BANK ONE CORPORATION
Financial Supplement and Form 10-Q
Contents Page
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Five-Quarter Summary of Selected Financial Information 1
Business Segments 2
Consolidated Results 24
Risk Management 28
Liquidity Risk Management 28
Market Risk Management 28
Credit Risk Management 30
Operating Risk Management 30
Credit Portfolio Composition 31
Asset Quality 34
Derivative Financial Instruments 37
Loan Securitizations 39
Capital Management 41
Forward-Looking Statements 42
Consolidated Financial Statements 44
Notes to Consolidated Financial Statements 48
Selected Statistical Information 55
Form 10-Q 58
Five-Quarter Summary of Selected Financial Information
BANK ONE CORPORATION and Subsidiaries
Three Months Ended
June 30 March 31 December 31 September 30 June 30
2001 2001 2000 2000 2000
------- -------- ----------- ------------ --------
(In millions, except per share data)
Income Statement Data:
Total revenue, net of interest expense....................... $ 3,846 $ 3,792 $ 3,461 $ 3,942 $ 2,509
Net interest income--fully taxable-equivalent ("FTE") basis.. 2,085 2,218 2,247 2,242 2,257
Noninterest income........................................... 1,791 1,607 1,247 1,734 288
Provision for credit losses.................................. 540 585 1,507 516 1,013
Noninterest expense.......................................... 2,306 2,236 2,847 2,593 3,507
Income (loss) before cumulative effect of change
in accounting principle................................... 708 679 (512) 581 (1,269)
Net income (loss)............................................ 664 679 (512) 581 (1,269)
Per Common Share Data:
Income (loss) before cumulative effect of change
in accounting principle:
Basic..................................................... $ 0.60 $ 0.58 $ (0.44) $ 0.50 $ (1.11)
Diluted (1)............................................... 0.60 0.58 (0.44) 0.50 (1.11)
Net income (loss):
Basic..................................................... 0.57 0.58 (0.44) 0.50 (1.11)
Diluted (1)............................................... 0.56 0.58 (0.44) 0.50 (1.11)
Cash dividends declared...................................... 0.21 0.21 0.21 0.21 0.42
Book value................................................... 16.49 16.20 15.90 16.47 16.12
Balance Sheet Data - Ending Balances:
Loans:
Managed................................................... $223,390 $229,942 $236,492 $237,505 $234,412
Reported.................................................. 166,576 171,427 174,251 176,419 172,591
Deposits..................................................... 164,299 163,555 167,077 164,130 163,169
Long-term debt (2)........................................... 41,693 42,197 40,911 42,641 39,093
Total assets:
Managed................................................... 312,244 315,104 309,096 324,780 316,011
Reported.................................................. 272,412 274,352 269,300 283,373 272,709
Common stockholders' equity.................................. 19,261 18,876 18,445 19,042 18,630
Total stockholders' equity................................... 19,451 19,066 18,635 19,232 18,820
Credit Quality Ratios:
Net charge-offs to average loans - managed (3)............... 2.50% 2.40% 2.22% 1.86% 1.99%
Allowance for credit losses to period end loans.............. 2.54 2.45 2.36 1.75 1.73
Nonperforming assets to related assets....................... 1.77 1.55 1.48 1.21 1.03
Financial Performance Ratios:
Return (loss) on average assets.............................. 0.99% 1.02% (0.75)% 0.85% (1.87)%
Return (loss) on average common equity....................... 13.9 14.6 (10.7) 12.2 (26.0)
Net interest margin:
Managed................................................... 4.65 4.76 4.65 4.66 4.80
Reported.................................................. 3.50 3.71 3.67 3.68 3.77
Efficiency ratio:
Managed................................................... 48.5 47.6 66.0 54.6 103.8
Reported.................................................. 59.5 58.5 81.5 65.2 137.8
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Five-Quarter Summary of Selected Financial Information
BANK ONE CORPORATION and Subsidiaries - Continued
Three Months Ended
June 30 March 31 December 31 September 30 June 30
2001 2001 2000 2000 2000
------- -------- ----------- ------------ -------
(In millions, except per share data)
Capital Ratios:
Risk-based capital:
Tier 1.................................................... 8.2% 7.8% 7.3% 7.5% 7.2%
Total..................................................... 11.6 11.2 10.8 10.9 10.3
Tangible common equity/tangible managed assets............... 5.8 5.6 5.5 5.4 5.4
Common Stock Data:
Average shares outstanding:
Basic..................................................... 1,166 1,163 1,158 1,156 1,153
Diluted (4)............................................... 1,176 1,173 1,158 1,167 1,153
Stock price, quarter-end..................................... $ 35.80 $ 36.18 $ 36.63 $ 38.06 $ 26.56
Employees (5)................................................ 78,491 79,157 80,778 81,291 82,443
__________
(1) Common equivalent shares and related income were excluded from the
computation of diluted loss per share for the three months ended December
31, 2000 and June 30, 2000 as the effect would be antidilutive.
(2) Includes trust preferred capital securities.
(3) Second quarter 2001 and first quarter 2001 amounts include $24 million and
$40 million, respectively, of charge-offs which are not so classified as
such in the Corporation's GAAP financial information because they are part
of a portfolio which has been accounted for as loans held at a discount. The
inclusion of these amounts in charge-offs more accurately reflects the
performance of the portfolio. In the Corporation's financial statements,
these items result in a higher provision in excess of net charge-offs.
(4) Common equivalent shares and related income were excluded from the
computation of diluted loss per share for the three months ended December
31, 2000 and June 30, 2000 as the effect would be antidilutive.
(5) Beginning in the first quarter of 2001, employees on long-term disability
and employees of unconsolidated subsidiaries are excluded. Prior period data
have not been restated for this change.
Business Segments
Bank One Corporation ("Bank One" or the "Corporation") is managed on a line
of business basis. The business segments' financial results presented reflect
the current organization of the Corporation. The following tables summarize
certain financial information (as reported) by line of business for the periods
indicated:
Net Income Average
(Loss) Managed Assets
(In millions) (In billions)
------------------- -------------------
Three Months Ended June 30 2001 2000 2001 2000
------------------- -------------------
Retail........................................................ $ 322 $ (81) $ 79.4 $ 77.9
Commercial Banking............................................ 167 (213) 101.7 110.2
First USA..................................................... 193 (379) 65.3 70.6
Investment Management......................................... 83 73 8.1 7.5
Corporate Investments......................................... 30 61 9.3 8.4
Corporate/Unallocated......................................... (87) (730) 45.0 42.0
----- ------- ------ ------
Total Corporation - operating............................... 708 (1,269) $308.8 $316.6
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Accounting change............................................. (44) --
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Total Corporation - reported................................ $ 664 $(1,269)
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-2-
Net Income Average
(Loss) Managed Assets
(In millions) (In billions)
-------------------- -----------------
Six Months Ended June 30 2001 2000 2001 2000
-------------------- -----------------
Retail........................................................ $ 671 $ 155 $ 80.2 $ 78.8
Commercial Banking............................................ 326 (13) 101.9 110.2
First USA..................................................... 341 (312) 66.8 71.7
Investment Management......................................... 165 154 8.1 7.6
Corporate Investments......................................... 1 202 9.3 8.2
Corporate/Unallocated......................................... (117) (766) 42.7 38.6
------ ----- ------ ------
Total Corporation - operating............................... 1,387 (580) $309.0 $315.1
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Accounting change............................................. (44) --
------ -----
Total Corporation - reported................................ $1,343 $(580)
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The information provided in the line of business tables beginning with the
caption entitled "Financial Performance" is included herein for analytical
purposes only and is based on management information systems, assumptions and
methodologies that are under continual review. For a detailed discussion of the
various business activities of Bank One's business segments, see pages 4 -13 of
the Corporation's 2000 Annual Report on Form 10-K.
-3-
The financial information and supplemental data presented for the respective
line-of-business sections for both the second quarter and six-month periods
ended June 30, 2000 are reported on an actual basis. However, for analytical
purposes and to better understand underlying trends, the following line of
business discussion excludes the impact of the second quarter 2000 significant
items noted in tables 1 - 4 on pages 22 - 24.
Retail
Retail includes consumer and small business banking, auto and consumer
lending, and interactive banking and financial management through bankone.com.
Three Months Ended June 30 Six Months Ended June 30
----------------------------- ----------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------- -------- ---------- ------- ------- ---------
Net interest income--FTE basis..................... $ 1,236 $ 1,196 3 % $2,553 $2,432 5%
Non-deposit service charges..................... 83 84 (1) 176 193 (9)
Credit card revenue............................. 41 37 11 77 70 10
Service charges on deposits..................... 198 205 (3) 384 384 --
Fiduciary and investment management fees........ 29 28 4 58 58 --
Other income (loss)............................. 8 (449) N/M 24 (494) N/M
------- ------- ------ ------
Noninterest income (loss).......................... 359 (95) N/M 719 211 N/M
------- ------- ------ ------
Total revenue...................................... 1,595 1,101 45 3,272 2,643 24
Provision for credit losses........................ 201 132 52 445 299 49
Salaries and employee benefits.................. 328 333 (2) 658 683 (4)
Other expense................................... 562 764 (26) 1,119 1,416 (21)
------- ------- ------ ------
Noninterest expense................................ 890 1,097 (19) 1,777 2,099 (15)
------- ------- ------ ------
Pretax income (loss)--FTE basis.................... 504 (128) N/M 1,050 245 N/M
Tax expense (benefit) and FTE basis adjustment..... 182 (47) N/M 379 90 N/M
------- ------- ------ ------
Net income (loss).................................. $ 322 $ (81) N/M $ 671 $ 155 N/M
======= ======= ====== ======
FINANCIAL PERFORMANCE:
Return (loss) on equity............................ 21% (6)% 22% 6%
Efficiency ratio................................... 56 N/M 54 79
Headcount--full-time (1)........................... 35,570 36,700 (3)%
ENDING BALANCES (in billions):
Commercial loans................................ $ 12.4 $ 11.8 5 %
Home equity loans............................... 30.3 27.3 11
Indirect auto loans / leases.................... 21.4 24.1 (11)
Other personal loans............................ 10.9 10.8 1
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Total loans........................................ $ 75.0 $ 74.0 1
Assets............................................. 78.9 76.3 3
Demand deposits................................. 24.4 24.8 (2)
Savings......................................... 33.8 33.0 2
Time............................................ 29.7 30.4 (2)
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Total deposits..................................... 87.9 88.2 --
Common equity...................................... 6.3 6.0 5
-4-
Three Months Ended June 30 Six Months Ended June 30
------------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
-------- ------- ------------ -------- -------- ----------
AVERAGE BALANCES (in billions):
Commercial loans............................. $ 12.2 $ 11.8 3 % $ 12.1 $ 11.7 3 %
Home equity loans............................ 30.5 26.3 16 30.8 25.9 19
Indirect auto loans / leases................. 21.7 24.4 (11) 22.1 24.4 (9)
Other personal loans ........................ 10.9 11.1 (2) 11.0 11.4 (3)
-------- -------- -------- --------
Total loans..................................... 75.3 73.6 2 76.0 73.4 4
Assets.......................................... 79.4 77.9 2 80.2 78.8 2
Demand deposits.............................. 24.1 25.3 (5) 24.1 25.1 (4)
Savings...................................... 33.5 33.8 (1) 33.0 34.0 (3)
Time......................................... 30.6 30.3 1 31.3 29.8 5
-------- -------- -------- --------
Total deposits.................................. 88.2 89.4 (1) 88.4 88.9 (1)
Common equity................................... 6.2 5.9 5 6.1 5.6 9
CREDIT QUALITY (in millions):
Net charge-offs:
Small business commercial.................... $ 17 $ 8 N/M $ 27 $ 13 N/M
Home equity loans............................ 93 52 79 % 166 73 N/M
Indirect auto loans / leases (2)............. 72 44 64 161 88 83 %
Other personal loans......................... 19 30 (37) 53 58 (9)
-------- -------- -------- --------
Total consumer (2)........................... 184 126 46 380 219 74
-------- -------- -------- --------
Total net charge-offs (2).................... 201 134 50 407 232 75
Net charge-off ratios:
Small business commercial.................... 0.56% 0.26% 0.45% 0.22%
Home equity loans............................ 1.22 0.80 1.08 0.56
Indirect auto loans / leases (2)............. 1.33 0.73 1.46 0.72
Other personal loans......................... 0.70 1.09 0.95 1.01
Total consumer (2)........................... 1.17 0.82 1.19 0.71
Total net charge-offs (2).................... 1.07 0.73 1.07 0.63
Nonperforming assets:
Commercial................................... $ 246 $ 187 32
Consumer..................................... 804 369 N/M
-------- --------
Total nonperforming loans....................... 1,050 556 89
Other including OREO......................... 69 66 5
--------- --------
Total nonperforming assets...................... $ 1,119 $ 622 80
Allowance for loan losses....................... $ 949 N/A N/A
Allowance to period end loans................... 1.26% N/A
Allowance to nonperforming loans................ 90 N/A
Nonperforming assets to related assets.......... 1.49 0.83%
DISTRIBUTION:
Banking centers.............................. 1,808 1,832 (1)%
ATMs......................................... 5,703 6,530 (13)
# On-line customers (in thousands)........... 1,035 690 50
# Households (in thousands).................. 7,499 7,926 (5)
# Business customers (in thousands).......... 530 545 (3)
# Debit cards issued (in thousands).......... 4,256 4,215 1
-5-
Three Months Ended June 30 Six Months Ended June 30
------------------------------ -----------------------------
2001 2000 % Change 2001 2000 % Change
-------- ------- ---------- -------- -------- ----------
INVESTMENTS:
Sales volume (in millions).................. $1,142 $1,112 3% $2,280 $2,305 (1)%
______________
N/M--Not meaningful.
N/A--Not available due to changes in segment composition; see Note 5 on page 59
of the Corporation's 2000 Annual Report on Form 10-K.
(1) Beginning in the first quarter of 2001, employees on long-term disability
and employees of unconsolidated subsidiaries are excluded.
(2) First quarter 2001 and six-months ended June 30, 2001 amounts include $24
million and $64 million, respectively, of charge-offs which are not so
classified in the Corporation's GAAP financials because they are part of a
portfolio which has been accounted for as loans held at a discount. The
inclusion of these amounts in charge-offs more accurately reflects the
performance of the portfolio. In the Corporation's financial statements,
this item results in a higher provision in excess of net charge-offs.
Quarterly Results - Adjusted Basis
----------------------------------
Retail reported second quarter net income of $322 million, up $75 million,
or 30%, from the year-ago quarter. The year-over-year improvement reflected
higher revenue and lower noninterest expense, partially offset by higher
provision for credit losses. Compared to the 2001 first quarter, net income
declined $27 million, or 8%, primarily reflecting lower net interest income
partially offset by lower provision.
Net interest income was $1.236 billion, up $31 million, or 3%, from the
year-ago quarter. This increase was driven by wider loan spreads and a 2%
increase in average loans, partially offset by deposit margin compression and a
shift in deposit product mix toward certificates of deposit. Average home equity
loans increased 16% from a year ago. In contrast, average auto loans / leases
decreased 11%, reflecting a deliberate reduction in the level of new auto
leases. Current quarter net interest income was relatively unchanged from the
first quarter when adjusted for seasonal tax-refund lending in that period.
Noninterest income was $359 million, up $29 million, or 9%, from a year
ago. This primarily reflected the absence of auto lease residual losses in the
current quarter, compared with $64 million of such losses a year ago.
Noninterest income was essentially unchanged from the first quarter.
Provision for credit losses was $201 million, up $80 million from the
year-ago quarter. Compared to the first quarter, the provision for credit losses
decreased $43 million. Managed net charge-offs totaled $201 million, up from
$134 million in the year-ago quarter, but down from $206 million in the first
quarter. The year-over-year increase in net charge-offs reflected anticipated
charge-offs related to brokered home equity loans and certain portions of the
auto lending portfolio. The second quarter net charge-off ratio was 1.07%, up
from 0.73% in the year-ago period, but down from 1.08% in the first quarter.
Nonperforming assets increased $497 million from a year ago, largely driven
by a $435 million increase in consumer nonperforming loans. Compared with the
first quarter, nonperforming assets increased $83 million, or 8%, reflecting an
increase in both consumer and small business nonperforming loans. The allowance
for credit losses expressed as a percent of loans increased to 1.26% at June 30,
2001, up from 1.21% at March 31, 2001, reflecting lower end-of-period loans.
Noninterest expense was $890 million, down $134 million, or 13%, from the
year-ago quarter, reflecting the positive impacts from waste-reduction
initiatives and reduced headcount in lending and staff units. Compared with the
first quarter, noninterest expense was essentially unchanged. The efficiency
ratio in the current quarter was 56%, compared with 67% a year ago.
-6-
Year-to-Date Results - Adjusted Basis
-------------------------------------
For the first six months of 2001, Retail reported net income of $671
million, up $188 million from the 2000 period. The $112 million, or 5%, increase
in net interest income for the first six months of 2001 from the prior year is
due to wider loan spreads and a 4% increase in average loan balances, partially
offset by deposit margin compression. The higher provision was primarily driven
by increased net charge-offs. Noninterest income increased by $83 million in the
first six months of 2001, to $719 million on an adjusted basis from the prior
year, reflecting $120 million in realized auto lease residual losses in the 2000
period. Noninterest expense was down $249 million, or 12%, due to the impacts of
waste-reduction initiatives and reduced headcount in lending and staff units.
Commercial Banking
Commercial Banking offers a broad array of products, including cash
management, capital markets and lending, to Corporate Banking and Middle Market
Banking customers.
Three Months Ended June 30 Six Months Ended June 30
------------------------------- -------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- ------- ---------- --------- -------- ----------
Net interest income--FTE basis.................... $ 660 $ 694 (5)% $ 1,325 $ 1,358 (2)%
Non-deposit service charges.................... 171 140 22 329 272 21
Credit card revenue............................ 22 19 16 44 37 19
Service charges on deposits.................... 151 130 16 283 265 7
Fiduciary and investment management fees....... 2 3 (33) 3 6 (50)
Trading........................................ 67 (4) N/M 144 49 N/M
Other income (loss)............................ (21) 24 N/M (13) 37 N/M
------- ------- ------- --------
Noninterest income................................ 392 312 26 790 666 19
------- ------- ------- --------
Total revenue..................................... 1,052 1,006 5 2,115 2,024 4
Provision for credit losses....................... 239 778 (69) 503 910 (45)
Salaries and employee benefits................. 270 278 (3) 548 555 (1)
Other expense.................................. 274 286 (4) 540 579 (7)
------- ------- ------- --------
Noninterest expense............................... 544 564 (4) 1,088 1,134 (4)
------- ------- ------- --------
Pretax income (loss)--FTE basis................... 269 (336) N/M 524 (20) N/M
Tax expense (benefit) and FTE basis adjustment.... 102 (123) N/M 198 (7) N/M
------- ------- ------- --------
Net income (loss)................................. $ 167 $ (213) N/M $ 326 $ (13) N/M
======= ======= ======= ========
Memo: Revenue by activity (4)
Lending-related revenue........................ 495 544 (9) 1,012 1,080 (6)
Treasury management services (1) 292 257 14 564 516 9
Capital markets (2)............................ 169 75 N/M 336 203 66
Other.......................................... 96 130 (26) 203 130 56
FINANCIAL PERFORMANCE:
Return (loss) on equity........................... 10% (13)% 10% --%
Efficiency ratio.................................. 52 56 51 56
Headcount--full-time
Corporate Banking (including Capital Markets).. 4,591 N/A N/A
Middle Market.................................. 3,952 N/A N/A
Treasury management services................... 7,216 N/A N/A
Support and other administration (3)........... 43 N/A N/A
------- -------
Total headcount - full-time ...................... 15,802 16,394 (4)%
-7-
Three Months Ended June 30 Six Months Ended June 30
------------------------------ -------------------------------
2001 2000 % Change 2001 2000 % Change
-------- ------- ---------- -------- -------- -----------
ENDING BALANCES (in billions):
Loans........................................... $ 73.9 $ 83.3 (11)%
Assets.......................................... 101.4 110.8 (8)
Demand deposits.............................. 21.8 20.8 5
Savings...................................... 2.9 N/A N/A
Time (+ Savings in 2000)..................... 8.2 8.9 (8)
Foreign offices.............................. 9.9 11.1 (11)
------- -------
Total deposits.................................. 42.8 40.8 5
Common equity................................... 7.0 6.8 3
AVERAGE BALANCES (in billions):
Loans........................................... $ 76.4 $ 82.1 (7)% $ 78.5 $ 81.3 (3)%
Assets.......................................... 101.7 110.2 (8) 101.9 110.2 (8)
Demand deposits.............................. 20.5 21.9 (6) 20.4 21.4 (5)
Savings...................................... 2.7 N/A N/A 2.7 N/A N/A
Time (+ Savings in 2000)..................... 6.6 8.9 (26) 6.2 9.1 (31)
Foreign offices.............................. 9.5 10.1 (6) 8.3 9.6 (14)
-------- ------- -------- -------
Total deposits.................................. 39.3 40.9 (4) 37.6 40.1 (6)
Common equity................................... 7.0 6.7 4 6.9 6.5 6
CREDIT QUALITY (in millions):
Net commercial charge-offs...................... $ 239 $ 110 N/M $ 488 $ 194 N/M
Net commercial charge-off ratios................ 1.25% 0.54% 1.24% 0.48%
Nonperforming assets:
Commercial nonperforming loans.................. $ 1,752 $1,010 73%
Other including OREO......................... 18 11 64
-------- -------
Total nonperforming assets...................... $ 1,770 $1,021 73
Allowance for loan losses....................... $ 3,032 N/A N/A
Allowance to period end loans................... 4.10% N/A
Allowance to nonperforming loans................ 173 N/A
Nonperforming assets to related assets.......... 2.40% 1.23%
CORPORATE BANKING (in billions):
Loans--ending balance........................... $ 39.6 $ 50.8 (22)%
--average balance.......................... 42.0 50.1 (16) $ 44.1 $ 49.8 (11)%
Deposits--ending balance........................ $ 23.1 $ 21.0 10
--average balance....................... 20.8 22.1 (6) $ 19.4 $ 21.3 (9)
Credit Quality (in millions):
Net commercial charge-offs...................... $ 155 $ 101 53% $ 341 $ 161 N/M
Net commercial charge-off ratio................. 1.48% 0.81% 1.55% 0.65%
Nonperforming loans............................. $ 1,050 $ 730 44
Nonperforming loans to loans.................... 2.65% 1.44%
-8-
Three Months Ended June 30 Six Months Ended June 30
------------------------------- ------------------------------
2001 2000 % Change 2001 2000 % Change
-------- ------- ----------- ------- -------- -----------
SYNDICATIONS:
Lead Arranger Deals:
Volume (in billions)......................... $12.8 $17.7 (28)% $27.3 $27.3 --
Number of transactions....................... 56 61 (8) 105 96 9%
League table standing--rank.................. 4 4 --
League table standing--market share.......... 3% 5%
MIDDLE MARKET BANKING (in billions):
Loans--ending balance........................... $34.3 $32.5 6%
--average balance.......................... 34.4 32.0 8 $34.4 $31.5 9%
Deposits--ending balance........................ $19.7 $19.8 (1)
--average balance....................... 18.6 18.8 (1) $18.3 $18.8 (3)
Credit Quality (in millions):
Net commercial charge-offs...................... $ 84 $ 9 N/M $ 147 $ 33 N/M
Net commercial charge-off ratio................. 0.98% 0.11% 0.85% 0.21%
Nonperforming loans............................. $ 702 $ 280 N/M
Nonperforming loans to loans.................... 2.05% 0.86%
____________________
(1) Treasury Management Services includes both fees and fee equivalent
from compensating balances.
(2) Capital Markets includes trading revenues and underwriting,
syndicated lending and advisory fees.
(3) Full-time headcount for June 30, 2000 has been restated to reflect
the movement of Support and Other Administrative personnel into the
respective business units reported.
(4) Second quarter 2000 amounts restated.
Quarterly Results - Adjusted Basis
----------------------------------
Commercial Banking reported second quarter net income of $167 million, down
$47 million, or 22%, from the year-ago quarter. Results continued to reflect
ongoing efforts to review all relationships in the portfolio to manage overall
exposure as well as relationship profitability.
At June 30, 2001, loans were $73.9 billion, down $9.4 billion, or 11%, from
the end of the year-ago quarter and $4.6 billion, or 6%, from the end of the
first quarter. Corporate Banking loans were $39.6 billion at June 30, down $11.2
billion, or 22% from a year ago and down $4.5 billion, or 10%, from the end of
the first quarter. The Corporate Banking decline from the first quarter included
$232 million related to problem loan sales, of which $147 million were
classified as nonperforming. Middle Market loans were $34.3 billion at quarter
end, up $1.8 billion, or 6%, from last year but down slightly from the end of
the first quarter.
Revenue totaled $1.052 billion, up slightly from the year-ago quarter with
growth in noninterest income partially offset by a decline in net interest
income. Revenue decreased $11 million from the first quarter.
Net interest income was $660 million, down $34 million, or 5%, from the
year-ago quarter and $5 million from the first quarter. This reflected lower
average loan balances following efforts to reduce credit risk exposure, the cost
of carrying a higher level of nonperforming loans, and the impact of lower rates
on customer compensating deposit balances. Second quarter average loans were
$76.4 billion, down $5.7 billion, or 7%, from the prior year and $4.2 billion,
or 5%, from the first quarter.
Noninterest income was $392 million, up $36 million, or 10%, from the
year-ago quarter. Non-deposit service charges increased $31 million, or 22%,
reflecting better underwriting and asset backed finance activities. Trading
revenue increased $27 million. Service charges on deposits increased $21
million, or 16%, reflecting growth in the Treasury Management business. Other
income declined $45 million, including a net loss on the sale of assets.
Compared with the first quarter, noninterest income declined $6 million.
Non-deposit service charges increased $13 million, or 8%, reflecting improved
loan syndication activity from depressed first quarter levels and continued
growth in the asset backed finance business. Trading revenue declined $10
million, or 13%, due to a lower level of
-9-
activity. Service charges on deposits increased $19 million, or 14%, reflecting
the seasonality of the Treasury Management business. Other income decreased $29
million, reflecting the net loss on the sale of assets.
The provision for credit losses was $239 million, up $89 million, or 59%,
from the year-ago quarter but down $25 million, or 9%, from the first quarter.
Total net charge-offs were $239 million in the second quarter, including $68
million related to problem loan sales. This represented 1.25% of average loans,
up significantly from 0.54% in the year-ago quarter, but up only slightly from
1.23% in the first quarter. Corporate Banking net charge-offs were $155 million,
or 1.48% of average loans, up from 0.81% a year ago, but down from 1.61% in the
first quarter. Middle Market net charge-offs were $84 million, or 0.98% of
average loans, up from 0.11% in the year-ago quarter and 0.73% in the first
quarter.
The allowance for credit losses at June 30, 2001, was $3.032 billion,
essentially unchanged from the first quarter. This represented 4.10% of
period-end loans and 173% of nonperforming loans, compared with 3.86% and 197%,
respectively, at March 31, 2001. At June 30, 2001, nonperforming loans were
$1.752 billion, up $208 million from the first quarter. Corporate Banking
nonperforming loans at quarter end were $1.050 billion, up $98 million, or 10%,
from the end of the first quarter. Adjusting for the impact of second quarter
nonperforming loan sales, Corporate Banking nonperforming loans increased $245
million, compared to increases on a comparable basis of about $270 million in
the prior two quarters. Middle Market nonperforming loans were $702 million at
June 30, 2001, up $110 million from the end of the first quarter.
Noninterest expense totaled $544 million, down $19 million, or 3%, from the
year-ago quarter, and was flat with the first quarter. The decline from the
year-ago quarter reflected the impact of waste-reduction efforts and lower
headcount. The efficiency ratio in the current quarter was 52%, down from 54% a
year ago, but up slightly from 51% in the first quarter.
Year-to-Date Results - Adjusted Basis
-------------------------------------
Commercial Banking reported year-to-date net income of $326 million, down
$88 million, or 21%, from the prior year reflecting higher credit costs and the
initiative to more actively manage the credit risk profile and profitability of
our relationships.
Net interest income was $1.325 billion, down $33 million, or 2%, for the
same reasons mentioned in the quarterly results.
Noninterest income was $790 million, up $80 million, or 11%, reflecting an
increase in fixed income and asset backed finance underwriting activities,
growth in the Treasury Management business, and improved fixed income trading
results. These were partially offset by losses on asset sales.
The provision for credit losses was $503 million, up $221 million, or 78%,
from 2000. Total net charge-offs were $488 million in the first half of 2001,
including $157 million related to problem loan sales. This represented 1.24% of
average loans, up significantly from 0.48% in the prior year. Nonperforming
loans at June 30, 2001, were $1.752 billion, up $742 million, or 73%, from the
prior year period reflecting the deterioration in the Commercial portfolio.
Noninterest expense totaled $1.088 billion, down $45 million, or 4%,
reflecting the impact of waste-reduction efforts and lower headcount.
-10-
First USA
First USA is the third largest credit card company in the United States and
is the largest Visa(R) credit card issuer in the world, with $63 billion in
managed credit card receivables and 50.4 million cardmembers.
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- ----------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------ ------ ---------- ------ ------ ----------
Net interest income--FTE basis........................ $ 1,458 $ 1,451 -- % $ 2,849 $ 2,976 (4)%
Non-deposit service charges......................... 1 2 (50) 3 5 (40)
Credit card revenue................................. 278 108 N/M 525 304 73
Fiduciary and investment management fees............ 21 20 5 44 45 (2)
Investment securities gains......................... -- -- -- -- 11 (100)
Other income (loss)................................. 36 (283) -- 73 (254) N/M
-------- ------- -------- -------
Noninterest income (loss)............................. 336 (153) N/M 645 111 N/M
-------- ------- -------- -------
Total revenue......................................... 1,794 1,298 38 3,494 3,087 13
Provision for credit losses........................... 962 935 3 1,912 1,904 --
Salaries and employee benefits...................... 124 132 (6) 253 274 (8)
Other expense....................................... 398 829 (52) 783 1,402 (44)
-------- ------- -------- -------
Noninterest expense................................... 522 961 (46) 1,036 1,676 (38)
-------- ------- -------- -------
Pretax income (loss)--FTE basis....................... 310 (598) N/M 546 (493) N/M
Tax expense (benefit) and FTE basis adjustment........ 117 (219) N/M 205 (181) N/M
-------- ------- -------- -------
Net income (loss)..................................... $ 193 $ (379) N/M $ 341 $ (312) N/M
======== ======= ======== =======
Memo: Net securitization gains (amortization)......... $ (19) $ (30) 37 $ (20) $ (71) 72
FINANCIAL PERFORMANCE:
% of average outstandings:
Net interest income -- FTE basis.................... 9.25% 8.83% 8.94% 8.99%
Provision for credit losses......................... 6.11 5.69 6.00 5.75
Noninterest income (loss)........................... 2.13 (0.93) 2.02 0.33
-------- ------- -------- ------
Risk adjusted margin........................... 5.27 2.21 4.96 3.57
Noninterest expense................................. 3.31 5.85 3.25 5.05
-------- ------- -------- ------
Pretax income -- FTE basis
Return on outstandings............................ 1.97 (3.64) 1.71 (1.49)
Net income (loss)................................... 1.22 (2.31) 1.07 (0.94)
Return (loss) on equity............................... 12% (25)% 11% (10)%
Efficiency ratio...................................... 29 74 30 54
Headcount--full-time ................................. 10,785 11,009 (2)%
-11-
Three Months Ended June 30 Six Months Ended June 30
----------------------------------- ----------------------------------
2001 2000 % Change 2001 2000 % Change
---------- --------- --------- ---------- --------- ----------
ENDING BALANCES (in billions):
Owned......................................... $ 6.2 $ 4.5 38 %
Seller's interest............................. 17.0 18.5 (8)
------- -------
Loans on balance sheet........................ 23.2 23.0 1
Securitized................................... 39.8 43.3 (8)
------- -------
Loans - managed.................................. $ 63.0 $ 66.3 (5)
Assets - managed................................. 64.9 69.7 (7)
Common equity.................................... 6.3 6.1 3
AVERAGE BALANCES (in billions):
Owned......................................... $ 6.0 $ 5.1 18 % $ 5.6 $ 4.7 19 %
Seller's interest............................. 16.6 17.3 (4) 18.6 17.6 6
------- ------- -------- --------
Loans on balance sheet........................ 22.6 22.4 1 24.2 22.3 9
Securitized................................... 40.6 43.7 (7) 40.1 44.3 (9)
------- ------- -------- --------
Loans - managed.................................. $ 63.2 $ 66.1 (4) $ 64.3 $ 66.6 (3)
Assets - managed................................. 65.3 70.6 (8) 66.8 71.7 (7)
Common equity.................................... 6.3 6.1 3 6.3 6.2 2
CREDIT QUALITY (in millions):
Net charge-offs:
Credit card--managed........................ $ 962 $ 900 7 % $ 1,912 $ 1,869 2 %
Net charge-off ratios:
Credit card--managed........................ 6.09% 5.44% 5.95% 5.61%
12-month lagged............................. 5.82 5.22 5.74 5.42
Delinquency ratio--30+ days...................... 4.10 3.83
--90+ days...................... 1.78 1.69
Allowance for loan losses........................ $ 197 N/A N/A
Allowance to period end owned loans.............. 3.18% N/A
OTHER DATA:
Charge volume (in billions)................... 34.4 36.8 (7)% $ 66.9 $ 70.8 (6)%
New accounts opened (in thousands)............ 1,003 826 21 1,778 1,776 --
Cards issued (in thousands)................... 50,449 54,648 (8)
Number of FUSA.com customers (in millions).... 2.6 1.6 63
Quarterly Results - Adjusted Basis
----------------------------------
First USA reported second quarter net income of $193 million, up $80
million, or 71%, from the year-ago quarter, reflecting higher noninterest income
and reduced expenses partially offset by increased credit costs. Net income
increased $45 million, or 30%, from the first quarter, driven primarily by
higher net interest income. Second quarter results represented a 1.97% pre-tax
return on outstandings, up from 1.46% in the prior quarter.
Net interest income was $1.458 billion, up $7 million from the year-ago
quarter and $67 million, or 5%, from the first quarter. Current period net
interest income benefited from lower interest rates, partially offset by lower
average outstandings.
Average managed outstandings for the second quarter were $63.2 billion,
down $2.9 billion, or 4%, from the year-ago period and $2.2 billion, or 3%, from
the first quarter. End of period managed loans declined to $63.0 billion. First
USA opened 1 million new accounts during the quarter, up 21% and 29% from the
year-ago and first quarters, respectively. At June 30, 2001, 50.4 million cards
were issued. First USA continues to be a leader in online
-12-
card marketing and customer service with over 2.6 million registered users of
its website, FirstUSA.com, up 63% from a year ago.
Noninterest income was $336 million, up $29 million, or 9%, from the
year-ago period, reflecting higher fee income. Noninterest income increased $27
million, or 9%, from the first quarter due to seasonally higher net interchange
revenue partially offset by a reduction in securitization activity.
The managed provision for credit losses was $962 million, up $62 million,
or 7%, from the year-ago quarter. The managed charge-off rate increased to 6.09%
from 5.44% over the same time period, reflecting the impact of both lower
average outstandings and higher net charge-offs. The provision increased $12
million from the first quarter, reflecting increased bankruptcy losses. The
managed 30-day and 90-day delinquency rates were 4.10% and 1.78%, respectively,
up from 3.83% and 1.69% in the year-ago quarter but down from 4.33% and 2.02% in
the first quarter.
Noninterest expense totaled $522 million, down $157 million, or 23%, from
the year-ago quarter, reflecting lower headcount, reduced operating losses and a
decrease in internally allocated costs related to a mid-year 2000 change in
methodology. The decline from a year ago also reflected the sale of the
international operations in the 2000 second quarter. Noninterest expense
increased slightly from the first quarter. The efficiency ratio for the current
period was 29%, down from 39% in the prior year and 30% in the first quarter.
Year-to-Date Results - Adjusted Basis
-------------------------------------
First USA reported net income of $341 million, up $161 million, or 89%,
from the 2000 period, reflecting reduced expenses and higher noninterest income
partially offset by lower net interest income. Net interest income was $2.849
billion, down $127 million from the 2000 period due to lower average
outstandings partially offset by lower interest rates and loan fee income. The
managed provision for credit losses was $1.912 billion, up $43 million, or 2%,
from the 2000 period.
Noninterest income was $645 million, up $74 million, or 13%, from the 2000
period, primarily reflecting increased securitization activity.
Noninterest expense totaled $1.036 billion, down $358 million, or 26%, from
the 2000 period, reflecting lower headcount, reduced operating losses, improved
operating efficiencies and a decrease in internally allocated costs related to a
mid-year 2000 change in methodology. The decline from a year ago also reflected
the sale of the international operations in the 2000 second quarter.
-13-
Investment Management
The Investment Management Group (IMG) provides investment, insurance, trust
and private banking services to individuals. The Group also provides
investment-related services, including retirement and custody services,
securities lending and corporate trust to institutions.
Three Months Ended June 30 Six Months Ended June 30
------------------------------- -------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- -------- ---------- --------- -------- ----------
Net interest income--FTE basis.................. $ 107 $ 101 6% $ 211 $ 201 5%
Non-deposit service charges.................. 172 134 28 336 264 27
Service charges on deposits.................. 4 4 -- 8 8 --
Fiduciary and investment management fees..... 131 150 (13) 265 289 (8)
Other income ................................ 1 -- -- 6 14 (57)
-------- -------- -------- --------
Noninterest income.............................. 308 288 7 615 575 7
-------- -------- -------- --------
Total revenue................................... 415 389 7 826 776 6
Provision for credit losses..................... 13 2 N/M 16 4 N/M
Salaries and employee benefits............... 142 144 (1) 282 288 (2)
Other expense................................ 126 128 (2) 263 241 9
-------- -------- -------- --------
Noninterest expense............................. 268 272 (1) 545 529 3
-------- -------- -------- --------
Pretax income - FTE basis....................... 134 115 17 265 243 9
Tax expense and FTE basis adjustment............ 51 42 21 100 89 12
-------- -------- -------- --------
Net income...................................... 83 $ 73 14 $ 165 $ 154 7
======== ======== ======== ========
Memo: Insurance revenues........................ $ 103.3 $ 87.0 19 $ 203.9 $ 166.9 22
-14-
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- ---------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- --------- -----------
FINANCIAL PERFORMANCE:
Return on equity................................ 33% 33% 33% 34%
Efficiency ratio................................ 65 70 66 68
Headcount--full-time............................ 6,371 6,645 (4)%
ENDING BALANCES (in billions):
Loans........................................... $ 7.1 $ 6.7 6
Assets.......................................... 8.4 7.7 9
Demand deposits.............................. 2.3 3.1 (26)
Savings...................................... 2.5 1.9 32
Time......................................... 3.3 3.8 (13)
Foreign offices.............................. 0.1 0.2 (50)
------- -------
Total deposits.................................. 8.2 9.0 (9)
Common equity................................... 1.0 0.9 11
AVERAGE BALANCES (in billions):
Loans........................................... $ 6.9 $ 6.5 6 % $ 6.9 $ 6.5 6 %
Assets.......................................... 8.1 7.5 8 8.1 7.6 7
Demand deposits.............................. 1.9 2.5 (24) 2.0 2.6 (23)
Savings...................................... 2.7 2.0 35 2.7 2.0 35
Time......................................... 3.3 3.9 (15) 3.3 3.9 (15)
Foreign offices.............................. 0.2 0.2 -- 0.2 0.2 --
------- ------- ------- -------
Total deposits.................................. 8.1 8.6 (6) 8.2 8.7 (6)
Common equity................................... 1.0 0.9 11 1.0 0.9 11
CREDIT QUALITY (in millions):
Net charge-offs:
Commercial................................... $ 10 N/A N/A $ 10 N/A N/A
Consumer..................................... 3 N/A N/A 3 N/A N/A
------- ------- ------- -------
Total net charge-offs........................ $ 13 N/A N/A $ 13 N/A N/A
Net charge-off ratios:
Commercial................................... 1.07% N/A 0.61% N/A
Consumer..................................... 0.37 N/A 0.17 N/A
Total net charge-offs........................ 0.72 N/A 0.38 N/A
Nonperforming assets:
Commercial................................... $ 37 N/A N/A
Consumer..................................... 5 N/A N/A
------- -------
Total nonperforming assets .................. $ 42 N/A N/A
Allowance for loan losses....................... $ 25 N/A N/A
Allowance to period end loans................... 0.35% N/A
Allowance to nonperforming loans................ 60 N/A
Nonperforming assets to related assets.......... 0.59% N/A
-15-
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- --------- ----------
ASSETS UNDER MANAGEMENT
ENDING BALANCES (in billions):
Mutual funds................................... $ 74.4 $ 67.4 10 %
Other.......................................... 57.9 63.8 (9)
------- -------
Total....................................... $ 132.3 $ 131.2 1
By type:
Money market................................... $ 47.8 $ 40.4 18
Equity......................................... 49.8 57.2 (13)
Fixed income................................... 34.7 33.6 3
------- -------
Total....................................... $ 132.3 $ 131.2 1
By channel:
Private client services........................ $ 52.0 $ 59.9 (13)
Retail brokerage............................... 9.5 9.2 3
Institutional.................................. 54.3 48.3 12
Commercial cash sweep.......................... 8.9 6.9 29
All other...................................... 7.6 6.9 10
------- -------
Total....................................... $ 132.3 $ 131.2 1
Morningstar Rankings:
Percentage of customer assets in
4 and 5 ranked funds...................... 54% 62%
Percentage of customer assets in
3+ ranked funds........................... 95 90
TRUST ASSETS
ENDING BALANCES:
Trust assets under administration (in
billions)................................... $ 342.3 N/A N/A
CORPORATE TRUST SECURITIES
ENDING BALANCES:
Corp. trust sec. under administration (in
billions)................................... $ 892.3 N/A N/A
RETAIL BROKERAGE:
Mutual fund sales (in millions)............. $ 559 $ 652 (14)% $ 1,173 $ 1,431 (18)%
Annuity sales............................... 582 460 27 1,106 874 27
------- ------- ------- -------
Total sales.............................. $ 1,141 $ 1,112 3 $ 2,279 $ 2,305 (1)
Number of accounts--end of period
(in thousands)............................ 393 370 6
Market value customer assets-end of
period (in billions)...................... $ 23.6 $ 23.6 --
Number of registered sales representatives.. 704 674 4
Number of licensed retail bankers........... 2,904 2,520 15
-16-
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- --------- ----------
PRIVATE CLIENT SERVICES:
Number of Private Client advisors........... 682 815 (16)%
Number of Private Client offices............ 105 104 1
Client Assets:
Assets under management (in billions).......... $ 52.0 $ 59.9 (13)
Ending Balances (in billions):
Loans.......................................... $ 6.9 $ 6.5 6
Deposits....................................... 6.6 6.8 (3)
Average Balances (in billions):
Loans.......................................... $ 6.9 $ 6.4 8 $ 6.9 $ 6.3 10%
Deposits....................................... 6.9 7.2 (4) 7.0 7.2 (3)
Quarterly Results - Adjusted Basis
----------------------------------
Investment Management reported second quarter net income of $83 million, up
$4 million, or 5%, from the year-ago quarter, reflecting a $26 million, or 7%,
increase in revenue partially offset by higher provision expense. Net income
increased slightly from the first quarter, reflecting modest revenue growth and
lower expenses, offset by higher provision expense.
Period-end assets under management increased slightly to $132.3 billion
from both the year-ago and first quarters. One Group(R) mutual fund assets under
management increased to $74.4 billion in the second quarter, up 10%
year-over-year and 5% from the first quarter. Overall, One Group net fund flows
remained positive. In the second quarter, the mix of assets under management
shifted to equities from money market and fixed income assets as equity markets
improved. Equity assets increased 5% from the first quarter, while fixed income
assets declined 4% and money market assets remained relatively flat.
Net interest income totaled $107 million, up $6 million, or 6%, from the
year-ago period. Higher spread income associated with a 6% increase in average
loans was partially offset by a 6% decrease in average deposits. Compared to the
first quarter, net interest income was up $3 million, or 3%, primarily as a
result of wider deposit spreads.
Noninterest income was $308 million, up $20 million, or 7%, from the
year-ago quarter. Beginning in the 2000 fourth quarter, fees associated with the
in-house administration of the One Group mutual funds were recorded as revenue,
with a corresponding increase in expense. Prior to that, a third-party
administrator incurred such fees and expenses, which totaled $24 million in the
second quarter. Excluding the impact of this change, noninterest income was
essentially flat from the year-ago and first quarters.
Retail brokerage sales of mutual funds and annuities were $1.1 billion in
the second quarter, an increase of $29 million, or 3%, from the year-ago quarter
and essentially unchanged from the first quarter.
Noninterest expense of $268 million was up $5 million, or 2%, from the
year-ago quarter. Excluding the expenses associated with the administration of
the One Group, noninterest expense declined 7%, driven by lower headcount and
waste-reduction initiatives. Noninterest expense decreased $9 million, or 3%,
from the first quarter due to lower operating losses.
-17-
Year-to-Date Results - Adjusted Basis
-------------------------------------
Investment Management reported year-to-date net income of $165 million, up
$5 million, or 3%, from the year-ago period. Net interest income was
$211 million, up $10 million, or 5%, from the year-ago period. Noninterest
income was $615 million, up $40 million, or 7%, from the year-ago period.
Excluding the impact of the in-house administration of the One Group mutual
funds, noninterest income was essentially flat from the year-ago period. For the
six-month period, retail brokerage sales of mutual funds and annuities were $2.3
billion, a decrease of $26 million, or 1%, from the year-ago period reflecting
slower mutual fund sales partially offset by an increase in annuity sales.
Noninterest expense was $545 million, $25 million or up 5% from the year-ago
period. Excluding the expenses associated with the administration of the One
Group, noninterest expense declined 4%, driven by lower headcount and waste-
reduction initiatives.
Corporate Investments
The Corporate Investments Group engages in proprietary investment
activities for the account of Bank One.
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- --------- ----------
Net interest income--FTE basis................... $ 28 $ 30 (7)% $ 54 $ 65 (17)%
Investment securities gains (losses).......... 4 62 (94) (93) 217 N/M
Trading gains (losses)........................ -- (4) 100 (1) 2 N/M
Other income (losses)......................... (5) (6) 17 6 18 (67)
------ ------ ------ ------
Noninterest income (loss)........................ (1) 52 N/M (88) 237 N/M
------ ------ ------ ------
Total revenue (loss)............................. 27 82 (67) (34) 302 N/M
Provision for credit losses...................... -- 1 (100) -- 2 N/M
Salaries and employee benefits................ 7 11 (36) 13 19 (32)
Other expense................................. 12 20 (40) 25 51 (51)
------ ------ ------ ------
Noninterest expense.............................. 19 31 (39) 38 70 (46)
------ ------ ------ ------
Pretax income--FTE basis......................... 8 50 (84) (72) 230 N/M
Tax expense (benefit) and FTE basis adjustment... (22) (11) (100) (73) 28 N/M
------ ------ ------ ------
Net income (1)................................... $ 30 $ 61 (51) $ 1 $ 202 N/M
====== ====== ====== ======
FINANCIAL PERFORMANCE:
Return on equity................................. 10% 20% -- 34%
Efficiency ratio................................. 70 38 N/M 23
Headcount--full time............................. 186 318 (42)%
ENDING BALANCES (in billions):
Loans............................................ $ 3.9 $ 3.6 8%
Assets........................................... 9.3 8.6 8
Common equity.................................... 1.2 1.2 --
AVERAGE BALANCES (in billions):
Loans............................................ $ 3.9 $ 3.5 11% $ 3.9 $ 3.5 11%
Assets........................................... 9.3 8.4 11 9.3 8.2 13
Common equity.................................... 1.2 1.2 -- 1.2 1.2 --
-18-
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- --------- ----------
CREDIT QUALITY (in millions)
Nonperforming assets:
Commercial nonperforming loans............... $ 10 N/A N/A
Other, including OREO........................ 10 N/A N/A
----- ----
Total nonperforming assets...................... 20 N/A N/A
Allowance for loan losses....................... $ 25 N/A N/A
Allowance to period end loans................... 0.64% N/A
Allowance to nonperforming loans................ 250 N/A
Nonperforming assets to related assets.......... 0.51% N/A
__________
(1) Excludes accounting change.
Quarterly Results - Adjusted Basis
----------------------------------
Corporate Investments reported net income of $30 million, excluding the
impact of the accounting change related to the way collateralized debt
obligations (CDOs) are valued and recorded. This compared with $61 million net
income in the year-ago quarter and a net loss of $29 million in the first
quarter. The decline in net income from the year-ago quarter reflected weaker
capital markets, which resulted in lower market valuations. Tax-oriented and
leasing activities continued to produce expected results and, while profitable,
market-driven activities continued to be impacted by unfavorable market
conditions.
Year-to-Date Results - Adjusted Basis
-------------------------------------
Net income for the six months ended June 30 was $1 million, compared to
$202 million for the year-ago period. The change in net income from the prior
year was primarily the result of a decline in market-driven revenue.
Net interest income for the year-to-date period was $54 million, a decline
of $11 million, or 17%, versus the prior year. Lower interest income on the
portfolio and the growth in volume of non-interest yielding investments
contributed to the decline.
Noninterest income for the six months was an $88 million loss compared to
income of $237 million in the year ago period. The weaker capital markets in
2001 resulted in lower market valuations compared to a year ago. Gains from
venture capital and private equity investments declined by $207 million while
other market driven investments declined by $106 million.
Noninterest expense decreased $32 million or 46%, to $38 million in the
current year. Lower incentive compensation and a reduction in headcount were
primary drivers to the lower expense levels.
During the third quarter, Corporate Investments will be reorganized. The
tax-oriented business will move to Commercial Banking and the remainder (direct
investments and fixed income investments) will be included in
Corporate/Unallocated. Prior periods will be restated for this reorganization.
-19-
Corporate/Unallocated
Corporate/Unallocated includes certain items that are not allocated to the
lines of business.
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- -----------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- --------- ---------- --------- -------- --------
Net interest expense--FTE basis.................... $ (246) $ (75) N/M $ (441) $ (190) N/M
Non-deposit service charges..................... 4 N/A N/A (1) N/A N/A
Credit card revenue............................. (2) N/A N/A (1) N/A N/A
Service charges on deposits .................... 7 N/A N/A 8 N/A N/A
Fiduciary & investment management fees.......... 1 N/A N/A 1 N/A N/A
Investment securities gains..................... 65 N/A N/A 65 N/A N/A
Trading......................................... (7) N/A N/A (16) N/A N/A
Other income ................................... 47 N/A N/A 165 N/A N/A
------- ------- -------- -------
Noninterest income (loss).......................... 115 (422) N/M 221 (304) N/M
------- ------- -------- -------
Total revenue (loss)............................... (131) (497) 74% (220) (494) 55%
Provision for credit losses........................ -- -- -- -- -- --
Salaries and employee benefits.................. 141 N/A N/A 240 N/A N/A
Other expense................................... (78) N/A N/A (182) N/A N/A
------- ------- -------- -------
Noninterest expense................................ 63 582 (89) 58 660 (91)
------- ------- -------- -------
Pretax loss--FTE basis............................. (194) (1,079) 82 (278) (1,154) 76
Tax benefit and FTE basis adjustment............... (107) (349) 69 (161) (388) 59
------- ------- -------- -------
Net loss........................................... $ (87) $ (730) 88 $ (117) $ (766) 85
======= ======= ======== =======
FINANCIAL PERFORMANCE:
Headcount - full-time.............................. 9,777 11,377 (14)%
ENDING BALANCES (in billions):
Loans.............................................. $ 0.5 $ 0.5 --
Assets............................................. 49.4 42.9 15%
Deposits........................................... 25.4 25.2 1
Common equity...................................... (2.5) (2.4) (4)
AVERAGE BALANCES (in billions):
Loans.............................................. $ 0.7 $ -- -- $ 0.6 $ (0.1) N/M
Assets............................................. 45.0 42.0 7% 42.7 38.6 11%
Deposits........................................... 26.2 25.0 5 27.2 24.8 10
Common equity...................................... (2.6) (1.1) N/M (2.6) (0.6) N/M
-20-
Quarterly Results - Adjusted Basis
----------------------------------
Corporate/Unallocated includes Treasury, unallocated corporate expenses and
any gains or losses from corporate transactions. Corporate/Unallocated reported
a second quarter net loss of $87 million, compared with net losses of $70
million in the year-ago quarter and $30 million in the first quarter. The first
quarter had $73 million of pre-tax gains on corporate transactions.
Year-to-Date Results - Adjusted Basis
-------------------------------------
Corporate/Unallocated reported a year-to-date net loss of $117 million,
compared with a net loss of $106 million in the prior year. Included in the
current results were gains of $150 million pre-tax ($95 million after tax) on
corporate transactions and $79 million pre-tax ($50 million after tax) in the
prior year.
2000 Second Quarter Significant Items
Results in the year-ago second quarter included the negative impact of
$1.913 billion after tax ($2.940 billion pre-tax), or $1.66 per share, of
significant items. Excluding the impact of these items, operating earnings in
the year-ago quarter and six months ended June 30, 2000 were $644 million, or
$0.55 per dilited share, and $1.333 billion, or $1.15 per diluted share,
respectively. The tables below reconciles 2000 actual results with results
adjusted for the significant items.
-21-
2000 Quarterly Significant Items - Table 1
2nd Qtr 2nd Qtr. 2000 2nd Qtr. 2001 Actual 2nd Qtr. 2001 Actual
2001 -------------------------------- vs. vs.
(Dollars in millions) Actual Actual Adjustments Adjusted 2nd Qtr 2000 Actual 2nd Qtr. 2000 Adjusted
-------------------------------------------------------------------------------------------
Consolidated
------------
Net interest income............. $3,243 $3,396 $ (9) $3,405 $ (153) (5)% $(162) (5)%
Noninterest income.............. 1,508 (18) (1,361) 1,343 1,526 N/M 165 12
Provision for credit losses..... 1,415 1,846 674 1,172 (431) (23) 243 21
Noninterest expense............. 2,306 3,507 896 2,611 (1,201) (34) (305) (12)
Net income (loss)............... 664 (1,269) (1,913) 644 1,933 N/M 20 3
Retail
------
Net interest income............. $1,236 $1,196 $ (9) $1,205 $ 40 3% $ 31 3%
Noninterest income.............. 359 (95) (425) 330 454 N/M 29 9
Provision for credit losses..... 201 132 11 121 69 52 80 66
Noninterest expense............. 890 1,097 73 1,024 (207) (19) (134) (13)
Net income (loss)............... 322 (81) (328) 247 403 N/M 75 30
Commercial Banking
------------------
Net interest income............. $ 660 $ 694 $ -- $ 694 $ (34) (5)% $ (34) (5)%
Noninterest income.............. 392 312 (44) 356 80 26 36 10
Provision for credit losses..... 239 778 628 150 (539) (69) 89 59
Noninterest expense............. 544 564 1 563 (20) (4) (19) (3)
Net income (loss)............... 167 (213) (427) 214 380 N/M (47) (22)
First USA
---------
Net interest income............. $1,458 $1,451 $ -- $1,451 $ 7 --% $ 7 --%
Noninterest income.............. 336 (153) (460) 307 489 N/M 29 9
Provision for credit losses..... 962 935 35 900 27 3 62 7
Noninterest expense............. 522 961 282 679 (439) (46) (157) (23)
Net income (loss)............... 193 (379) (492) 113 572 N/M 80 71
Investment Management
---------------------
Net interest income............. $ 107 $ 101 $ -- $ 101 $ 6 6% $ 6 6%
Noninterest income.............. 308 288 -- 288 20 7 20 7
Provision for credit losses..... 13 2 -- 2 11 N/M 11 N/M
Noninterest expense............. 268 272 9 263 (4) (1) 5 2
Net income...................... 83 73 (6) 79 10 14 4 5
Corporate Investments
---------------------
Net interest income............. $ 28 $ 30 $ -- $ 30 $ (2) (7)% $ (2) (7)%
Noninterest income.............. (1) 52 -- 52 (53) N/M (53) N/M
Provision for credit losses..... -- 1 -- 1 (1) (100) (1) (100)
Noninterest expense............. 19 31 -- 31 (12) (39) (12) (39)
Net income...................... 30 61 -- 61 (31) (51) (31) (51)
Corporate / Unallocated
-----------------------
Net interest income............. $ (246) $ (75) $ -- $ (75) $ (171) N/M $(171) N/M
Noninterest income.............. 115 (422) (432) 10 537 N/M 105 N/M
Provision for credit losses..... -- -- -- -- -- -- -- --
Noninterest expense............. 63 582 531 51 (519) (89)% 12 24%
Net income (loss)............... (87) (730) (660) (70) 643 88 (17) (24)
-22-
2000 Year to Date Significant Items - Table 2
Six Months Six Months Ended Six Months Ended
Ended June 30, 2001 Actual June 30, 2001 Actual
June 30, Six Months Ended June 30, 2000 vs. vs.
2001 -------------------------------- Six Months Ended Six Months Ended
(Dollars in millions) Actual Actual Adjustments Adjusted June 30, 2000 Actual June 30, 2000 Adjusted
-------------------------------------------------------------------------------------------
Consolidated
------------
Net interest income............. $6,551 $6,841 $ (9) $6,850 $ (290) (4)% $ (299) (4)%
Noninterest income.............. 2,901 1,496 (1,361) 2,857 1,405 94 44 2
Provision for credit losses..... 2,876 3,118 674 2,444 (242) (8) 432 18
Noninterest expense............. 4,542 6,168 896 5,272 (1,626) (26) (730) (14)
Net income (loss)............... 1,343 (580) (1,913) 1,333 1,923 N/M 10 1
Retail
------
Net interest income............. $2,553 $2,432 $ (9) $2,441 $ 121 5% $ 112 5%
Noninterest income.............. 719 211 (425) 636 508 N/M 83 13
Provision for credit losses..... 445 299 11 288 146 49 157 55
Noninterest expense............. 1,777 2,099 73 2,026 (322) (15) (249) (12)
Net income...................... 671 155 (328) 483 516 N/M 188 39
Commercial Banking
------------------
Net interest income............. $1,325 $1,358 $ -- $1,358 $ (33) (2)% $ (33) (2)%
Noninterest income.............. 790 666 (44) 710 124 19 80 11
Provision for credit losses..... 503 910 628 282 (407) (45) 221 78
Noninterest expense............. 1,088 1,134 1 1,133 (46) (4) (45) (4)
Net income (loss)............... 326 (13) (427) 414 339 N/M (88) (21)
First USA
---------
Net interest income............. $2,849 $2,976 $ -- $2,976 $ (127) (4)% $ (127) (4)%
Noninterest income.............. 645 111 (460) 571 534 N/M 74 13
Provision for credit losses..... 1,912 1,904 35 1,869 8 N/M 43 2
Noninterest expense............. 1,036 1,676 282 1,394 (640) (38) (358) (26)
Net income (loss)............... 341 (312) (492) 180 653 N/M 161 89
Investment Management
---------------------
Net interest income............. $ 211 $ 201 $ -- $ 201 $ 10 5% $ 10 5%
Noninterest income.............. 615 575 -- 575 40 7 40 7
Provision for credit losses..... 16 4 -- 4 12 N/M 12 N/M
Noninterest expense............. 545 529 9 520 16 3 25 5
Net income...................... 165 154 (6) 160 11 7 5 3
Corporate Investments
---------------------
Net interest income............. $ 54 $ 65 $ -- $ 65 $ (11) (17)% $ (11) (17)%
Noninterest income.............. (88) 237 -- 237 (325) N/M (325) N/M
Provision for credit losses..... -- 2 -- 2 (2) N/M (2) N/M
Noninterest expense............. 38 70 -- 70 (32) (46) (32) (46)
Net income...................... 1 202 -- 202 (201) N/M (201) N/M
Corporate / Unallocated
-----------------------
Net interest income............. $ (441) $ (190) $ -- $ (190) $ (251) N/M $ (251) N/M
Noninterest income.............. 221 (304) (432) 128 525 N/M 93 73%
Provision for credit losses..... -- -- -- -- -- N/M -- N/M
Noninterest expense............. 58 660 531 129 (602) (91)% (71) (55)
Net income (loss)............... (117) (766) (660) (106) 649 (85) (11) 10
-23-
The significant items recorded in the second quarter 2000 by each business
segment and income statement line are summarized as follows:
Business Segments--Table 3
Investment Corporate Corporate/
(In millions) Retail Commercial First USA Management Investments Unallocated Total
------ ---------- --------- ---------- ----------- ----------- -----
Pretax expense (income):
Provision for credit losses................... $ -- $ 647 $ -- $ -- $ -- $ -- $ 647
Writedown of auto lease residuals............. 307 307
Repositioning of investment
securities portfolio....................... 415 415
Operational and other......................... 44 26 27 9 217 323
Writedown of interest-only strip.............. 354 354
Occupancy and fixed asset related............. 141 141
Writedown of purchased credit card
relationship intangibles................... 275 275
Writedowns primarily related to planned
loan sales (1)............................. 167 167
Increase to legal accruals.................... 190 190
Writedown of marketing partnership
agreements................................. 121 121
------ ------ ------ ------ ------ ------ -------
Total.................................... $ 518 $ 673 $ 777 $ 9 $ -- $ 963 $ 2,940
====== ====== ====== ====== ====== ====== =======
After tax................................ $ 328 $ 427 $ 492 $ 6 $ -- $ 660 $ 1,913
====== ====== ====== ====== ====== ====== =======
Income Statement line--Table 4
(In millions)
Pretax expense (income):
Net interest income........................... $ 9 $ -- $ -- $ -- $ -- $ -- $ 9
Provision for credit losses................... 11 628 35 674
Noninterest income:
Credit card revenue....................... 152 152
Investment securities losses.............. 30 415 445
Trading................................... 14 14
Other income.............................. 425 308 17 750
------ ------ ------ ------ ------ ------ -------
Total noninterest income...................... 425 44 460 -- -- 432 1,361
Noninterest expense:
Salaries and employee benefits............ 54 54
Other intangible amortization............. 275 9 284
Other..................................... 12 1 7 305 325
Merger-related and restructuring charges.. 61 172 233
------ ------ ------ ------ ------ ------ -------
Total noninterest expense..................... 73 1 282 9 -- 531 896
------ ------ ------ ------ ------ ------ -------
Pretax expense................................ $ 518 $ 673 $ 777 $ 9 $ -- $ 963 $ 2,940
====== ====== ====== ====== ====== ====== =======
-------
(1) At December 31, 2000, Management discontinued its plan to dispose of these
loans, and as such, are now considered part of the general portfolio.
Consolidated Results
Summary of Financial Results
The Corporation reported net income of $664 million, or $0.56 per diluted
share, for the second quarter of 2001, compared to a net loss of $1.269 billion,
or $1.11 per diluted share, for the second quarter of 2000. The second quarter
2001 results included a $44 million after tax ($69 million pre-tax) charge, or
$0.04 per diluted share, for the cumulative effect of the change in accounting
principle (see Note 2 to the consolidated financial statements). Results in the
year-ago second quarter included the negative impact of $1.913 billion after tax
($2.940 billion pre-tax), or $1.66 per share, of significant items noted in
tables 1-4 above.
-24-
For the six months ended June 30, 2001, the Corporation reported net income
of $1.343 billion, or $1.14 per diluted share, compared to a net loss of $580
million, or $0.51 per diluted share, for the six months ended June 30, 2000.
Excluding the impact of the cumulative effect of the change in accounting
principle noted above in the 2001 period, the Corporation earned $1.387 billion
or $1.18 per diluted share. The impact of the 2000 significant items noted in
tables 1-4 above amounted to $1.66 per diluted share for the six months ended
June 30, 2000.
Net Interest Income
Net interest income includes spreads on earning assets as well as items
such as loan fees, cash interest collections on problem loans, dividend income,
interest reversals, and income or expense on derivatives used to manage interest
rate risk. Net interest margin measures how efficiently the Corporation uses its
earning assets and underlying capital.
In order to understand fundamental trends in net interest income, average
earning assets and net interest margins, it is useful to analyze financial
performance on a managed portfolio basis, which adds data on securitized loans
to reported data on loans as presented below:
Three Months Ended June 30 Six Months Ended June 30
----------------------------------- ---------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- -------- ---------- ---------- --------- ----------
Managed:
Net interest income--FTE basis............... $ 3,243 $ 3,396 (5)% $ 6,551 $ 6,841 (4)%
Average earning assets....................... 279,561 284,607 (2) 280,735 283,380 (1)
Net interest margin.......................... 4.65% 4.80% 4.71% 4.85%
Reported:
Net interest income--FTE basis............... $ 2,085 $ 2,257 (8) $ 4,304 $ 4,485 (4)
Average earning assets....................... 238,971 240,826 (1) 240,645 239,070 (1)
Net interest margin.......................... 3.50% 3.77% 3.61% 3.77%
The decline in net interest income and net interest margin for the second
quarter 2001 and six-months ended 2001 reflected reduced loan volumes, shifts in
the deposit mix and the cost of carrying a higher level of nonperforming loans.
Noninterest Income
The components of managed noninterest income for the periods indicated are:
Three Months Ended Percent Six Months Ended Percent
June 30 Increase June 30 Increase
--------------------- --------------------
(Dollars in millions) 2001 2000 (Decrease) 2001 2000 (Decrease)
---------- --------- ---------- --------- --------- -----------
Non-deposit service charges.................... $ 431 $ 363 19% $ 842 $ 752 12%
Credit card revenue (1)........................ 338 171 98 645 442 46
Service charges on deposits.................... 360 331 9 691 655 5
Fiduciary and investment management fees....... 184 200 (8) 371 395 (6)
Investment securities gains (losses)........... 69 (354) N/M (27) (196) 86
Trading........................................ 61 (3) N/M 126 61 N/M
Other income................................... 65 (726) N/M 253 (613) N/M
------- ----- -------- -------
Managed noninterest income (loss)........... $ 1,508 $ (18) N/M $ 2,901 $ 1,496 N/M
======= ===== ======== =======
-------
(1) Excludes net credit card revenue due to securitization totaling $283
million in 2001 and $306 million in 2000 for the three months ended June
30. For the six months ended June 30, the amounts totaled $497 million in
2001 and $613 million in 2000.
In order to provide more meaningful trend analysis, credit card fee revenue
and total noninterest income in the above table are shown on a managed basis.
Credit card fee revenue excludes the net interest revenue associated with
securitized credit card receivables. Components of noninterest income that are
primarily related to a single business segment are discussed within that
business segment rather than the consolidated section.
-25-
Managed non-deposit service charges increased from both the year-ago
quarter and prior six-months by 19% and 12%, respectively. These increases were
primarily the result of increased annuity sales and in fees associated with the
in-house administration of the One Group mutual funds, which the Corporation
began recording as revenue in the 2000 fourth quarter.
Managed credit card revenue in the second quarter of 2001 increased $167
million, or 98% over the prior year period. For the first six months of 2001,
credit card revenue increased $203 million, or 46%, compared to the previous
period. These increases are the result of significant items recorded in the 2000
second quarter, (see table 4 on page 24).
Investment securities in the second quarter of 2001 generated gains of $69
million, compared to a loss of $354 million in the second quarter of 2000.
Significant items charges taken in the second quarter of 2000, (see table 4 page
24), contributed to most of this increase. However, for the first six months of
2001 there was a loss of $27 million reflecting first quarter 2001 losses due to
market valuation.
Other income totaled $65 million, a $791 million increase compared to the
year-ago quarter. The majority of these increases reflect significant items
recorded in the second quarter of 2000, (see table 4 page 24).
Noninterest Expense
The components of noninterest expense for the periods indicated are:
Three Months Ended Percent Six Months Ended Percent
June 30 Increase June 30 Increase
--------------------- --------------------
(Dollars in millions) 2001 2000 (Decrease) 2001 2000 (Decrease)
---------- --------- ---------- --------- --------- -----------
Salaries and employee benefits:
Salaries.................................... $ 870 $ 967 (10)% $ 1,707 $ 1,864 (8)%
Employee benefits........................... 142 165 (14) 287 366 (22)
-------- -------- -------- --------
Total salaries and employee benefits...... 1,012 1,132 (11) 1,994 2,230 (11)
Occupancy expense.............................. 164 172 (5) 331 345 (4)
Equipment expense.............................. 119 155 (23) 240 310 (23)
Outside service fees and processing ........... 311 375 (17) 566 783 (28)
Marketing and development...................... 201 245 (18) 406 471 (14)
Telecommunications............................. 95 96 (1) 204 201 1
Other intangible amortization.................. 19 317 (94) 39 356 (89)
Goodwill amortization.......................... 18 18 -- 35 35 --
Other.......................................... 370 768 (52) 730 1,227 (41)
-------- -------- -------- --------
Total noninterest expense before merger-
related and restructuring charges....... 2,309 3,278 (30) 4,545 5,958 (24)
Merger-related and restructuring charges....... (3) 229 N/M (3) 210 N/M
-------- -------- -------- --------
Total noninterest expense................. $ 2,306 $ 3,507 (34) $ 4,542 $ 6,168 (26)
======== ======== ======== ========
Employees...................................... 78,491 82,443 (5) 78,491 82,443 (5)
======== ======== ======== ========
Efficiency ratio--managed basis................ 48.5% 103.8% 48.1% 74.0%
======== ======== ======== ========
---------
Components of noninterest expense that are primarily related to a single
business segment are discussed within that business segment rather than the
consolidated section.
Salary and benefit costs, including severance charges, in the second
quarter and first six months of 2001 declined 11% from the year-ago periods.
These decreases reflected significant items recorded in June of 2000, as
outlined in table 4 on page 24, and expense savings from reduced headcount,
lower incentive compensation and cost reductions associated with the
modification of the Corporation's medical benefit plan.
Equipment expense for both the second quarter and first six months of 2001
decreased 23% from the year-ago periods, primarily due to reduced furniture and
equipment rental and lower maintenance and depreciation expense.
-26-
Outside service fees and processing expense decreased $64 million, or 17%,
in the second quarter of 2001 and $217 million, or 28%, for the first six months
of 2001 compared to the year-ago periods. These decreases reflected lower
consulting expenses and other benefits from the continuation of the
Corporation's waste-reduction initiatives.
Marketing and development expense decreased for both the second quarter and
first six months of 2001 compared with the prior periods as continued expense
reductions in the Retail line of business more than offset increased
expenditures for First USA.
Other intangible amortization expense significantly decreased for both the
second quarter and first six months of 2001 when compared with previous periods,
mainly due to significant items recorded in second quarter 2000, (see table 4 on
page 24).
Other operating expense in the second quarter and first six months of 2001
also significantly decreased compared to the year ago periods. The decrease in
the second quarter is attributed to reduced legal provisions and fraud expense
and the continuation of the Corporation's waste-reduction initiatives to lower
expenses for such items as travel and entertainment and other miscellaneous
items. The six-month decrease is due to significant items recorded in the second
quarter of 2000, (see table 4 on page 24).
In July, the Corporation announced the acceleration of the four remaining
major deposit system conversions, following the successful conversion of
Texas/Louisiana. Over the last year this conversion required 90,000 hours of
development time and $75 million to convert 1.2 million customer accounts. Also
announced was the planned acceleration of streamlining programs across the
Corporation, which may require restructuring charges of up to $200 million in
the second half of 2001.
Applicable Income Taxes
The Corporation's income before income taxes and the cumulative effect of a
change in accounting principle (see Note 2 to the consolidated financial
statements), as well as applicable income tax expense and effective tax rate for
each of the periods indicated are:
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
(Dollars in millions) 2001 2000 2001 2000
------- -------- -------- -------
Income (loss) before income taxes and the
cumulative effect of change in accounting
principle.................................... $1,000 $(2,011) $1,971 $(1,020)
Applicable income taxes (benefits).............. 292 (742) 584 (440)
Effective tax rates............................. 29.2% 36.9% 29.6% 43.1%
Applicable income tax expense or (benefit) for both periods included
benefits for tax-exempt income, tax-advantaged investments and general business
tax credits, offset by the effect of nondeductible expenses, including goodwill.
In the case of a loss before income taxes, the effect of the net benefits
described above is to increase, rather than decrease, the effective rate of tax.
This is the primary reason for the difference in effective tax rates between the
2001 and 2000 periods.
-27-
Risk Management
The Corporation's various business activities generate liquidity, market,
credit and operating risks:
. Liquidity risk is the possibility of being unable to meet all current
and future financial obligations in a timely manner.
. Market risk is the possibility that changes in future market rates or
prices will make the Corporation's positions less valuable.
. Credit risk is the possibility of loss from borrowers and
counterparties failing to perform according to the terms of a
transaction.
. Operating risk, among other things, includes the risk of fraud by
employees or persons outside the Corporation, the execution of
unauthorized transactions by employees, and errors relating to
transaction processing and systems.
The following discussion of the Corporation's risk management processes
focuses primarily on developments since March 31, 2001. The Corporation's risk
management processes for liquidity, market, credit and operating risks are
described in detail in the Corporation's 2000 Annual Report on Form 10-K,
beginning on page 20.
Liquidity Risk Management
Liquidity is managed in order to preserve stable, reliable and
cost-effective sources of cash to meet all current and future financial
obligations in a timely manner. The Corporation considers strong capital ratios,
credit quality and core earnings essential to retaining high credit ratings and,
consequently, cost-effective access to market liquidity. In addition, a
portfolio of liquid assets, consisting of federal funds sold, deposit placements
and selected highly marketable investment securities, is maintained to meet
short-term demands on liquidity.
The Corporation's ability to attract wholesale funds on a regular basis and
at a competitive cost is fostered by strong ratings from the major credit rating
agencies. The Corporation and its principal banks had the following long- and
short-term debt ratings:
Senior
Short-Term Debt Long-Term Debt
--------------------- -------------------
S & P Moody's S & P Moody's
-------- --------- -------- ---------
The Corporation (Parent)......... A-1 P-1 A Aa3
Principal Banks.................. A-1 P-1 A+ Aa2
The Corporation's funding source mix at June 30, 2001 was consistent with
that at March 31, 2001.
Market Risk Management
Overview
Market risk refers to potential losses arising from changes in interest
rates, foreign exchange rates, equity prices and commodity prices, as well as
the correlation among these factors and their volatility. The portfolio effect
of engaging in diverse trading activities helps reduce the potential impact of
market risk on earnings. Through its trading activities, the Corporation strives
to take advantage of profit opportunities available in interest and exchange
rate movements. In asset and liability management activities, policies are in
place that are designed to closely manage structural interest rate and foreign
exchange rate risk.
-28-
Value-At-Risk - Trading Activities
The Corporation has developed policies and procedures to manage market risk
through a value-at-risk measurement and control system, through a stress testing
process and through dollar trading limits. The objective of this process is to
quantify and manage market risk in order to limit single and aggregate
exposures.
Value-at-risk is intended to measure the maximum fair value the Corporation
could lose on a trading position, given a specified confidence level and time
horizon. Value-at-risk limits and exposure are monitored on a daily basis for
each significant trading portfolio. Stress testing is similar to value-at-risk
except that the confidence level is geared to capture more extreme, less
frequent market events.
The Corporation's value-at-risk calculation measures potential losses in
fair value using a 99% confidence level and a one-day time horizon. This equates
to 2.33 standard deviations from the mean under a normal distribution. This
means that, on average, daily profits and losses are expected to exceed
value-at-risk one out of every 100 overnight trading days. Value-at-risk is
calculated using various statistical models and techniques for cash and
derivative positions, including options.
The value-at-risk at June 30, 2001 and March 31, 2001 (in millions) is as
follows:
June 30, March 31,
Risk Type 2001 2001
-------- --------
Interest rate............................................. $ 11 $ 8
Currency exchange rate.................................... -- --
Equity.................................................... 1 1
----- ----
Aggregate portfolio market risk.............................. $ 12 $ 9
===== ====
The activities covered by the table above reflect trading and other
activities, including certain overseas balance sheet positions that are managed
principally as trading risk. Value-at-risk from commodity price risk was
immaterial.
Interest rate risk was the predominant type of market risk incurred during
the second quarter of 2001. At June 30, 2001, approximately 90% of primary
market risk exposures were related to interest rate risk. Exchange rate, equity
and commodity risks accounted for 10% of primary market risk exposures.
Structural Interest Rate Risk Management
Interest rate risk exposure in the Corporation's "core" business
(non-trading) activities, i.e., asset/liability management ("ALM") position, is
a result of reprice, option and basis risks associated with on- and off-balance
sheet positions. The ALM position is measured and monitored using sophisticated
and detailed risk management tools, including earnings simulation modeling and
economic value of equity sensitivity analysis, to capture both near-term and
longer-term interest rate risk exposures.
Earnings simulation analysis, or earnings-at-risk, measures the sensitivity
of pretax earnings to various interest rate movements. The base-case scenario is
established using the implied forward curve. The comparative scenarios assume an
immediate parallel shock of the forward curve in increments of +/- 100 basis
point rate movements. Numerous other scenarios are analyzed, including more
gradual rising or declining rate changes and non-parallel rate shifts. Estimated
earnings for each scenario are calculated over a 12-month and 24-month horizon.
The interest rate scenarios are used for analytical purposes and do not
necessarily represent Management's view of future market movements. Rather,
these are intended to provide a measure of the degree of volatility interest
rate movements may introduce into the earnings and economic value of the
Corporation.
-29-
The Corporation's pretax earnings sensitivity profile as of June 30, 2001
and March 31, 2001 is as follows:
Immediate Change
in Rates
--------------------------
(In millions) -100 bp +100 bp
--------- ---------
June 30, 2001................................................. $155 $(163)
==== =====
March 31, 2001................................................ $128 $(150)
==== =====
The increase in earnings sensitivity during the quarter is primarily due to
a longer duration of the Corporation's earning assets.
Modeling the sensitivity of earnings to interest rate risk is highly
dependent on the numerous assumptions embedded in the model. While the earnings
sensitivity analysis incorporates Management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact will likely differ from that projected.
Foreign Exchange Risk Management
Whenever possible, foreign currency-denominated assets are funded with
liability instruments denominated in the same currency. If a liability
denominated in the same currency is not immediately available or desired, a
forward foreign exchange or cross-currency swap contract is used to fully hedge
the risk due to cross-currency funding.
To minimize the capital impact of translation gains or losses measured on
an after-tax basis, the Corporation uses forward foreign exchange contracts to
hedge the exposure created by investments in overseas branches and subsidiaries.
Credit Risk Management
In conducting its business operations, the Corporation is exposed to the
risk that borrowers or counterparties may default on their obligations to the
Corporation. These transactions create credit exposure that is reported both on
and off the balance sheet. On-balance sheet credit exposure includes such items
as loans. Off-balance sheet credit exposure includes unfunded credit commitments
and other credit-related financial instruments.
In order to meet its credit risk management objectives, the Corporation
maintains a risk profile that is diverse in terms of borrower concentrations,
product type, and industry and geographic concentrations. Additional
diversification of the Corporation's exposure is accomplished through
syndication of credits, participations, loan sales, securitizations and other
risk-reduction measures.
Operating Risk Management
In addition to being exposed to liquidity, market and credit risk, the
Corporation is also exposed to numerous types of operating risk. Operating risk
generally refers to the risk of loss resulting from the Corporation's
operations, including, but not limited to, the risk of fraud by employees or
persons outside the Corporation, the execution of unauthorized transactions by
employees, errors relating to transaction processing and systems, and other
breaches of the internal control system and compliance requirements. This risk
of loss also includes the potential legal actions that could arise as a result
of the operational deficiency or as a result of noncompliance with applicable
regulatory standards.
-30-
Credit Portfolio Composition
Selected Statistical Information
The significant components of credit risk and the related ratios, presented
on a reported basis, for the periods indicated are as follows:
June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 2001 2001 2000 2000 2000
---------- ---------- ----------- ------------- ---------
Loans outstanding................................. $166,576 $171,427 $174,251 $176,419 $172,591
Average loans..................................... 169,140 173,677 175,588 173,259 170,743
Nonperforming loans............................... 2,854 2,559 2,475 2,026 1,690
Other, including other real estate owned.......... 97 106 98 110 94
--------- ----------- ----------- ---------- ---------
Nonperforming assets.............................. 2,951 2,665 2,573 2,136 1,784
Allowance for credit losses....................... 4,229 4,205 4,110 3,090 2,983
Net charge-offs................................... 516 489 487 319 319
Nonperforming assets to related assets............ 1.77% 1.55% 1.48% 1.21% 1.03%
Allowance for credit losses/loans outstanding..... 2.54 2.45 2.36 1.75 1.73
Allowance for credit losses/nonperforming loans... 148 164 166 153 177
Net charge-offs/average loans..................... 1.22 1.13 1.11 0.74 0.75
Allowance for credit losses/net charge-offs....... 205 215 211 242 234
-31-
Loan Composition
For analytical purposes, the Corporation's loan portfolio is divided into
commercial, consumer and credit card loan categories as follows for the periods
indicated:
June 30 March 31 December 31 September 30 June 30
2001 2001 2000 2000 2000
---------------- ----------------- ------------------ ----------------- -----------------
(Dollars in millions) Amount % (1) Amount % (1) Amount % (1) Amount % (1) Amount % (1)
-------- ------ ----------------- --------- ------ --------- ------ --------- ------
Loan Product
---------------------------------
Commercial:
Domestic:
Commercial.................. $ 59,308 26% $ 63,071 28% $ 65,270 28% $ 65,446 27% $ 63,552 27%
Real estate:
Construction............... 6,029 3 5,775 3 5,757 2 6,295 3 6,005 3
Other...................... 15,923 7 16,710 7 16,778 7 18,220 8 19,119 8
Lease financing............. 5,634 3 5,734 2 5,818 3 5,514 2 5,789 3
Foreign....................... 6,726 3 6,689 3 6,837 3 7,344 3 7,348 3
-------- ---- -------- --- ---------- --- --------- ---- --------- ---
Total commercial......... 93,620 42 97,979 43 100,460 43 102,819 43 101,813 44
Consumer:
Residential real estate..... 40,581 18 40,561 18 40,596 17 39,299 17 36,589 16
Automotive--
loans/leases............... 19,707 9 19,955 8 20,741 9 21,860 9 22,199 9
Other....................... 6,467 3 7,415 3 7,710 3 7,643 3 7,518 3
-------- ---- -------- ---- ---------- --- --------- ---- --------- ---
Total consumer........... 66,755 30 67,931 29 69,047 29 68,802 29 66,306 28
Credit card:
On balance sheet............ 6,201 3 5,517 2 4,744 2 4,798 2 4,472 2
Securitized................. 56,814 25 58,515 26 62,241 26 61,086 26 61,821 26
-------- ---- -------- --- --------- ---- --------- ---- --------- ---
Managed credit card......... 63,015 28 64,032 28 66,985 28 65,884 28 66,293 28
-------- ---- -------- --- --------- ---- --------- ---- --------- ---
Total managed.................... $223,390 100% $229,942 100% $ 236,492 100% $ 237,505 100% $234,412 100%
======== ==== ======== === ========= === ========= ==== ========= ===
Total reported................... $166,576 $171,427 $ 174,251 $ 176,419 $172,591
======== ======== ========= ========= ========
-------
(1) Percentages shown for loan type are determined as a percentage of total
managed loans.
For management purposes, the Corporation's loan portfolio is divided into
Retail, Commercial Banking, First USA and other lines of business as follows for
the periods indicated:
June 30 March 31 December 31 September 30 June 30
2001 2001 2000 2000 2000
----------------- ------------------ ------------------ ----------------- -----------------
(Dollars in millions) Amount % (1) Amount % (1) Amount % (1) Amount % (1) Amount % (1)
--------- ------ ------------------ --------- ------ ---------- ------ --------- ------
Line of Business
---------------------------
Retail..................... $ 75,063 34% $ 76,102 33% $ 77,301 33% $ 76,798 32% $ 74,000 32%
Commercial Banking......... 73,866 33 78,527 34 81,435 34 84,300 36 83,301 35
Other lines of business.... 11,446 5 11,281 5 10,771 5 10,523 4 10,818 5
First USA:
On balance sheet...... 6,201 3 5,517 2 4,744 2 4,798 2 4,472 2
Securitized........... 56,814 25 58,515 26 62,241 26 61,086 26 61,821 26
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Managed credit card... 63,015 28 64,032 28 66,985 28 65,884 28 66,293 28
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total managed.............. $223,390 100% $229,942 100% $236,492 100% $237,505 100% $234,412 100%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Total reported............. $166,576 $171,427 $174,251 $176,419 $172,591
======== ======== ======== ======== ========
(1) Percentages shown for line of business are determined as a percentage of
total managed loans.
-32-
Commercial Portfolio Concentrations
The Corporation's commercial loan portfolio primarily comprises Corporate
Banking (including syndicated credits) and Middle Market Banking loans within
Commercial Banking, and also includes small business loans originated by Retail.
The more significant borrower industry concentrations of the commercial
loan portfolio as of June 30, 2001, March 31, 2001 and December 31, 2000 are as
follows:
June 30, 2001 March 31, 2001 December 31, 2000
-------------------------- -------------------------- -----------------------
Carrying Carrying Carrying
(Dollars in millions) Amount Percent Amount Percent Amount Percent
------------ ---------- ----------- ----------- ---------- ----------
Commercial real estate........ $21,952 23.4% $22,485 23.0% $ 22,535 22.4%
Wholesale trade............... 5,874 6.3 5,783 5.9 6,080 6.0
Industrial materials.......... 5,064 5.4 5,125 5.2 4,775 4.8
Oil and gas................... 3,745 4.0 4,040 4.1 4,207 4.2
Metals and products........... 3,793 4.1 3,841 3.9 4,128 4.1
Consumer staples.............. 4,311 4.6 4,308 4.4 3,880 3.9
Other......................... 48,881 52.2 52,397 53.5 54,855 54.6
------- ----- ------- ------ -------- ------
Total commercial......... $93,620 100.0% $97,979 100.0% $100,460 100.0%
======= ===== ======= ====== ======== =====
Commercial Real Estate
The commercial real estate segment of the portfolio is the largest product
category and consists primarily of loans secured by real estate as well as
certain loans that are real estate-related. This exposure includes loans and
commitments that finance both owner-occupied and investment properties/projects.
Commercial real estate lending is conducted in several lines of business,
with the majority of these loans originated by Corporate Banking primarily
through its specialized National Commercial Real Estate Group. This group's
focus is lending to targeted regional and national real estate developers,
homebuilders and REITs/REOCs. As of June 30, 2001, this group's loan
outstandings totaled $9.2 billion, or 42%, of the commercial real estate
portfolio. Middle Market Banking originates primarily owner-occupied real estate
loans located in the Middle Market footprint. At June 30, 2001, commercial real
estate loans totaled $22.0 billion, or 23.4% of total commercial loans, compared
with $22.5 billion, or 23.0% of commercial loans, at March 31, 2001.
The commercial real estate loans for the National Commercial Real Estate
Group by property type as of June 30, 2001, March 31, 2001 and December 31, 2000
are as follows:
June 30, 2001 March 31, 2001 December 31, 2000
----------------------- --------------------- ---------------------
PROPERTY-TYPE (National Commercial
Real Estate Group only) Carrying Carrying Carrying
(Dollars in millions) Amount Percent Amount Percent Amount Percent
----------- --------- ---------- --------- ---------- ---------
Retail...................................... $ 1,618 17.5% $ 1,582 16.8% $ 1,608 16.9%
Apartment complexes......................... 1,504 16.3 1,520 16.1 1,525 16.1
Office buildings............................ 1,342 14.5 1,364 14.5 1,412 14.9
REIT/REOC................................... 938 10.2 991 10.5 1,228 12.9
Industrial.................................. 515 5.6 523 5.6 491 5.2
Lodging..................................... 337 3.6 375 4.0 402 4.2
Other....................................... 2,989 32.3 3,060 32.5 2,823 29.8
------- ------ ------- ----- ------- ------
Total National Commercial
Real Estate Group loans................. 9,243 100.0% 9,415 100.0% 9,489 100.0%
====== ===== ======
Other commercial real estate loans (1)... 12,709 13,070 13,046
------- ------- -------
Total commercial real estate loans...... $21,952 $22,485 $22,535
======= ======= =======
(1) Comprised primarily of Middle Market Banking loans secured by real estate.
The National Commercial Real Estate Group real estate portfolio is diverse,
with no geographic concentrations greater than 10% of the portfolio at June 30,
2001.
-33-
Asset Quality
Nonperforming Assets
The Corporation defines nonperforming loans as commercial loans that are
impaired and/or on nonaccrual status, consumer loans (i.e., non-credit card)
greater than 90 days past due and restructured loans. These loans, along with
assets primarily consisting of foreclosed real estate, represent nonperforming
assets.
The Corporation's nonperforming loans by line of business and total
nonperforming assets for the periods indicated are as follows:
June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 2001 2001 2000 2000 2000
-------- -------- ----------- ------------ --------
Nonperforming Loans:
Retail................................. $1,050 $ 959 $ 912 $ 695 $ 556
Commercial Banking..................... 1,752 1,544 1,523 1,243 1,010
Other lines of business................ 52 56 40 88 124
------ ------ ------ ------ ------
Total ............................... 2,854 2,559 2,475 2,026 1,690
Other, primarily other real estate owned.. 97 106 98 110 94
------ ------ ------ ------ ------
Total nonperforming assets........... $2,951 $2,665 $2,573 $2,136 $1,784
====== ====== ====== ====== ======
Nonperforming assets/related assets....... 1.77% 1.55% 1.48% 1.21% 1.03%
====== ====== ====== ====== ======
Loans 90 days or more past due
and accruing interest:
Credit Card............................ $ 59 $ 63 $ 57 $ 52 $ 52
Other.................................. 9 7 5 15 8
------ ------ ------ ------ ------
Total.................................. $ 68 $ 70 $ 62 $ 67 $ 60
====== ====== ====== ====== ======
The Corporation has experienced credit quality deterioration in a number of
distinct market segments. A weakening economy, among other things, has led to an
increase in nonperforming loans. The Corporation has established processes for
identifying potential problem areas of the portfolio, which currently include
exposure to leveraged lending and acquisition finance activities, healthcare,
automotive parts and manufacturing, business finance and leasing, professional
services, miscellaneous transportation services, selected utilities,
telecommunications, and companies engaged in ongoing asbestos litigation. The
Corporation will continue to monitor of these potential risks.
-34-
The Corporation's net charge-offs by line of business for the proceeds
indicated are as follows:
(Dollars in millions) June 30, 2001 March 31, 2001 December 31, 2000
---------------------------- ------------------------------ ----------------------------
Net Net Net Net Net Net
charge- Average charge-off charge- Average charge-off charge- Average charge-off
offs balance rate offs balance rate offs balance rate
----------------------------- ------------------------------- ----------------------------
Retail (1).................. $ 177 $ 75,279 1.07% $ 166 $ 76,746 0.87% $ 159 $ 76,654 0.83%
Commercial banking.......... 239 76,400 1.25 249 80,628 1.23 259 83,114 1.24
First USA (2)............... 962 63,179 6.09 950 65,443 5.81 887 65,631 5.41
Other lines of business 13 11,494 - - 11,065 - 4 10,909 -
------ --------- ------- -------- ------ --------
Total--Managed (1)(2)....... 1,391 226,352 2.50% 1,365 233,882 2.33% 1,309 236,308 2.22%
==== ==== ====
Securitized................. (875) (57,212) (876) (60,205) (822) (60,720)
------ --------- ------- -------- ------ --------
Total--Reported............. $ 516 $ 169,140 1.22% $ 489 $173,677 1.13% $ 487 $175,588 1.11%
====== ========= ==== ======= ======== ==== ====== ======== ====
(Dollars in millions) September 30, 2000 June 30, 2000
----------------------------- -------------------------------
Net Net Net Net
charge- Average charge-off charge- Average charge-off
offs balance rate offs balance rate
----------------------------- --------------------------------
Retail (1).................. $ 151 $ 74,746 0.81% $ 134 $ 73,771 0.73%
Commercial banking.......... 109 83,400 0.52 110 81,867 0.54
First USA (2)............... 828 65,849 5.03 900 66,148 5.44
Other lines of business..... 3 10,409 - 8 10,035 -
------- ------- ----- --------
Total--Managed (1)(2)....... 1,091 234,404 1.86% 1,152 231,821 1.99%
==== ====
Securitized................. (772) (61,145) (833) (61,078)
------- -------- ----- --------
Total--Reported............. $ 319 $173,259 0.74% $ 319 $170,743 0.75%
======= ======== ==== ===== ======== ====
_______
(1) June 30, 2001 and March 31, 2001 amounts exclude $24 million and $40
million, respectively, of charge-offs relating to part of a portfolio that
has been accounted for as loans held at a discount, but viewed for
management purposes as charge-offs. In Management's view, the inclusion of
these amounts in charge-offs more accurately reflects the performance of
the portfolio. See Retail LOB discussion on page 4 for further detail.
(2) Reported on a managed basis.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that in
Management's judgment is adequate to provide for estimated probable credit
losses inherent in various on- and off-balance sheet financial instruments. This
process includes deriving probable loss estimates that are based on historical
loss ratios and portfolio stress testing and Management's judgment. The
allowance is based on ranges of estimates and is intended to be adequate but not
excessive. Each quarter, reserves are formally estimated by each line of
business and reviewed by the Corporate Risk Management Department and Senior
Management.
-35-
The following table shows the components of, by line of business, the
change in the Corporation's allowance for credit losses for the periods
indicated:
June 30 March 31 December 31 September 30 June 30
(In millions) 2001 2001 2000 2000 2000
--------- ---------- ------------ ------------ ----------
Line of Business
---------------------------------------------
Balance, beginning of period................. $4,205 $4,110 $3,090 $2,983 $2,338
Charge-offs:
Retail.................................... 222 216 199 189 169
Commercial Banking........................ 266 287 284 121 125
First USA (1)............................. 94 78 69 59 72
Other lines of business................... 14 5 6 19 17
------ ------ ------ ------ ------
Total charge-offs.................... 596 586 558 388 383
Recoveries:
Retail.................................... 45 50 40 38 35
Commercial Banking........................ 27 38 25 12 15
First USA (1)............................. 7 4 4 3 5
Other lines of business................... 1 5 2 16 9
------ ------ ------ ------ ------
Total recoveries.................... 80 97 71 69 64
Net charge-offs:
Retail.................................... 177 166 159 151 134
Commercial Banking........................ 239 249 259 109 110
First USA (1)............................. 87 74 65 56 67
Other lines of business................... 13 - 4 3 8
------ ------ ------ ------ ------
Total net charge-offs................ 516 489 487 319 319
Provision for credit losses:
Retail.................................... 201 244 364 207 132
Commercial Banking........................ 239 264 1,078 225 778
First USA (1)............................. 87 74 65 56 67
Other lines of business................... 13 3 - 28 36
------ ------ ------ ------ ------
Total provision for credit losses.... 540 585 1,507 516 1,013
Transfers / other (2)........................ - (1) - (90) (49)
------ ------ ------ ------ ------
Balance, end of period....................... $4,229 $4,205 $4,110 $3,090 $2,983
====== ====== ====== ====== ======
(1) On a reported basis.
(2) Transfers from the allowance for credit losses primarily represent
allocable credit reserves associated with consumer loan sale transactions,
including securitization transactions.
The composition of the Corporation's allowance for credit losses by line of
business is as follows:
(Dollars in millions) June 30, 2001 March 31, 2001 December 31, 2000
-------------------- ------------------- --------------------
Retail................................... $ 949 22% $ 924 22% $ 846 21%
Commercial Banking....................... 3,032 72 3,034 72 3,020 73
First USA................................ 197 5 197 5 197 5
Other lines of business.................. 51 1 50 1 47 1
------- --- ------ --- ------ ---
Total............................... $ 4,229 100% $4,205 100% $4,110 100%
======= === ====== === ====== ===
Allowance as a % of total loans:
Retail................................ 1.26% 1.21% 1.10%
Commercial Banking.................... 4.10 3.86 3.71
First USA............................. 3.18 3.58 4.19
Other lines of business............... 0.44 0.44 0.44
Total............................... 2.54 2.45 2.36
-36-
Derivative Financial Instruments
The Corporation uses a variety of derivative financial instruments in its
trading, asset and liability management, and corporate investment activities, as
well as to manage certain currency translation exposures of foreign operations.
These instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts.
Accounting for Derivative Financial Instruments
Effective January 1, 2001, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended. The new standard significantly changed the
accounting treatment for interest rate and foreign exchange derivatives the
Corporation uses in its asset and liability management ("ALM") activities. The
new accounting treatment for ALM derivatives is described below. Cash flows from
derivative financial instruments are reported net as operating activities.
Trading Derivative Instruments
The Corporation's accounting policies for derivatives used in trading
activities have not changed as the result of SFAS No. 133. A detailed discussion
of accounting for trading derivative instruments is presented in the
Corporation's 2000 Annual Report on Form 10-K.
ALM Derivative Instruments
Derivative financial instruments used in ALM activities, principally
interest rate swaps, are classified as fair value hedges or cash flow hedges and
are required to meet specific criteria. Such interest rate swaps are designated
as ALM derivatives, and are linked to and adjust the interest rate sensitivity
of a specific asset, liability, firm commitment, or anticipated transaction or a
specific pool of transactions with similar risk characteristics. Interest rate
swaps that do not meet these and the following criteria are designated as
derivatives used in trading activities and are accounted for at estimated fair
value.
Fair Value Hedge (primarily hedges of fixed rate interest-bearing
instruments) -- The change in fair value of both the hedging derivative and
hedged item is recorded in current earnings. If a hedge is dedesignated prior to
maturity, previous adjustments to the carrying value of the hedged item are
recognized in earnings to match the earnings recognition pattern of the hedged
item (e.g., level yield amortization if hedging an interest-bearing instrument).
Cash Flow Hedge (primarily hedges of variable rate interest-bearing
instruments) -- The effective portion of the change in fair value of the hedging
derivative is recorded in Accumulated Other Adjustments to Stockholders' Equity
("AOASE") and the ineffective portion directly in earnings. Amounts in "AOASE"
are reclassified into earnings in a manner consistent with the earnings pattern
of the underlying hedged item (generally, reflected in interest expense). The
total amount of such reclassification into earnings is projected to be charges
of $92 million after-tax ($143 million pre-tax) over the next twelve months. If
a hedge is dedesignated prior to maturity, previous adjustments to "AOASE" are
recognized in earnings to match the earnings recognition pattern of the hedged
item (e.g., level yield amortization if hedging an interest-bearing instrument)
or immediately recognized in current earnings if the hedged item is sold.
Interest income or expense on most ALM derivatives used to manage interest
rate exposure is recorded on an accrual basis, as an adjustment to the yield of
the linked exposures over the periods covered by the contracts. This matches the
income recognition treatment of that exposure, generally assets or liabilities
carried at historical cost, that are recorded on an accrual basis. If all or
part of a linked position is terminated, e.g., a linked asset is sold or
prepaid, or if the amount of an anticipated transaction is likely to be less
than originally expected, then the related pro rata portion of any unrecognized
gain or loss on the swap is recognized in earnings at that time, and the related
pro rata portion of the swap is subsequently accounted for at estimated fair
value.
-37-
Hedges of the Net Investment in Foreign Operations
In order to minimize the capital impact of translation gains or losses
measured on an after-tax basis, the Corporation uses forward foreign exchange
contracts to hedge the exposure relating to the net investment in foreign
operations. The effective portion of the change in fair value of the hedging
derivatives is recorded in "AOASE" as part of the cumulative translation
adjustment. The amount of after-tax gains included in the cumulative translation
adjustment during the six months ended June 30, 2001, related to hedges of the
foreign currency exposures of net investments in foreign operations, totaled $6
million.
Income Resulting from Derivative Financial Instruments
The Corporation uses interest rate derivative financial instruments to
reduce structural interest rate risk and the volatility of net interest margin.
Net interest margin reflects the effective use of these derivatives. Without
their use, net interest income would have been lower by $14 million in the
second quarter 2001 and higher by $2 million in the second quarter of 2000. For
six month ended June 30 2001 and 2000, net interest income would have been lower
by $21 million and $9 million, respectively.
The amount of hedge ineffectiveness recognized for cash flow and fair value
hedges in the quarter ended June 30, 2001 was insignificant. No component of a
hedging derivative instrument's gain or loss is excluded from the assessment of
fair value and cash flow hedge effectiveness.
Credit Exposure Resulting from Derivative Financial Instruments
Credit exposure from derivative financial instruments arises from the risk
of a counterparty default on the derivative contract. The amount of loss created
by the default is the replacement cost or current fair value of the defaulted
contract. The Corporation utilizes master netting agreements whenever possible
to reduce its credit exposure from counterparty defaults. These agreements allow
the netting of contracts with unrealized losses against contracts with
unrealized gains to the same counterparty, in the event of a counterparty
default.
The table below shows the impact of these master netting agreements:
(In millions) June 30, 2001 March 31, 2001
-------------- --------------
Gross replacement cost............................................ $ 10,535 $ 12,334
Less: Adjustment due to master netting agreements.............. (7,390) (8,426)
-------- --------
Balance sheet credit exposure..................................... $ 3,145 $ 3,908
======== ========
Asset and Liability Management Derivatives
Access to the derivatives market is an important element in maintaining the
Corporation's desired interest rate risk position. In general, the assets and
liabilities generated through ordinary business activities do not naturally
create offsetting positions with respect to repricing, basis or maturity
characteristics. Using derivative instruments, principally plain vanilla
interest rate swaps (ALM swaps), interest rate sensitivity is adjusted to
maintain the desired interest rate risk profile.
-38-
At June 30, 2001, the notional value of ALM interest rate swaps tied to
specific assets or liabilities, firm commitments and forecasted transactions
totaled $13.0 billion as follows:
Receive Fixed Pay Fixed
(In millions) Pay Floating Receive Floating Total
---------------- -------------------------
Fair Value Fair Value Cash Flow Swaps
---------- ---------- --------- -----
Interest rate swaps associated with:
Investment securities........................ $ -- $50 $ -- $ 50
Funds borrowed (including long-term debt).... 8,380 -- 4,522 12,902
------ --- ------ -------
Total.................................... $8,380 $50 $4,522 $12,952
====== === ====== =======
Interest rate swaps used to adjust the interest rate sensitivity of
securities and funds borrowed will not need to be replaced at maturity, since
the corresponding asset or liability will mature along with the swap. Interest
rate swaps designated as an interest rate related hedge of an existing fixed
rate asset or liability are fair value type hedges. Conversely, interest rate
swaps designated as an interest rate hedge of an existing variable rate asset or
liability are cash flow type hedges. Management designates interest rate swaps
as hedges of both fixed and variable rate assets and liabilities
interchangeably. The type of hedge for accounting purposes is not a strategic
consideration. The Corporation has an insignificant amount of hedges involving
forecasted transactions and firm commitments, and no non-derivative instruments
are designated as a hedge.
Loan Securitizations
Investors in the beneficial interests of the securitized loans have no
recourse against the Corporation if cash flows generated from the securitized
loans are inadequate to service the obligations of the SPE. To help ensure that
adequate funds are available in the event of a shortfall, the Corporation is
required to deposit funds into cash spread accounts if excess spread falls below
certain minimum levels. Spread accounts are funded from excess spread that would
normally be returned to the Corporation. In addition, various forms of other
credit enhancement are provided to protect more senior investor interests from
loss. Credit enhancements associated with credit card securitizations, such as
cash collateral or spread accounts, totaled $205 million at June 30, 2001, and
are classified on the balance sheet as other assets.
For further discussion of Bank One's loan securitization process and other
related disclosures, see pages 41-42 and pages 63-65 of the Corporation's 2000
Annual Report on Form 10-K.
The following comprised the Corporation's managed credit card loans at June
30, 2001:
(In millions)
Owned credit card loans - held in portfolio............................................. $ 2,776
Owned credit card loans - held for future securitization................................ 3,425
Seller's interest in credit card loans (investment securities).......................... 16,981
--------
Total credit card loans reflected on balance sheet...................................... 23,182
Securities sold to investors and removed from balance sheet............................. 39,833
--------
Managed credit card loans............................................................... $ 63,015
========
At June 30, 2001, the estimated fair value of seller's interest and
interest-only strip from credit card securitizations were as follows:
(In millions)
Seller's interest................................................................................ $16,856
Interest-only strip.............................................................................. 209
-------
Total interests in credit card securitizations................................................ $17,065
=======
-39-
For analytical purposes only, income statement line items adjusted for the
net impact of securitization of credit card receivables for the periods
indicated are as follows:
Credit Card Credit Card
(Dollars in millions) Reported Securitizations Managed Reported Securitizations Managed
--------- ---------------- --------- ------------ ---------------- ---------
Three Months Ended June 30 Three Months Ended June 30
------------------------------------ ---------------------------------------
2001 2000
------------------------------------ ---------------------------------------
Net interest income--FTE basis............. $ 2,085 $ 1,158 $ 3,243 $ 2,257 $ 1,139 $ 3,396
Provision for credit losses................ 540 875 1,415 1,013 833 1,846
Noninterest income......................... 1,791 (283) 1,508 288 (306) (18)
Noninterest expense........................ 2,306 -- 2,306 3,507 - 3,507
Net income................................. 664 -- 664 (1,269) - (1,269)
Total average loans........................ $ 169,140 $ 57,212 $ 226,352 $ 170,743 $ 61,078 $ 231,821
Total average earning assets............... 238,971 40,590 279,561 240,826 43,781 284,607
Total average assets....................... 268,259 40,590 308,849 272,823 43,781 316,604
Net interest margin........................ 3.50% 11.44% 4.65% 3.77% 10.46% 4.80%
Delinquency and charge-off rates:
Credit card delinquencies over 30 days
as a percentage of ending credit card
loan balances.......................... 2.23% 4.30% 4.10% 2.70% 3.91% 3.83%
Credit card delinquencies over 90 days
as a percentage of ending credit card
loan balances.......................... 0.94% 1.87% 1.78% 1.17% 1.73% 1.69%
Net credit card charge-offs as a
percentage of average credit card
loan balances.......................... 5.78% 6.12% 6.09% 5.25% 5.46% 5.44%
Six Months Ended June 30 Six Months Ended June 30
------------------------------------ ---------------------------------------
2001 2000
------------------------------------ ---------------------------------------
Net interest income--FTE basis............. $ 4,303 $ 2,248 $ 6,551 $ 4,485 $ 2,356 $ 6,841
Provision for credit losses................ 1,125 1,751 2,876 1,375 1,743 3,118
Noninterest income......................... 3,398 (497) 2,901 2,109 (613) 1,496
Noninterest expense........................ 4,542 - 4,542 6,168 - 6,168
Net income................................. 1,343 - 1,343 (580) - (580)
Total average loans........................ $ 171,395 $ 58,701 $ 230,096 $ 169,083 $ 61,920 $ 231,003
Total average earning assets............... 240,645 40,090 280,735 239,070 44,310 283,380
Total average assets....................... 268,883 40,090 308,973 270,770 44,310 315,080
Net interest margin........................ 3.61% 11.31% 4.71% 3.77% 10.69% 4.85%
Delinquency and charge-off rates:
Credit card delinquencies over 30 days
as a percentage of ending credit card
loan balances.......................... 2.23% 4.30% 4.10% 2.70% 3.91% 3.83%
Credit card delinquencies over 90 days
as a percentage of ending credit card
loan balances.......................... 0.94% 1.87% 1.78% 1.17% 1.73% 1.69%
Net credit card charge-offs as a
percentage of average credit card
loan balances.......................... 5.71% 5.97% 5.91% 5.36% 5.63% 5.61%
-40-
CAPITAL MANAGEMENT
Capital represents the stockholders' investment on which the Corporation
strives to generate attractive returns. It is the foundation of a cohesive risk
management framework and links return with risk. Capital supports business
growth and provides protection to depositors and creditors.
In conjunction with the annual financial planning process, a capital plan
is established to ensure that the Corporation and all of its subsidiaries have
capital structures consistent with prudent management principles and regulatory
requirements.
Economic Capital
An important aspect of risk management and performance measurement is the
ability to evaluate the risk and return of a business unit, product or customer
consistently across all lines of business. The Corporation's economic capital
framework facilitates this standard measure of risk and return. Business units
are assigned capital consistent with the underlying risks of their product set,
customer base and delivery channels. For a more detailed discussion of Bank
One's economic capital framework, see page 44 of the Corporation's 2000 Annual
Report on Form 10-K.
Selected Capital Ratios
The Corporation aims to maintain regulatory capital ratios, including those
of the principal banking subsidiaries, in excess of the well-capitalized
guidelines under federal banking regulations. The Corporation has maintained a
well-capitalized regulatory position for the past several years.
The tangible common equity to tangible managed assets ratio is also
monitored. This ratio adds securitized credit card loans to reported total
assets and is calculated net of total intangible assets. The tangible common
equity to tangible managed assets ratio was 5.8% at June 30, 2001, up from 5.6%
at March 31, 2001. Tier 1 and Total Capital ratios were 8.2% and 11.6% and 7.8%
and 11.2%, respectively, at June 30, 2001, and March 31, 2001.
The Corporation's capital ratios that adhere to regulatory guidelines
appear in the table below:
Well-
Capitalized
June 30 March 31 December 31 September 30 June 30 Regulatory
2001 2001 2000 2000 2000 Guidelines
--------- ----------- ----------- ------------ ------- -----------
Risk-based capital ratios (1)
Tier 1........................... 8.2% 7.8% 7.3% 7.5% 7.2% 6.0
Total............................ 11.6 11.2 10.8 10.9 10.3 10.0
Common equity/managed assets.......... 6.2 6.0 6.0 5.9 5.9
Tangible common equity/tangible
managed assets...................... 5.8 5.6 5.5 5.4 5.4
Double leverage ratio (1)............. 105 106 108 109 115
Dividend payout ratio................. 37 36 N/M 42 N/M
------
N/M--Not meaningful.
(1) Includes trust preferred capital securities.
The components of the Corporation's regulatory risk-based capital and
risk-weighted assets are as follows:
June 30 March 31 December 31 September 31 June 30
(In millions) 2001 2001 2000 2000 2000
------------ ---------- ------------- ------------ -----------
Regulatory risk-based capital:
Tier 1 capital...................... $ 21,243 $ 20,727 $ 19,824 $ 20,433 $ 19,121
Tier 2 capital...................... 8,930 9,148 9,316 9,119 8,350
--------- --------- --------- --------- ---------
Total capital....................... $ 30,173 $ 29,875 $ 29,140 $ 29,552 $ 27,471
========= ========= ========= ========= =========
Total risk-weighted assets............... $ 259,372 $ 266,077 $ 270,182 $ 272,095 $ 266,937
========= ========= ========= ========= =========
-41-
In deriving Tier 1 and total capital, goodwill and other nonqualifying
intangible assets are deducted as indicated:
June 30 March 31 December 31 September 31 June 30
(In millions) 2001 2001 2000 2000 2000
---------- --------- ----------- ------------ ---------
Goodwill................................. $ 824 $ 841 $ 858 $ 876 $ 894
Other nonqualifying intangibles.......... 273 299 375 405 436
------- ------- ------- ------- -------
Subtotal............................. 1,097 1,140 1,233 1,281 1,330
Qualifying intangibles................... 205 205 214 235 256
------- ------- ------- ------- -------
Total intangibles.................... $ 1,302 $ 1,345 $ 1,447 $ 1,516 $ 1,586
======= ======= ======= ======= =======
Dividend Policy
The Corporation's common stock dividend policy reflects its earnings
outlook, desired payout ratios, the need to maintain an adequate capital level
and alternative investment opportunities. The common stock dividend payout ratio
is targeted in the range of 25% - 30% of earnings over time. On July 17, 2001,
the Corporation declared its quarterly common cash dividend of 21 cents per
share, payable on October 1, 2001. The common stock dividend declared for the
second quarter of 2000 was 42 cents per share. The decrease from the year-ago
period reflects a 50% reduction of the quarterly dividend rate from 42 cents per
share to 21 cents per share commencing in the third quarter of 2000.
Double Leverage
Double leverage is the extent to which the Corporation's resources are used
to finance investments in subsidiaries. Double leverage was 105% at June 30,
2001, 106% at March 31, 2001 and 108% at December 31, 2000. Trust Preferred
Capital Securities of $2.790 billion for the first and second quarter of 2001
and $1.578 billion in the prior year quarter were included in capital for
purposes of this calculation.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis included herein contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, the Corporation may make or approve
certain statements in future filings with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the Corporation's approval that are not statements of historical fact and
may constitute forward-looking statements. Forward-looking statements may relate
to, without limitation, the Corporation's financial condition, results of
operations, plans, objectives, future performance or business.
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They often include the words
"believes", "anticipates", "expects", "intends", "plans", "estimates", "targets"
or words of similar meaning or future or conditional verbs such as "will",
"would", "should", "could" or "may".
Forward-looking statements involve risks and uncertainties. Actual
conditions, events or results may differ materially from those contemplated by a
forward-looking statement. Factors that could cause this difference - many of
which are beyond the Corporation's control - include the following, without
limitation:
. Local, regional and international business or economic conditions may
differ from those expected.
. The effects of and changes in trade, monetary and fiscal policies and
laws, including the Federal Reserve Board's interest rate policies may
adversely affect the Corporation's business.
. The timely development and acceptance of new products and services may
be different than anticipated.
. Technological changes instituted by the Corporation and by persons who
may affect the Corporation's business may be more difficult to
accomplish or more expensive than anticipated or may have unforeseen
consequences.
. Acquisitions and integration of acquired businesses may be more
difficult or expensive than expected.
. The ability to increase market share and control expenses may be more
difficult than anticipated.
-42-
. Changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) may adversely
affect the Corporation or its business.
. Changes in accounting policies and practices, as may be adopted by
regulatory agencies and the Financial Accounting Standards Board, may
affect expected financial reporting.
. The costs, effects and outcomes of litigation may adversely affect the
Corporation or its business.
. The Corporation may not manage the risks involved in the foregoing as
well as anticipated.
. Forward-looking statements speak only as of the date they are made.
The Corporation undertakes no obligation to update any forward-looking
statement to reflect subsequent circumstances or events.
-43-
Consolidated Balance Sheets
BANK ONE CORPORATION and Subsidiaries
June 30 December 31 June 30
(Dollars in millions) 2001 2000 2000
-----------------------------------------
Assets
Cash and due from banks...................................................... $ 18,453 $ 17,291 $ 16,470
Interest-bearing due from banks.............................................. 2,106 5,210 7,649
Federal funds sold and securities under resale agreements.................... 11,600 4,737 10,592
Trading assets............................................................... 7,177 2,788 10,681
Derivative product assets.................................................... 3,145 2,322 3,278
Investment securities........................................................ 49,732 50,561 38,288
Loans........................................................................ 166,576 174,251 172,591
Allowance for credit losses................................................ (4,229) (4,110) (2,983)
---------- ---------- ----------
Loans, net................................................................. 162,347 170,141 169,608
Premises and equipment, net.................................................. 2,645 2,894 3,073
Customers' acceptance liability.............................................. 343 402 544
Other assets................................................................. 14,864 12,954 12,526
---------- ---------- ----------
Total assets............................................... $272,412 $269,300 $272,709
======== ======== ========
Liabilities
Deposits:
Demand................................................................ $ 30,662 $ 30,738 $ 29,055
Savings............................................................... 66,974 63,414 63,722
Time:
Under $100,000...................................................... 23,289 25,302 23,338
$100,000 and over................................................... 20,973 22,656 19,832
Foreign offices....................................................... 22,401 24,967 27,222
--------- --------- ---------
Total deposits............................................. 164,299 167,077 163,169
Federal funds purchased and securities under repurchase agreements........... 17,779 12,120 17,610
Other short-term borrowings.................................................. 13,310 18,003 21,827
Long-term debt............................................................... 38,903 38,428 37,515
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated debt............................................................ 2,790 2,483 1,578
Acceptances outstanding...................................................... 343 402 544
Derivative product liabilities............................................... 3,051 2,212 3,201
Other liabilities............................................................ 12,486 9,940 8,445
--------- ---------- ---------
Total liabilities.......................................... 252,961 250,665 253,889
Stockholders' Equity
Preferred stock.............................................................. 190 190 190
Common stock - $0.01 par value............................................... 12 12 12
Number of common shares (in thousands): 6/30/01 12/31/00 6/30/00
--------- --------- ---------
Authorized................... 4,000,000 2,500,000 2,500,000
Issued....................... 1,181,382 1,181,386 1,181,386
Surplus...................................................................... 10,329 10,487 10,605
Retained earnings............................................................ 9,907 9,060 9,484
Accumulated other adjustments to stockholders' equity........................ (207) (5) (135)
Deferred compensation........................................................ (156) (121) (156)
Treasury stock, at cost, 13,587,000, 21,557,000, and 25,872,000 shares, (624) (988) (1,180)
------------ ------------ ---------
respectively.................................................................
Total stockholders' equity................................. 19,451 18,635 18,820
---------- ---------- ---------
Total liabilities and stockholders' equity................. $272,412 $269,300 $ 272,709
======== ======== =========
The accompanying notes are an integral part of this statement.
-44-
Consolidated Income Statements
BANK ONE CORPORATION and Subsidiaries
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
(In millions, except per share data) 2001 2000 2001 2000
------ ------ ------ ------
Net Interest Income:
Interest income............................................................ $ 4,385 $ 4,966 $9,306 $ 9,719
Interest expense........................................................... 2,330 2,745 5,066 5,305
------- --------- ------ -------
Total net interest income.............................................. 2,055 2,221 4,240 4,414
Noninterest Income:
Non-deposit service charges..................................................... 431 363 842 752
Credit card revenue............................................................. 621 477 1,142 1,055
Service charges on deposits..................................................... 360 331 691 655
Fiduciary and investment management fees........................................ 184 200 371 395
Investment securities gains (losses)............................................ 69 (354) (27) (196)
Trading......................................................................... 61 (3) 126 61
Other income (losses)........................................................... 65 (726) 253 (613)
------- --------- ------ -------
Total noninterest income............................................... 1,791 288 3,398 2,109
------- --------- ------ -------
Total revenue, net of interest expense................................. 3,846 2,509 7,638 6,523
Provision for credit losses..................................................... 540 1,013 1,125 1,375
Salaries and employee benefits.................................................. 1,012 1,132 1,994 2,230
Occupancy expense............................................................... 164 172 331 345
Equipment expense............................................................... 119 155 240 310
Outside service fees and processing............................................. 311 375 566 783
Marketing and development....................................................... 201 245 406 471
Telecommunications.............................................................. 95 96 204 201
Other intangible amortization................................................... 19 317 39 356
Goodwill amortization........................................................... 18 18 35 35
Other........................................................................... 370 768 730 1,227
------- --------- ------ -------
Total noninterest expense before merger and restructuring charges...... 2,309 3,278 4,545 5,958
Merger-related and restructuring charges........................................ (3) 229 (3) 210
------- --------- ------ -------
Total noninterest expense.............................................. 2,306 3,507 4,542 6,168
Income (loss) before income taxes and cumulative effect of change in
accounting principle.......................................................... 1,000 (2,011) 1,971 (1,020)
Applicable income taxes (benefit)............................................... 292 (742) 584 (440)
------ --------- ------ -------
Income (loss) before cumulative effect of change in accounting principle........ 708 (1,269) 1,387 (580)
Cumulative effect of change in accounting principle, net of taxes of $25........ (44) -- (44) --
------- --------- ------ -------
Net Income (Loss)............................................................... $ 664 $ (1,269) $1,343 $ (580)
======= ========= ====== =======
Net Income (Loss) Attributable to Common Stockholders' Equity................... $ 661 $ (1,272) $1,337 $ (586)
======= ========= ====== =======
Earnings (loss) per share before cumulative effect of change in accounting
principle:
Basic...................................................................... $ 0.60 $ (1.11) $ 1.18 $ (0.51)
======= ======== ====== -------
Diluted.................................................................... $ 0.60 $ (1.11) $ 1.18 $ (0.51)
======= ======== ====== =======
Earnings (loss) per share:
Basic...................................................................... $ 0.57 $ (1.11) $ 1.15 $ (0.51)
======= ======== ====== -------
Diluted.................................................................... $ 0.56 $ (1.11) $ 1.14 $ (0.51)
======= ======== ====== =======
The accompanying notes are an integral part of this statement.
-45-
Consolidated Statement of Stockholders' Equity
BANK ONE CORPORATION and Subsidiaries
Accumulated
Other
Adjustments
to Total
Preferred Common Retained Stockholders' Deferred Treasury Stockholders'
(In millions) Stock Stock Surplus Earnings Equity Compensation Stock Equity
--------------------------------------------------------------------------------------
Balance--December 31, 1999 $190 $12 $10,799 $11,037 $(263) $(118) $(1,567) $20,090
Net income (loss)......................... (580) (580)
Change in fair value, investment securities--
available for sale, net of taxes........ 127 127
Translation gain, net of hedge results 1 1
and taxes.................................
------- ----- -------
Net income and changes in accumulated other
adjustments to stockholders' equity..... (580) 128 (452)
Cash dividends declared:
Common stock............................ (967) (967)
Preferred stock......................... (6) (6)
Issuance of stock......................... (129) 423 294
Purchase of common stock.................. (17) (17)
Employee Stock Program.................... (59) (59)
Awards granted, net of forfeitures and (70) (70)
amortization..............................
Other..................................... (6) 32 (19) 7
---- --- ------- ------- ----- ----- ------- -------
Balance--June 30, 2000 $190 $12 $10,605 $ 9,484 $(135) $(156) $(1,180) $18,820
==== === ======= ======= ===== ===== ======= =======
Balance--December 31, 2000 $190 $12 $10,487 $ 9,060 $ (5) $(121) $ (988) $18,635
Net income................................ 1,343 1,343
Change in fair value, investment
securities--
available for sale, net of taxes........ (62) (62)
Change in fair value of cash-flow type hedge
derivative securities net of taxes...... (137) (137)
Translation loss, net of hedge results and
taxes..................................... (3) (3)
Net income and changes in accumulated other
------- ----- -------
adjustments to stockholders' equity..... 1,343 (202) 1,141
Cash dividends declared:
Common stock............................ (490) (490)
Preferred stock......................... (6) (6)
Issuance of stock......................... (159) 364 205
Awards granted, net of forfeitures and
amortization.............................. (35) (35)
Other..................................... 1 1
---- --- ------- ------- ----- ----- ------- -------
Balance--June 30, 2001 .................... $190 $12 $10,329 $ 9,907 $(207) $(156) $ (624) $19,451
==== === ======= ======= ===== ===== ======= =======
The accompanying notes are an integral part of this statement.
-46-
Consolidated Statement of Cash Flows
BANK ONE CORPORATION and Subsidiaries
Six Months Ended
June 30
-----------------------
(In millions) 2001 2000
---------- ----------
Cash Flows from Operating Activities
Net income(loss)................................................................................... $ 1,343 $ (580)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization................................................................. 276 602
Cumulative effect of accounting change........................................................ 69 --
Provision for credit losses................................................................... 1,125 1,375
Investment securities losses.................................................................. 27 196
Net decrease (increase) in net derivative product assets...................................... 153 (37)
Net (increase) decrease in trading assets..................................................... (4,389) 3,798
Net (increase) decrease in other assets....................................................... (1,634) (478)
Net increase (decrease) in other liabilities.................................................. 2,583 (24)
Merger-related and restructuring charges...................................................... 3 210
Other operating adjustments................................................................... (638) 215
---------- ---------
Net cash (used in) provided by operating activities................................................ (1,082) 5,277
Cash Flows from Investing Activities
Net increase in federal funds sold and securities under resale agreements.......................... (6,863) (810)
Securities available for sale:
Purchases...................................................................................... (31,102) (25,667)
Maturities..................................................................................... 14,770 4,509
Sales.......................................................................................... 11,046 22,520
Credit card receivables securitized................................................................ 3,845 --
Net decrease (increase) in loans .................................................................. 8,496 (8,228)
Loan recoveries.................................................................................... 177 136
Additions to premises and equipment................................................................ (87) --
Proceeds from sales of premises and equipment...................................................... 47 --
All other investing activities, net................................................................ 442 (13)
---------- ---------
Net cash provided by (used in) investing activities................................................ 771 (7,553)
Cash Flows from Financing Activities
Net (decrease) increase in deposits................................................................ (2,805) 805
Net increase (decrease) in federal funds purchased and securities under repurchase agreements...... 5,659 (1,110)
Net (decrease) increase in other short-term borrowings............................................. (4,693) 616
Proceeds from issuance of long-term debt........................................................... 7,072 7,392
Repayment of long-term debt........................................................................ (6,858) (3,919)
Cash dividends paid................................................................................ (495) (489)
Proceeds from issuance of trust preferred capital securities ...................................... 300 --
Proceeds from issuance of common and treasury stock................................................ 139 72
All other financing activities, net................................................................ 12 199
---------- ---------
Net cash (used in) provided by financing activities................................................ (1,669) 3,566
Effect of Exchange Rate Changes on Cash and Cash Equivalents....................................... 38 108
---------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents............................................... (1,942) 1,398
Cash and Cash Equivalents at Beginning of Period................................................... 22,501 22,721
---------- ---------
Cash and Cash Equivalents at End of Period......................................................... $ 20,559 $ 24,119
========== =========
The accompanying notes are an integral part of this statement.
-47-
Notes to Consolidated Financial Statements
BANK ONE CORPORATION and Subsidiaries
Note 1--Summary of Significant Accounting Policies
Consolidated financial statements of BANK ONE CORPORATION and Subsidiaries
(the "Corporation" or "Bank One") have been prepared in conformity with
generally accepted accounting principles. Management is required to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes that could differ from actual results. Certain
prior-year financial statement information has been reclassified to conform to
the current year's financial statement presentation.
Although the interim amounts are unaudited, they do reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results of operations for the interim periods. All such adjustments are of a
normal, recurring nature. Because the results from commercial banking operations
are so closely related and responsive to changes in economic conditions, fiscal
policy and monetary policy, and because the results for the investment security
and trading portfolios are largely market-driven, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2000.
Note 2--New and Pending Accounting Pronouncements
Accounting for Transfers and Servicing of Financial Assets and Liabilities
Effective April 1, 2001, the Corporation adopted SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Liabilities" ("SFAS No.
140"). On July 23, 2001, the FASB issued a Technical Bulletin that will delay
the effective date of certain provisions of SFAS No. 140 relating to isolation
in bankruptcy for banks subject to FDIC receivership and for certain other
financial institutions. For these entities, the isolation provisions would be
effective for transfers of financial assets occurring after December 31, 2001,
except for transfers involving revolving credits such as credit card
securitizations. An additional transition period was granted for securitizations
involving revolving credits that ends three months after the earliest date at
which sufficient approvals can be obtained to permit the necessary changes to
existing master trusts to meet the isolation provisions, but in no event extend
later than June 30, 2006. The new standard also provides revised guidance for an
entity to be considered a qualifying special purpose entity ("QSPE") and
requires additional disclosures concerning securitization activities and
collateral. The impact of adopting SFAS No. 140 was not significant to the
Corporation's financial position or net income.
Accounting for Derivative Instruments and Hedging Activities
Effective January 1, 2001, the Corporation adopted SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities ("SFAS No. 133")", as amended.
The new standard significantly changed the accounting treatment for interest
rate and foreign exchange derivatives the Corporation uses in its asset and
liability management activities. The Corporation's accounting for derivatives
used in trading activities has not changed as the result of SFAS No. 133.
Hedging derivatives are now recognized on the balance sheet at fair value as
either assets or liabilities. Hedge ineffectiveness, if any, is calculated and
recorded in current earnings. The accounting for the effective portion of the
change in value of a hedging derivative is based on the nature of the hedge. See
"Derivative Financial Instruments" on page 37 for detailed information on the
Corporation's strategy in using derivative instruments in its asset and
liability management and trading activities, as well as the new accounting
principles and disclosure for derivative instruments pursuant to SFAS No. 133.
-48-
Recognition and Impairment of Certain Investments
Effective April 1, 2001, the Corporation adopted Emerging Issues Task Force
(EITF) Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF No. 99-20"). Under EITF No. 99-20, impairment on certain beneficial
interests in securitized assets must be recognized when the asset's fair value
is below its carrying value and there has been an adverse change in estimated
cash flows. The effect of adopting EITF No. 99-20 was a one-time, non-cash
charge to earnings of $44 million after-tax ($69 million pre-tax) or $0.04 per
diluted share. This charge has been presented as a cumulative effect of a change
in accounting principle in the income statement. The securities impacted by EITF
No. 99-20 primarily involved collateralized debt obligations held by the
Corporate Investments line of business.
Business Combinations and Goodwill and Other Intangible Assets
In July 2001, SFAS No. 141, "Business Combinations" ("SFAS No. 141") and
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were
issued. SFAS No. 141 requires that all business combinations initiated after
June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. SFAS No. 142 is effective January 1, 2002 for calendar
year companies, however, any acquired goodwill or intangible assets recorded in
transactions closed subsequent to June 30, 2001 will be subject immediately to
the nonamortization and amortization provisions of SFAS No. 142. As required
under SFAS No. 142, the Company will discontinue the amortization of goodwill
with an expected net carrying value of $789 million at the date of adoption and
annual amortization of $70 million that resulted from business combinations
prior to the adoption of SFAS No. 141. However, the Company continues to
evaluate the additional effect, if any, that adoption of SFAS No. 141 and SFAS
No. 142 will have on the Company's consolidated financial statements.
-49-
Note 3--Earnings per Share
Basic EPS is computed by dividing income available to common stockholders
by the average number of common shares outstanding for the period. Except when
the effect would be antidilutive, the diluted EPS calculation includes shares
that could be issued under outstanding stock options and the employee stock
purchase plan, and common shares that would result from the conversion of
convertible preferred stock.
--------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(In millions, except per share data) 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------
Basic:
Income before cumulative effect of accounting change.......... $ 708 $(1,269) $1,387 $ (580)
Cumulative effect of accounting change.................... (44) -- (44) --
------ ------- ------ ------
Net income (loss)......................................... 664 (1,269) 1,343 (580)
Preferred stock dividends................................. (3) (3) (6) (6)
------ -------- ------ ------
Net income (loss) attributable to common stockholder
equity................................................... $ 661 $(1,272) $1,337 $ (586)
====== ======= ====== ======
Diluted:
Income before cumulative effect of accounting change.......... $ 708 $(1,269) $1,387 $ (580)
Cumulative effect of accounting change.................... (44) -- (44) --
------ ------- ------ ------
Net income (loss)......................................... 664 (1,269) 1,343 (580)
Preferred stock dividends................................. (3) (3) (6) (6)
------ -------- ------ ------
Diluted income (loss) available to common stockholders.... $ 661 $(1,272) $1,337 $ (586)
====== ======= ====== ======
Average shares outstanding.................................... 1,166 1,153 1,165 1,150
Dilutive shares:
Stock options............................................. 10 - 9 -
------ ------- ------ ------
Average shares outstanding assuming full dilution............. 1,176 1,153 1,174 1,150
====== ======= ====== ======
Earnings (loss) per share before cumulative effect of change
in accounting principle:
Basic..................................................... $ 0.60 $ (1.11) $ 1.18 $(0.51)
======= ======== ======= ======
Diluted................................................... $ 0.60 $ (1.11) $ 1.18 $(0.51)
======= ======== ======= ======
Earnings (loss) per share:
Basic..................................................... $ 0.57 $ (1.11) $ 1.15 $(0.51)
====== ======== ======= ======
Diluted................................................... $ 0.56 $ (1.11) $ 1.14 $(0.51)
====== ======== ======= ======
--------------------------------------------------------------------------------------------------------------
Note 4--Acquisition
On July 27, 2001, the Corporation completed its cash purchase of Wachovia
Corporation's ("Wachovia") approximately $7.5 billion portfolio of consumer
credit card receivables. The acquisition will be accounted for under the
provisions of SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
other Intangible Assets. The portfolio includes 2.6 million active customer
accounts. There are two components to the transaction. The first component is
the primary portfolio of $6.2 billion in receivables of card holders who are not
customers of Wachovia's retail bank. The second component is the agent bank
portfolio of $1.3 billion. The transaction includes an agent bank relationship
under which Wachovia will offer its branded credit cards to retail customers,
with servicing provided by First USA. Flexibility and protections exist for both
parties to adapt the relationship to changes in circumstances
-50-
Note 5--Second Quarter 2000 Restructuring Charge
Actions under this restructuring plan have been completed, with only
payments of identified obligations remaining, which consist primarily of lease
obligations. Unpaid amounts totaled $82 million as of June 30, 2001, and will be
paid as required over the contract period.
Note 6--Business Segments
The information presented on page 2 is consistent with the content of
operating segments data provided to the Corporation's management. The
Corporation's management currently does not use product group revenues to assess
consolidated results. Aside from investment management and insurance products,
product offerings are tailored to specific customer segments. As a result, the
aggregation of product revenues and related profit measures across lines of
business is not available.
Aside from the United States, no single country or geographic region
generates a significant portion of the Corporation's revenues or assets. In
addition, there are no single customer concentrations of revenue or
profitability.
Data presented in the line of business tables prior to the caption entitled
"Financial Performance" are included in the "Business Segments" section (see
pages 2 - 24 for details).
Note 7--Interest Income and Interest Expense
Details of interest income and expense are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------- ---------------------
(In millions) 2001 2000 2001 2000
-------- -------- -------- --------
Interest Income
Loans, including fees................................................ $ 3,395 $ 3,750 $ 7,197 $ 7,346
Bank balances........................................................ 36 131 106 233
Federal funds sold and securities under resale agreements............ 136 145 251 269
Trading assets....................................................... 85 100 168 201
Investment securities................................................ 733 840 1,584 1,670
------ ------- ------- -------
Total....................................................... 4,385 4,966 9,306 9,719
Interest Expense
Deposits............................................................. 1,312 1,487 2,832 2,876
Federal funds purchased and securities under repurchase agreements... 177 281 408 547
Other short-term borrowings.......................................... 198 307 481 605
Long-term debt....................................................... 643 670 1,345 1,277
------- ------- ------- -------
Total....................................................... 2,330 2,745 5,066 5,305
------ ------- ------- -------
Net Interest Income.................................................. 2,055 2,221 4,240 4,414
Provision for credit losses.......................................... 540 1,013 1,125 1,375
------- ------- ------- -------
Net Interest Income After Provision for Credit Losses................ $ 1,515 $ 1,208 $ 3,115 $ 3,039
======= ======= ======= =======
Note 8--Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of June 30, 2001 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2000.
-51-
Note 9--Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
As of June 30, 2001 the Corporation has sponsored nine trusts with a total
aggregate issuance of $2.790 billion in trust preferred securities as follows:
Trust Preferred Junior Subordinated Debt Owned by Trust
---------------------------------------------- -------------------------------------------------------
Initial Initial
Liquidation Distribution Principal Redeemable
(Dollars in millions) Issuance Date Value Rate Amount Maturity Beginning
------------------- ----------- -------------- ---------- -------------------- ----------------------
Capital V.............. January 30, 2001 $300 8.00% $309.3 January 30, 2031 January 30, 2006
Capital IV............. August 30, 2000 160 3-mo LIBOR 164.9 September 1, 2030 See (1) below.
plus 1.50%
Capital III............ August 30, 2000 475 8.75% 489.7 September 1, 2030 See (1) below.
Capital II............ August 8, 2000 280 8.50% 288.7 August 15, 2030 August 15, 2005
Capital I............ September 20, 1999 575 8.00% 593 September 15, 2029 September 20, 2004
First Chicago
NBD Capital 1......... January 31, 1997 250 3-mo LIBOR
plus 0.55% 258 February 1, 2027 February 1, 2007
First USA
Capital Trust I (2)... December 20, 1996 200 9.33% 206.2 January 15, 2027 January 15, 2007
First Chicago
NBD Institutional
Capital A............. December 3, 1996 500 7.95% 515 December 1, 2026 December 1, 2006
First Chicago
NBD Institutional
Capital B............. December 5, 1996 250 7.75% 258 December 1, 2026 December 1, 2006
---------
(1) Redeemable at any time subject to approval by the Federal Reserve Board.
(2) The Corporation paid a premium of $36 million to repurchase $193 million of
these securities in 1997.
These trust preferred securities are tax-advantaged issues that qualify for
Tier 1 capital treatment. Distributions on these securities are included in
interest expense on long-term debt. Each of the trusts is a statutory business
trust organized for the sole purpose of issuing trust securities and investing
the proceeds thereof in junior subordinated debentures of the Corporation, the
sole asset of each trust. The preferred trust securities of each trust represent
preferred beneficial interests in the assets of the respective trusts and are
subject to mandatory redemption upon payment of the junior subordinated
debentures held by the trust. The common securities of each trust are wholly
owned by the Corporation. Each trust's ability to pay amounts due on the trust
preferred securities is solely dependent upon the Corporation making payment on
the related junior subordinated debentures. The Corporation's obligations under
the junior subordinated securities and other relevant trust agreements, in
aggregate, constitute a full and unconditional guarantee by the Corporation of
each respective trust's obligations under the trust securities issued by such
trust.
-52-
Note 10--Supplemental Disclosures for Accumulated Other Adjustments to
Stockholders' Equity
Accumulated other adjustments to stockholders' equity is as follows:
(In millions) June 30, 2001 June 30, 2000
----------------- -----------------
Fair value adjustment on investment securities--available for sale:
Balance, beginning of period........................................................ $ (15) $ (271)
Change in fair value, net of taxes of $34 and $56, for the six months ended......... (49) (115)
June 30, 2001 and 2000, respectively...........................................
Reclassification adjustment, net of taxes of $8 and $(140), for the six months
ended June 30, 2001 and 2000, respectively........................................ (13) 242
------- ------
Balance, end of period.............................................................. (77) (144)
Fair value adjustment on derivative instruments--cash flow type hedges:
Balance, beginning of period........................................................ -- --
Transition adjustment at January 1, 2001, net of taxes of $56....................... (98) --
Net change in fair value associated with current period hedging activities, net of
taxes of $39, for the six months ended June 30, 2001.............................. (71) --
Net reclassification into earnings, net of taxes of $17, for the six months ended
June 30, 2001..................................................................... 32 --
------ ------
Balance, end of period.............................................................. (137) --
Accumulated translation adjustment:
Balance, beginning of period........................................................ 10 8
Translation gain (losses), net of hedge results and taxes........................... (3) 1
------ ------
Balance, end of period.............................................................. 7 9
------ ------
Total accumulated other adjustments to stockholders' equity............................ $ (207) $ (135)
====== ======
Note 11--Contingent Liabilities
The Corporation and certain of its subsidiaries have been named as
defendants in various legal proceedings, including certain class actions,
arising out of the normal course of business or operations. In certain of these
proceedings, which are based on alleged violations of consumer protection,
securities, banking, insurance and other laws, rules or principles, substantial
money damages are asserted against the Corporation and its subsidiaries. Since
the Corporation and certain of its subsidiaries, which are regulated by one or
more federal and state regulatory authorities, are the subject of numerous
examinations and reviews by such authorities, the Corporation also is and will
be, from time to time, normally engaged in various disagreements with
regulators, related primarily to its financial services businesses. The
Corporation has also received certain tax deficiency assessments. In view of the
inherent difficulty of predicting the outcome of such matters, the Corporation
cannot state what the eventual outcome of pending matters will be; however,
based on current knowledge and after consultation with counsel, Management does
not believe that liabilities arising from these matters, if any, will have a
material adverse effect on the consolidated financial position of the
Corporation.
-53-
Note 12--Investment Securities
The following table is a summary of the available for sale investment
portfolio:
Gross Unrealized Gross Unrealized Fair Value
June 30, 2001 (In millions) Amortized Cost Gains Losses (Book Value)
-----------------------------------------------------------------------
U.S. Treasury.................................. $ 1,602 $ 5 $ (29) $ 1,578
U.S. government agencies....................... 20,469 15 (141) 20,343
States and political subdivisions.............. 1,293 31 (6) 1,318
Interests in credit card securitized receivables 16,985 80 -- 17,065
Other debt securities.......................... 5,490 23 (82) 5,431
Equity securities (1).......................... 2,237 20 (31) 2,226
------- ---- ------ -------
Total available for sale securities $48,076 $174 $(289) 47,961
======= ==== ======
Venture capital and other investments (2)...... 1,771
-------
Total investment securities........... $49,732
=======
---------
(1) The fair values of certain securities for which market quotations were not
available were estimated.
(2) The fair values of certain securities reflect liquidity and other market-
related factors, and includes investments accounted for at fair value
consistent with specialized industry practice.
-54-
Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001 March 31, 2001
------------------------------------------------------------- ----------------------------------------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------- ----------------------------------------------------------------------
Assets
Short-term investments...................................... $ 15,050 $ 172 4.58% $ 12,221 $ 185 6.14%
Trading assets.............................................. 7,276 85 4.69 5,703 83 5.90
Investment securities:
U.S. government and federal agencies.................... 20,013 314 6.29 19,327 302 6.34
States and political subdivisions....................... 1,265 23 7.29 1,269 24 7.67
Other................................................... 26,227 413 6.32 30,141 544 7.32
-------- ------ ------- -------- ------ -----
Total investment securities.......................... 47,505 750 6.33 50,737 870 6.95
Loans: (1) ................................................. 169,140 3,408 8.08 173,677 3,816 8.91
-------- ------ ------- -------- ------ -----
Total earning assets (2)............................. 238,971 $4,415 7.41% 242,338 $4,954 8.29%
====== ===== ====== =====
Allowance for credit losses................................. (4,255) (4,216)
Other assets................................................ 33,543 31,392
-------- --------
Total assets......................................... $268,259 $269,514
======== ========
Liabilities and Stockholders' Equity
Deposits-interest-bearing:
Savings................................................. $ 15,888 $ 45 1.14% $ 15,491 $ 51 1.34%
Money market............................................ 48,914 330 2.71 47,006 384 3.31
Time.................................................... 45,649 688 6.05 47,267 743 6.38
Foreign offices (3)..................................... 22,782 249 4.38 24,081 342 5.76
-------- ------ ----- -------- ------ -----
Total deposits-interest-bearing...................... 133,233 1,312 3.95 133,845 1,520 4.61
Federal funds purchased and securities under repurchase
agreements.............................................. 16,890 177 4.20 17,129 231 5.47
Other short-term borrowings................................. 15,024 198 5.26 18,252 283 6.29
Long-term debt (4).......................................... 42,191 643 6.11 41,781 702 6.81
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities................... 207,338 $2,330 4.51% 211,007 $2,736 5.26%
====== ===== ====== =====
Demand deposits............................................. 28,575 26,827
Other liabilities........................................... 13,039 12,675
Preferred stock............................................. 190 190
Common stockholders' equity................................. 19,117 18,815
-------- --------
Total liabilities and stockholders' equity........... $268,259 $269,514
======== ========
Interest income/earning assets (2).......................... $4,415 7.41% $4,954 8.29%
Interest expense/earning assets............................. 2,330 3.91 2,736 4.58
------ ----- ------ -----
Net interest margin......................................... $2,085 3.50% $2,218 3.71%
====== ===== ====== =====
----------
(1) Nonperforming loans are included in average balances used to determine the
average rate.
(2) Includes tax-equivalent adjustments based on federal income tax rate of 35%.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
(4) Includes trust preferred capital securities.
-55-
---------------------------------------------------------------------------------------------------------------------
December 31, 2000 September 30, 2000 June 30, 2000
---------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
$ 16,272 $ 272 6.65% $ 18,673 $ 306 6.52% $ 17,356 $ 276 6.40%
6,140 101 6.54 8,252 138 6.65 6,442 100 6.24
14,765 228 6.14 12,163 212 6.93 15,074 260 6.94
1,283 25 7.75 1,308 25 7.60 1,398 27 7.77
29,485 620 8.37 28,861 603 8.31 29,813 575 7.76
-------- ------ ------ -------- ------ ------ -------- ------ ------
45,533 873 7.63 42,332 840 7.89 46,285 862 7.49
175,588 3,961 8.97 173,259 3,935 9.04 170,743 3,764 8.87
-------- ------ ------ -------- ------ ------ -------- ------ ------
243,533 $5,207 8.51% 242,516 $5,219 8.56% 240,826 $5,002 8.35%
(3,499) ====== ===== (3,036) ====== ===== (2,531) ====== =====
33,319 33,534 34,528
-------- -------- --------
$273,353 $273,014 $272,823
======== ======== ========
$ 15,543 $ 57 1.46% $ 16,287 $ 62 1.51% $ 16,973 $ 60 1.42%
47,084 429 3.62 47,080 419 3.54 48,450 410 3.40
47,480 759 6.36 45,906 728 6.31 41,946 609 5.84
25,950 397 6.09 26,228 410 6.22 28,848 408 5.69
-------- ------ ------ -------- ------ ------ -------- ------ ------
136,057 1,642 4.80 135,501 1,619 4.75 136,217 1,487 4.39
18,564 284 6.09 19,331 311 6.40 18,632 281 6.07
17,833 292 6.51 18,933 319 6.70 19,248 307 6.41
41,395 742 7.13 41,018 728 7.06 38,642 670 6.97
-------- ------ ----- -------- ------ ------ -------- ------ ------
213,849 $2,960 5.51% 214,783 $2,977 5.51% 212,739 $2,745 5.19%
27,194 ====== ===== 26,456 ====== ===== 27,692 ====== =====
12,943 12,706 12,503
190 190 190
19,177 18,879 19,699
-------- -------- --------
$273,353 $273,014 $272,823
======== ======== ========
$5,207 8.51% $5,219 8.56% $5,002 8.35%
2,960 4.84 2,977 4.88 2,745 4.58
------ ----- ------ ----- ------ -----
$2,247 3.67% $2,242 3.68% $2,257 3.77%
====== ===== ====== ===== ====== =====
-56-
Selected Statistical Information
Bank One Corporation And Subsidiaries
Average Balances/Net Interest Margin/Rates
------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2001 June 30, 2000
------------------------------------------------------------ ---------------------------------------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
------------------------------------------------------------ ---------------------------------------------------------------------
Assets
Short-term investments...................................... $ 13,644 $ 358 5.29% $ 16,404 $ 502 6.15%
Trading assets.............................................. 6,494 167 5.19 6,676 200 6.02
Investment securities:
U.S. government and federal agencies.................... 19,672 616 6.31 15,357 518 6.78
States and political subdivisions....................... 1,267 47 7.48 1,440 55 7.68
Other................................................... 28,173 957 6.85 30,110 1,139 7.61
-------- ------- ---- --------- ------- ----
Total investment securities.......................... 49,112 1,620 6.65 46,907 1,712 7.34
Loans: (1) ................................................. 171,395 7,225 8.50 169,083 7,376 8.77
-------- ------- ---- --------- ------- ----
Total earning assets (2)............................. 240,645 $ 9,370 7.85% 239,070 $ 9,790 8.24%
======= ==== ======= ====
Allowance for credit losses................................. (4,235) (2,449)
Other assets................................................ 32,473 34,149
-------- ---------
Total assets......................................... $268,883 $ 270,770
======== =========
Liabilities and Stockholders' Equity
Deposits-interest-bearing:
Savings................................................. $ 15,691 $ 96 1.23% $ 16,957 $ 121 1.43%
Money market............................................ 47,965 714 3.00 48,028 810 3.39
Time.................................................... 46,454 1,431 6.21 40,382 1,159 5.77
Foreign offices (3)..................................... 23,427 591 5.09 29,146 786 5.42
-------- ------- ---- --------- ------- ----
Total deposits-interest-bearing...................... 133,537 2,832 4.28 134,513 2,876 4.30
Federal funds purchased and securities under repurchase
agreements.............................................. 17,009 408 4.84 18,974 547 5.80
Other short-term borrowings................................. 16,629 481 5.83 19,580 605 6.21
Long-term debt (4).......................................... 41,987 1,345 6.46 37,563 1,277 6.84
-------- ------- ---- --------- ------- ----
Total interest-bearing liabilities................... 209,162 $ 5,066 4.88% 210,630 $ 5,305 5.06%
======= ==== ======= ====
Demand deposits............................................. 27,706 27,806
Other liabilities........................................... 12,858 12,404
Preferred stock............................................. 190 190
Common stockholders' equity................................. 18,967 19,740
-------- ---------
Total liabilities and stockholders' equity........... $268,883 $ 270,770
======== =========
Interest income/earning assets (2).......................... $ 9,370 7.85% $ 9,790 8.24%
Interest expense/earning assets............................. 5,066 4.24 5,305 4.47
------- ---- ------- ----
Net interest margin......................................... $ 4,304 3.61% $ 4,485 3.77%
======= ==== ======= ====
----------
(1) Nonperforming loans are included in average balances used to determine the
average rate.
(2) Includes tax-equivalent adjustments based on federal income tax rate of 35%.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
(4) Includes trust preferred capital securities.
-57-
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
-------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 001-15323
---------
BANK ONE CORPORATION
-----------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 31-0738296
-----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 BANK ONE PLAZA CHICAGO, ILLINOIS 60670
-----------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
312-732-4000
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of July 31, 2001.
Class Number of Shares Outstanding
---------------------------- ----------------------------
Common Stock $0.01 par value 1,167,967,503
-58-
Form 10-Q Cross-Reference Index
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
-----------------------------
Page
----
Consolidated Balance Sheets-
June 30, 2001 and 2000, and December 31, 2000 44
Consolidated Income Statements -
Three months ended June 30, 2001 and 2000
Six months ended June 30, 2001 and 2000 45
Consolidated Statements of Stockholders' Equity -
Six months ended June 30, 2001 and 2000 46
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000 47
Notes to Consolidated Financial Statements 48
Selected Statistical Information 55
ITEM 2. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations 2 - 43
-----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings 60
--------------------------
ITEM 2. Changes in Securities 60
------------------------------
ITEM 3. Defaults Upon Senior Securities 60
----------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 60
------------------------------------------------------------
ITEM 5. Other Information 61
--------------------------
ITEM 6. Exhibits and Reports on Form 8-K 61
-----------------------------------------
Signatures 62
-59-
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings
--------------------------
None
ITEM 2. Changes in Securities
------------------------------
None
ITEM 3. Defaults Upon Senior Securities
----------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
BANK ONE CORPORATION held its Annual Meeting of Stockholders on Tuesday, May 15,
2001. A total of 986,403,417 shares were represented in person or by proxy, or
nearly 85% of the total shares outstanding.
1. Proposal 1--Stockholders elected the fourteen Director nominees named in
the Proxy Statement. Each of the nominees received more than 967 million
votes, in excess of 98% of the shares voted at the meeting. The
particulars are:
Name For Withheld
---- --- --------
John H. Bryan 973,001,031 13,402,386
James S. Crown 973,117,545 13,285,872
James Dimon 973,700,571 12,702,846
Maureen A. Fay, O.P. 972,406,379 13,997,038
John R. Hall 967,381,142 19,022,275
Laban P. Jackson, Jr. 972,744,318 13,659,099
John W. Kessler 972,601,935 13,801,482
Richard A. Manoogian 973,011,030 13,392,387
William T. McCormick, Jr. 968,171,803 18,231,614
Heidi G. Miller 969,037,285 17,366,132
David C. Novak 973,439,032 12,964,385
John W. Rogers, Jr. 973,412,108 12,991,309
Frederick P. Stratton, Jr. 968,117,601 18,285,816
Robert D. Walter 973,414,426 12,988,991
2. Proposal 2--the ratification of the appointment of KPMG LLP as Bank One's
independent auditor for 2001--received votes as follows:
FOR: 975,621,289 (98.907% of the shares present and entitled to vote on the proposal)
----------- ------
AGAINST: 5,469,036 (0.554% of the shares present and entitled to vote on the proposal)
--------- -----
ABSTAIN: 5,313,092 (0.539% of the shares present and entitled to vote on the proposal)
--------- -----
3. Proposal 3--approval of an amendment to Bank One's Restated Certificate
of Incorporation to increase the number of shares of authorized common
stock--received votes as follows:
FOR: 904,601,308 (91.707% of the shares present and entitled to vote on the proposal and 77.627%
----------- ------ ------
of the total shares outstanding)
AGAINST: 73,954,422 (7.497% of the shares present and entitled to vote on the proposal and 6.346%
---------- ----- -----
of the total shares outstanding)
ABSTAIN: 7,847,687 (0.796% of the shares present and entitled to vote on the proposal and 0.673%
--------- ----- -----
of the total shares outstanding)
-60-
4. Proposal 4--approval of the performance goals under Bank One's Stock
Performance Plan--received votes as follows:
FOR: 915,654,440 (92.828% of the shares present and entitled to vote on the proposal)
----------- ------
AGAINST: 59,548,790 (6.037% of the shares present and entitled to vote on the proposal)
---------- -----
ABSTAIN: 11,200,187 (1.135% of the shares present and entitled to vote on the proposal)
---------- -----
5. Proposal 5--approval of the performance goals under Bank One's Planning
Group Annual Incentive Plan--received votes as follows:
FOR: 914,622,135 (92.723% of the shares present and entitled to vote on the proposal)
----------- ------
AGAINST: 60,086,566 (6.091% of the shares present and entitled to vote on the proposal)
---------- -----
ABSTAIN: 11,694,716 (1.186% of the shares present and entitled to vote on the proposal)
---------- -----
ITEM 5. Other Information
--------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibit 12 - Statement re computation of ratio.
(b) The Registrant filed the following Current Reports on Form 8-K during
the quarter ended June 30, 2001.
Date Item Reported
------ -------------
4/9/01 The Registrant's press release announcing the purchase
of Wachovia Corporation's consumer credit card
portfolio.
4/17/01 The Registrant's press release announcing 2001 first
quarter earnings.
6/6/01 The Registrant's June 5 press release commenting on
2001 second quarter earnings.
-61-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK ONE CORPORATION
--------------------
Date August 14, 2001 /s/ James Dimon
------------------------------- ----------------------------
James Dimon
Principal Executive Officer
Date August 14, 2001 /s/ Charles W. Scharf
------------------------------- ----------------------------
Charles W. Scharf
Principal Financial Officer
Date August 14, 2001 /s/ William J. Roberts
------------------------------- ----------------------------
William J. Roberts
Principal Accounting Officer
-62-
BANK ONE CORPORATION
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
12 - Statement re computation of ratio.
99 - Minutes of Bank One Corporation Annual Meeting of Stockholders,
Tuesday, May 15, 2001.
-63-