While the level of earnings may not quite be to your liking or ours,
we still have a powerful income stream
C. These earnings have allowed us to increase the dividend by more than
10 percent each year, buy back 146 million shares in a year and a
half, and increase capital levels by 7 percent versus last year
D. We do have issues - the slowing economy is taking its toll on credit
quality and a few of our businesses are sluggish because of the tight
markets
E. But we are dealing with these issues and will manage each of the
problems through the cycle
III. In the fourth quarter, operating earnings were $1.4 billion or $.85 per
share on a diluted basis compared with $1.23 per share a year ago and $1.31
per share in the third quarter of this year
A. Results were in line with our comments in early December
B. These results reflected a much higher provision for loan losses, lower
revenue from market sensitive areas and higher expenses compared to
earlier expectations
C. However, we did see increases in net interest income and continued fee
momentum in both consumer and commercial
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banking and asset management compared to third quarter results
1. The 2.5 percent increase in net interest income and 11 basis
point increase in margin were the result of a higher yielding
loan mix, increased trading related activities, deposit growth
and a decline in auto lease residual losses
a. The balance sheet this quarter reflected our successful
efforts in reducing asset growth as average earning assets
dropped for the first time in several quarters, including
decreases in securities, loans and trading related assets
b. Managed loan levels were flat with third quarter levels as
strong growth in home equity and credit card loans were
offset by a decrease in commercial loans reflecting customer
balance pay-downs and the concerted efforts to reduce loan
levels
c. As we mentioned last October, we are selling the bulk of our
mortgage company originations and exiting low margin
commercial relationships whenever possible
d. As investment securities mature, we will be replacing them
with off-balance sheet positions
e. Sharp declines in rates late last year allowed us to
accelerate sales of securities and mortgage loans with the
subsequent favorable impact on margins and convexity risk
f. As a result, our period-end assets declined $30 billion
2. On the fee side, service charges, investment and brokerage,
mortgage servicing and card income were all up from the third
quarter in line with the positive momentum we have been
experiencing in these areas all year
3. 'Other income' increased more than $200 million due to the gain
of $187 million from the sale of our factoring operation in late
December and from lower lease residual charges
a. Factoring was one of the businesses that we had identified
early last year as a candidate for divestiture
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i. While returns were attractive, the business did not
meet our growth targets
b. 'Other income' this quarter included $73 million of lease
residual charges, down from $186 million in the third
quarter
i. Total residual charges this quarter, including the
impact on net interest income, were $113 million
versus $257 million last quarter
4. Fourth quarter results reflected weakness in the capital markets
area
a. Investment banking fees were down slightly as increases in
syndications and advisory services were offset by lower
equity and high yield activity
b. Equity investment losses of $65 million reflected cash gains
of $143 million offset by a negative impact from fair value
adjustments
c. The fair market adjustment in the third quarter was a
positive $44 million
d. Trading fees were down almost 30 percent as improvements in
foreign exchange, interest rate contracts and commodities
were more than offset by declines in fixed income
i. Within fixed income, High Yield was once again the
primary culprit as the market declined due to widening
credit spreads, weak equity markets and lack of
liquidity
5. Noninterest expenses for the corporation were up 5 percent from
third quarter levels reflecting increases in all categories
except personnel
a. Decreases in personnel expense of 2 percent were more than
offset by investments in our growth initiatives, including a
new corporate brand campaign; additional marketing support
for card, asset management and investment banking; and
investments in bankofamerica.com
b. Unusual items included in expenses this quarter were $30
million to rationalize our operations in Colombia and
Venezuela and $25 million of additional legal expense
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6. Turning to credit quality, net charge-offs on loans increased
$640 million from third quarter results driven by a sizeable
writedown of a large credit discussed in our third quarter 10-Q
and the one-time $104 million charge for conforming to FFIEC
regulatory guidelines on consumer loans
a. The bulk of the remaining charge-offs were attributable to
companies across a handful of industries as we continued our
practice of writing nonperforming assets down to our current
expectation of value
b. Provision exceeded charge-offs by $135 million
7. Nonperforming assets increased approximately 24 percent or $1.1
billion dollars over third quarter levels
a. Commercial credits represented more than 80 percent of the
increase, which was driven by two large credits - the one
with the sizeable writedown in the consumer products
industry and one in the financial services industry
b. The remaining increase centered in the US Commercial and
Corporate portfolios as companies with higher leverage were
impacted by the slowing US economy, higher interest rates
and the overall competitive environment
8. As you can see, we had several unusual items that impacted
results this quarter
a. The factoring gain was, obviously, positive to earnings
b. Negatives included higher legal expense, expenses associated
with closing overseas offices, fair market writedowns and
higher provision versus charge-offs
IV. I realize most of you are focused on the quarter but let me spend a few
moments highlighting the 12-month results, as certain aspects of our
business segments get lost in the quarterly comparisons
V. Operating earnings for the corporation were $4.72 per share on a diluted
basis, up from $4.68 per share in 1999
A. ROE for the year was 16.7 percent versus 17.7 percent in 1999
B. Cash earnings on a diluted basis were $5.24, which is 11 percent
higher than operating earnings
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C. For the year, increases in net interest income of 2 percent and
in noninterest income before `other income' of 9 percent were
offset by higher provision for loan losses, lower security gains
and the absence of several one time gains that existed in 1999
D. Expense growth was held to less than 1 percent
VI. The results of our four business segments for the year were quite varied:
A. Consumer and Commercial Banking, earned $4.6 billion or 59
percent of the corporation's total operating earnings during the
past year with an ROE of 19 percent
1. Fee revenue growth in our branches, credit card and mortgage
operations were outweighed by lease residual charges and
fewer one time gains than the year before
2. Expenses were down 4 percent from 1999 levels due to
productivity initiatives even as we stepped up investments
in card services, e-commerce and marketing
3. Average managed loans grew 12 percent driven by residential
real estate lending and credit card
a. Managed commercial loan growth was 6 percent driven by
domestic non-real estate lending
4. Fee growth was strongest in our card businesses
a. Card fee income grew 11 percent due to growth in
customers and purchasing volume
i. Our card businesses include consumer, commercial
and government cards along with debit cards and
merchant processing
ii. For the year, these combined businesses showed
increases in receivables of 8 percent, increases
in purchase volume of 17 percent and increases in
processing volume of 18 percent
B. Turning to Global Corporate and Investment Banking, earnings in
2000 were $2.1 billion with an ROE of 15 percent, versus $2.3
billion in 1999 reflecting 9 percent revenue growth offset by
higher expenses and higher credit costs
1. Average managed loan growth was less than 3 percent
2. Much of the growth in both net interest income and fee
revenue was driven by the buildout of the investment banking
and trading platforms
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3. Investment banking fees rose 10 percent due to higher
securities underwriting fees (up 34 percent) and higher fees
from advisory services (up 13 percent) while syndication
fees were essentially flat
4. Trading revenue rose 33 percent for the year primarily due
to a doubling of revenue from equities (which includes
equity derivatives) and a 23 percent increase in revenue
from interest rate protection contracts
5. This growth has allowed us to show an increase in our market
shares and rankings
a. For full year 2000, we rank in the top ten in all key
product areas
6. Revenue growth translated into profitable growth for the
year
a. For full year 2000, our Global Capital Raising unit,
which includes fixed income and equity underwriting,
equity derivatives, M&A, and global investment
banking, achieved 38 percent revenue growth, while
cash earnings doubled to $412 million, representing
almost 19 percent of the total cash earnings of GCIB
7. Offsetting much of the higher earnings of Global Capital
Raising are the higher costs related to credit quality
issues in the large corporate loan book
a. Driven by the issues in the fourth quarter that I
discussed earlier, provision in GCIB in 2000 was
substantially higher than the level in 1999
C. A third business segment and another one of our key strategic
growth areas is Asset Management
1. Net income in 2000 was $601 million, up 18 percent from
1999, with an ROE improving from 30 to 34 percent
2. The combination of 7 percent revenue growth and 2 percent
expense growth provided us great operating leverage
a. Revenue growth was led by a 30 percent increase in
mutual fund fees
3. Total assets under management rose to $277 billion, or 12
percent, over the past year led by growth in mutual funds of
35 percent
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4. We have seen clear evidence that more of our customers and
clients are coming to Bank of America to buy investment
products
D. Our fourth and final business segment is Equity Investments
1. Principal Investing is the biggest piece of Equity
Investments and as you know, represents predominately our
venture capital operations with about $5 billion invested
2. Equity Investments also includes our strategic technologies
area as well as other parent company investments
3. Earnings for Equity Investments in 2000 were up 39 percent
from 1999 to $460 million
a. Equity Investment cash gains increased approximately
41 percent
b. This performance was driven by certain e-commerce
investments, as well as improvement in principal
investing
VII. Moving to the balance sheet, capital levels are stronger now than at the
end of last year
A. We have $54 billion of equity and reserves, up from $51 billion
at the end of 1999
B. Our Tier One capital ratio rose to 7.50 percent at the end of
the year, up from 7.35 percent the end of 1999 as our earnings
stream compensated for a higher dividend, share repurchase
activity and higher levels of risk-weighted assets
C. The leverage ratio was 6.12 percent
D. Last year at this time, the mark-to-market depreciation in the
securities and swaps portfolio was in excess of $5 billion and
reached as high as $6.5 billion during the year
1. However, at year end that depreciation is essentially gone
($600 million) without any impact on future revenue
expectations
VIII. Common shares outstanding at the end of the year were 1.61 billion, down 4
percent from a year ago, reflecting share repurchases of 68 million during
the year
IX. Let me spend the rest of my time today discussing our outlook for this year
A. When we did our plan in the fourth quarter we used the following
assumptions:
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1. Economic growth will be between 2 percent and 3 percent for
the year with the growth being slower early in the year and
picking up as the year progresses
2. We expect industrial production to be sluggish and exports
to slow
3. We expected the Fed to cut interest rates in the first half
of the year and expect, perhaps, another 50 to 100 basis
points
4. As the Fed lowers rates, the treasury and swap curves should
become steeper as we have experienced over the past couple
weeks
5. Clearly, we are anticipating a less robust economy on all
fronts in 2001 but, at this time, we do not anticipate a
recession
B. We are looking for modest loan growth in 2001, due in part to
the slowing economy
1. In addition, we would expect large corporate loan levels to
be flat to down as the addition of corporate loans
originated in 2001 would be more than offset by decreases as
we exit low-margin, credit-only corporate relationships
2. In addition, given our decision to sell the bulk of our
mortgage company originations, we expect to see residential
mortgages decline in 2001
3. However, consumer and commercial loans overall should
continue to grow as we stay focused on credit cards,
branch-based mortgages, home equity loans and small business
and commercial credits
4. Year over year we are looking for managed loan growth of
around 2 percent
C. Other earning assets should see modest decreases as we continue
to move investment securities into off-balance sheet swaps
D. With a steeper yield curve, additional rate cuts and a loan
portfolio with a greater mix of higher yielding loans, we are
looking for net interest income to grow 2 percent or so
E. On the fee side, we are looking for continued positive trends in
our consumer and commercial business in the areas of service
charges, mortgage servicing and card income
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1. Other fee income will show improvement as we have reduced
impact from lease residual charges
F. Asset management is expected to show strong, double digit
increases in fee revenue given the closing of the Marsico
acquisition earlier this month and the fact that we have been
making investments to support additional growth
G. In Global Corporate and Investment Banking we are looking for an
improving business environment as the year progresses
1. Over the past six quarters we have expanded both our
investment banking and trading platforms
2. This expansion plus the stimulus to investment banking and
trading from lower rates should allow us to increase fee
revenue in the low double digits
H. Equity investment gains overall should see little if any growth
versus last year's performance as increasing fees in principal
investing should offset the absence of gains from strategic
investments in 2000
I. To sum up, fee revenue growth in total is expected to be in the
higher single digits for 2001
J. Total revenue including net interest income and fee income is
expected to be up 4 to 5 percent in 2001
K. On the expense front, we will continue to invest incremental
resources in those businesses that will produce long-term and
profitable revenue growth even as we experience a slowing in
current economic growth
1. But having said that, expense growth should still remain
below revenue growth although the leverage will not be huge
2. Both Ken and I, as the year progresses, will scrutinize
spending levels in the various businesses to ensure that the
intended revenue growth occurs
3. Should we not achieve the expected growth because of
execution, interest rate environment or market conditions,
we will take quick action to constrain expenditures
L. Turning to credit quality, our outlook remains essentially the
same as we outlined for you in early December
1. We are projecting higher loan losses than the $2.4 billion
in 2000 and these losses could go as high as 75 basis points
or approximately $3 billion at current loan levels
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2. As you would expect, higher commercial charge-offs would
represent much of the increase
3. However, we also have assumed higher charge-offs in credit
card and consumer finance as a result of the slowing economy
as well as higher levels of outstandings
4. Provision expense should track net charge-offs for the most
part so that our loan loss allowance should stay fairly flat
with our year-end coverage of approximately 1.75 percent
given our minimal loan growth assumptions
5. Nonperforming assets are expected to rise for the
foreseeable future driven by increases in the commercial
portfolio and in consumer finance
M. Turning to capital trends, we expect to keep our Tier 1 ratio
above 7.0 percent which should give us plenty of room to pay an
attractive dividend and still buy back shares
N. So, when you take all these comments into consideration, you
should arrive at an earnings number that should exceed earnings
per share in 2000 and be within the guidance we gave you in
December which was north of $5.00
O. We realize that predicting economic growth at this time is
extremely difficult so we tried to build in some conservative
assumptions as far as revenue growth and charge-offs
P. If the economy comes in for a soft landing, I feel comfortable
that our guidance is adequate but if we get a hard landing, then
we will have to monitor the situation and update you as we go
along.
X. With that, let me now open the floor up for questions - I appreciate your
attention
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