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 19
Risk Management 23
Liquidity Risk Management 23
Market Risk Management 23
Credit Risk Management 25
Operating Risk Management 25
Credit Portfolio Composition 25
Asset Quality 28
Derivative Financial Instruments 31
Loan Securitizations 33
Capital Management 34
Forward-Looking Statements 36
Consolidated Financial Statements 38
Notes to Consolidated Financial Statements 42
Selected Statistical Information 51
Form 10-Q 52
Five-Quarter Summary of Selected Financial Information
BANK ONE CORPORATION and Subsidiaries
Three Months Ended
September 30 June 30 March 31 December 31 September 30
(In millions, except per share data) 2001 2001 2001 2000 2000
------------ ----------- ---------- ----------- ------------
Income Statement Data:
Total revenue, net of interest expense ............... $ 4,016 $ 3,846 $ 3,792 $ 3,461 $ 3,942
Net interest income-fully taxable-equivalent ("FTE")
basis ............................................... 2,193 2,085 2,218 2,247 2,242
Noninterest income ................................... 1,853 1,791 1,607 1,247 1,734
Provision for credit losses .......................... 620 540 585 1,507 516
Noninterest expense .................................. 2,303 2,306 2,236 2,847 2,593
Income (loss) before cumulative effect of change in
accounting principle ................................ 754 708 679 (512) 581
Net income (loss) .................................... 754 664 679 (512) 581
Per Common Share Data:
Income (loss) before cumulative effect of change in
accounting principle:
Basic ............................................. $ 0.64 $ 0.60 $ 0.58 $ (0.44) $ 0.50
Diluted (1) ....................................... 0.64 0.60 0.58 (0.44) 0.50
Net income (loss):
Basic ............................................. 0.64 0.57 0.58 (0.44) 0.50
Diluted (1) ....................................... 0.64 0.56 0.58 (0.44) 0.50
Cash dividends declared .............................. 0.21 0.21 0.21 0.21 0.21
Book value ........................................... 17.30 16.49 16.20 15.90 16.47
Balance Sheet Data-Ending Balances:
Loans:
Managed ........................................... $ 222,604 $ 223,390 $ 229,942 $ 236,492 $ 237,505
Reported .......................................... 164,251 166,576 171,427 174,251 176,419
Deposits ............................................. 162,385 164,299 163,555 167,077 164,130
Long-term debt (2) ................................... 44,361 41,693 42,197 40,911 42,641
Total assets:
Managed ........................................... 310,207 312,244 315,104 309,096 324,780
Reported .......................................... 270,252 272,412 274,352 269,300 283,373
Common stockholders' equity .......................... 20,192 19,261 18,876 18,445 19,042
Total stockholders' equity ........................... 20,382 19,451 19,066 18,635 19,232
Credit Quality Ratios:
Net charge-offs to average loans-managed (3) ......... 2.58% 2.50% 2.40% 2.22% 1.86%
Allowance for credit losses to period end loans ...... 2.73 2.54 2.45 2.36 1.75
Nonperforming assets to related assets ............... 1.96 1.77 1.55 1.48 1.21
Financial Performance Ratios:
Return (loss) on average assets ...................... 1.13% 0.99% 1.02% (0.74)% 0.84%
Return (loss) on average common equity ............... 15.0 13.9 14.6 (10.7) 12.1
Net interest margin:
Managed ........................................... 4.95 4.65 4.76 4.65 4.66
Reported .......................................... 3.70 3.50 3.71 3.67 3.68
Efficiency ratio:
Managed ........................................... 46.9 48.5 47.6 66.0 54.6
Reported .......................................... 56.9 59.5 58.5 81.5 65.2
1
Five-Quarter Summary of Selected Financial Information-Continued
BANK ONE CORPORATION and Subsidiaries
Three Months Ended
September 30 June 30 March 31 December 31 September 30
(In millions, except per share data) 2001 2001 2001 2000 2000
---------------- ----------- ------------- ------------- --------------
Capital Ratios:
Risk-based capital:
Tier 1(5) ........................................ 8.4% 8.2% 7.8% 7.3% 7.5%
Total (5) ........................................ 11.7 11.6 11.2 10.8 10.9
Tangible common equity/tangible managed assets ...... 5.8 5.8 5.6 5.5 5.4
Common Stock Data:
Average shares outstanding:
Basic ............................................ 1,168 1,166 1,163 1,158 1,156
Diluted (1) ...................................... 1,176 1,176 1,173 1,158 1,167
Stock price, quarter-end ............................ $ 31.47 $ 35.80 $ 36.18 $ 36.63 $ 38.06
Employees (4) ....................................... 75,801 78,491 79,157 80,778 81,291
(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 as the effect would be antidilutive.
(2) Includes trust preferred capital securities.
(3) Third quarter 2001, second quarter 2001, and first quarter 2001 amounts
include $14 million, $24 million, and $40 million, respectively, of
charge-offs which are not so classified 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) 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.
(5) Excludes $190 million of preferred stock called for redemption as of
September 30, 2001.
Business Segments
Bank One Corporation and its subsidiaries ("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 September 30 2001 2000 2001 2000
------------------------ ------------------------
Retail ..................................................... $ 310 $ 251 $ 78 $ 79
Commercial Banking ......................................... 199 194 104 115
First USA .................................................. 279 177 70 69
Investment Management ...................................... 101 86 8 8
Corporate/Unallocated ...................................... (135) (127) 47 45
------- ------ ------ ------
Total Corporation-reported .............................. $ 754 $ 581 $ 307 $ 316
======= ====== ====== ======
Net Income Average
(Loss) Managed Assets
(In millions) (In billions)
------------------------ ------------------------
Nine Months Ended September 30 2001 2000 2001 2000
------------------------ ------------------------
Retail ..................................................... $ 981 $ 406 $ 80 $ 79
Commercial Banking ......................................... 577 238 106 114
First USA .................................................. 620 (135) 68 71
Investment Management ...................................... 266 240 8 8
Corporate/Unallocated ...................................... (303) (748) 46 43
------- ------ ----- ------
Total Corporation-operating ............................. 2,141 1 $ 308 $ 315
===== ======
Accounting change .......................................... (44) -
------- ------
Total Corporation-reported .............................. $ 2,097 $ 1
======= ======
7
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 4-14 of
the Corporation's 2000 Annual Report on Form 10-K.
The financial information and supplemental data presented for the
respective line-of-business sections for the nine months ended September 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
1-3 on pages 18-19.
During the third quarter, certain organizational changes were made
impacting the Corporate Investments and Commercial Banking businesses. The
tax-oriented portfolio of Corporate Investments was transferred to Commercial
Banking, while the principal investments and fixed income portfolios were
transferred to Corporate/Unallocated. All results for prior periods conform to
the current line of business organization.
Retail
Retail includes consumer and small business banking, auto and consumer
lending, and interactive banking and financial management through bankone.com.
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- ---------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
---------- --------------------- ---------- -------- -----------
Net interest income-FTE basis ................. $ 1,237 $ 1,236 -% $ 3,790 $ 3,668 3%
Non-deposit service charges ................. 81 89 (9) 257 282 (9)
Credit card revenue ......................... 43 36 19 120 106 13
Service charges on deposits ................. 203 192 6 587 576 2
Fiduciary and investment management fees .... 32 25 28 90 83 8
Other income (loss) ......................... 1 (16) N/M 25 (510) N/M
---------- -------- --------- -------
Noninterest income ............................ 360 326 10 1,079 537 N/M
--------- -------- --------- -------
Total revenue ................................. 1,597 1,562 2 4,869 4,205 16
Provision for credit losses ................... 247 207 19 692 506 37
Salaries and employee benefits .............. 376 377 - 1,128 1,172 (4)
Other expense ............................... 498 582 (14) 1,523 1,886 (19)
--------- -------- --------- -------
Noninterest expense (3) ....................... 874 959 (9) 2,651 3,058 (13)
--------- -------- --------- -------
Pretax income-FTE basis ....................... 476 396 20 1,526 641 N/M
Tax expense and FTE basis adjustment .......... 166 145 14 545 235 N/M
--------- -------- --------- --------
Net income .................................... $ 310 $ 251 24 $ 981 $ 406 N/M
========= ======== ========= ========
FINANCIAL PERFORMANCE:
Return on equity .............................. 20% 17% 21% 10%
Efficiency ratio .............................. 55 61 54 73
Headcount-full-time (1) ....................... 34,253 35,979 (5)
ENDING BALANCES (in billions):
Commercial loans ............................ $12.4 $11.6 7%
Home equity loans ........................... 30.7 29.7 3
Auto loans / leases ......................... 20.4 23.9 (15)
Other personal loans ........................ 9.9 11.6 (15)
------- ------
Total loans ................................... 73.4 76.8 (4)
Assets ........................................ 77.6 79.1 (2)
Demand deposits ............................. 24.7 24.2 2
Savings ..................................... 34.7 32.5 7
Time ........................................ 28.1 31.0 (9)
------ ------
Total deposits ................................ 87.5 87.7 -
Common equity ................................. 6.3 5.9 7
3
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- --------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
---------- --------- --------- ---------- -------- ----------
AVERAGE BALANCES (in billions):
Commercial loans .......................... $ 12.4 $ 11.8 5% $ 12.2 $ 11.7 4%
Home equity loans ......................... 30.8 28.3 9 30.8 26.7 15
Auto loans / leases ....................... 21.0 24.0 (13) 21.7 24.2 (10)
Other personal loans ...................... 10.0 10.6 (6) 10.7 11.2 (4)
-------- ------- -------- -------
Total loans ................................. 74.2 74.7 (1) 75.4 73.8 2
Assets ...................................... 78.3 78.8 (1) 79.6 78.8 1
Demand deposits ........................... 24.1 24.3 (1) 24.1 24.8 (3)
Savings ................................... 34.4 33.1 4 33.5 33.7 (1)
Time ...................................... 28.8 30.5 (6) 30.4 30.1 1
-------- ------- -------- -------
Total deposits .............................. 87.3 87.9 (1) 88.0 88.5 (1)
Common equity ............................... 6.3 5.9 7 6.2 5.7 9
CREDIT QUALITY (in millions):
Net charge-offs:
Small business commercial ................. $ 20 $ 11 82% $ 47 $ 24 96%
Home equity loans ......................... 84 59 42 250 132 89
Auto loans / leases (2) ................... 84 54 56 245 142 73
Other personal loans ...................... 35 27 30 88 85 4
-------- ------- -------- -------
Total consumer (2) ........................ 203 140 45 583 359 62
-------- ------- -------- -------
Total net charge-offs (2) ................. 223 151 48 630 383 64
Net charge-off ratios:
Small business commercial ................. 0.65% 0.37% 0.51% 0.27%
Home equity loans ......................... 1.09 0.83 1.08 0.66
Auto loans / leases (2) ................... 1.60 0.90 1.51 0.78
Other personal loans ...................... 1.40 1.02 1.10 1.01
-------- ------- -------- -------
Total consumer (2) ........................ 1.31 0.89 1.23 0.77
-------- ------- -------- -------
Total net charge-offs (2) ................. 1.14 0.81 1.11 0.69
Nonperforming assets:
Commercial ................................ $ 244 $ 187 30%
Consumer .................................. 914 508 80
-------- -------
Total nonperforming loans ................... 1,158 695 67
Other, including OREO ..................... 76 82 (7)
-------- -------
Total nonperforming assets .................. 1,234 777 59
Allowance for loan losses ................... $ 990 N/A
Allowance to period end loans ............... 1.35% N/A
Allowance to nonperforming loans ............ 85 N/A
Nonperforming assets to related assets ...... 1.68 1.01%
4
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- --------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
---------- -------- ---------- ---------- ------- ----------
DISTRIBUTION:
# Banking centers ......................... 1,805 1,818 (1)%
# ATMs .................................... 5,652 6,377 (11)
# On-line customers (in thousands) ........ 1,040 825 26
# Households (in thousands) ............... 7,361 7,781 (5)
# Business customers (in thousands) ....... 512 533 (4)
# Debit cards issued (in thousands) ....... 4,359 4,173 4
INVESTMENTS:
Investment sales volume (in millions) .... $1,231 $1,028 20% $3,510 $3,333 5
_____
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) Third quarter 2001 and nine-months ended September 30, 2001 amounts include
$14 million and $78 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.
(3) Certain capitalized expenses have been reclassified from salaries to other
expenses in all periods.
Quarterly Results
-----------------
Retail reported third quarter net income of $310 million, up $59 million,
or 24%, 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 second quarter, net income
declined $12 million, or 4%, reflecting increased provision, partially offset by
lower noninterest expense.
Net interest income was $1.237 billion, essentially unchanged from a year
ago. Average home equity loans increased 9% from a year ago, while average auto
loans and leases decreased 13%, reflecting a deliberate reduction in the level
of new auto leases. Current quarter net interest income was also unchanged from
the second quarter, primarily reflecting lower average loans and deposits,
offset by higher margins on deposits.
Noninterest income was $360 million, up $34 million, or 10%, from a year
ago. This primarily reflected the absence of auto lease residual losses in the
current quarter, compared with $58 million of such losses a year ago, and higher
deposit fees, partially offset by losses on tax-advantaged investments and lower
asset sale gains. Noninterest income was essentially unchanged from the second
quarter.
Provision for credit losses was $247 million, up $40 million from the
year-ago quarter and $46 million from the second quarter. Managed net
charge-offs totaled $223 million, up from $151 million in the year-ago quarter
and $201 million in the second quarter. The year-over-year increase was driven
by higher charge-offs in the home equity and the auto lending portfolios, while
the increase from the second quarter reflected higher charge-offs of other
personal loans and auto loans and leases, partially offset by lower home equity
loan charge-offs. The third quarter net charge-off ratio was 1.14%, up from
0.81% in the year-ago period and 1.07% in the second quarter.
Nonperforming assets increased $457 million from a year ago, largely driven
by a $406 million increase in consumer nonperforming loans. Compared with the
second quarter, nonperforming assets increased $115 million, or 10%. The
allowance for credit losses expressed as a percent of loans increased to 1.35%
at September 30, 2001, up from 1.27% at June 30, 2001.
Noninterest expense was $874 million, down $85 million, or 9%, from the
year-ago quarter, reflecting the positive impacts from waste-reduction
initiatives and reduced headcount. Compared with the second quarter, noninterest
expense decreased $16 million. The efficiency ratio in the current quarter was
55%, down from 61% a year ago.
5
Year-to-Date Results-Adjusted Basis
-----------------------------------
For the first nine months of 2001, Retail reported net income of $981
million, up $247 million from the 2000 period. The $113 million, or 3%, increase
in net interest income for 2001 from the prior year was due to wider loan
spreads and a 2% increase in average loan balances, partially offset by deposit
margin compression.
Noninterest income increased $117 million from the prior year on an
adjusted basis, to $1.079 billion in 2001 period, reflecting $178 million in
realized auto lease residual losses in the 2000 period. Noninterest expense was
down $334 million, or 11%, due to waste reduction initiatives and reduced
headcount.
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 September 30 Nine Months Ended September 30
--------------------------------- --------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
--------- -------- ---------- --------- --------- -----------
Net interest income-FTE basis ................. $ 642 $ 710 (10)% $ 2,021 $ 2,126 (5)%
Non-deposit service charges ................. 178 166 7 518 445 16
Credit card revenue ......................... 21 19 11 65 56 16
Service charges on deposits ................. 174 117 49 453 382 19
Fiduciary and investment management fees .... 6 (2) N/M 9 4 N/M
Investment securities losses ................ (12) - - (12) - -
Trading ..................................... 81 77 5 225 126 79
Other income (loss) ......................... (23) (10) N/M (71) (11) N/M
------- ------- ------- -------
Noninterest income ............................ 425 367 16 1,187 1,002 18
------- ------- ------- -------
Total revenue ................................. 1,067 1,077 (1) 3,208 3,128 3
Provision for credit losses ................... 246 226 9 749 1,138 (34)
Salaries and employee benefits .............. 261 275 (5) 794 807 (2)
Other expense ............................... 278 294 (5) 856 903 (5)
------- ------- ------- -------
Noninterest expense ........................... 539 569 (5) 1,650 1,710 (4)
------- ------- ------- -------
Pretax income-FTE basis ....................... 282 282 - 809 280 N/M
Tax expense and FTE basis adjustment .......... 83 88 (6) 232 42 N/M
------- ------- ------- -------
Net income .................................... $ 199 $ 194 3 $ 577 $ 238 N/M
======= ======= ======= =======
Memo: Revenue by activity (7)
Lending-related revenue ..................... $478 $555 (14)% $ 1,497 $ 1,635 (8)%
Treasury management services (4) ............ 288 251 15 852 767 11
Capital markets (5) ......................... 161 161 - 490 361 36
Other ....................................... 140 110 27 369 365 1
FINANCIAL PERFORMANCE:
Return on equity .............................. 11% 11% 11% 5%
Efficiency ratio .............................. 51 53 51 55
Headcount-full-time
Corporate Banking (including Capital
Markets) .................................. 4,410 4,804 (8)%
Middle Market ............................... 4,034 4,267 (5)
Treasury management services ................ 4,787 4,931 (3)
Support and other administration (6) ........ 33 177 (81)
------- -------
Total headcount-full-time ..................... 13,264 14,179 (6)
6
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------- ------------------------------------
2001 2000 % Change 2001 2000 % Change
---------- -------- -------- ---------- ---------- ---------
ENDING BALANCES (in billions):
Loans ..................................... $ 75.0 $ 87.6 (14)%
Assets .................................... 103.9 121.4 (14)
Demand deposits ......................... 23.0 20.5 12
Savings ................................. 2.8 N/A
Time (+ Savings in 2000) ................ 9.4 8.4 12
Foreign offices ......................... 9.3 9.6 (3)
--------- --------
Total deposits ............................ 44.5 38.5 16
Common equity ............................. 7.2 7.0 3
AVERAGE BALANCES (in billions):
Loans ..................................... $ 75.6 $ 86.7 (13)% $ 80.0 $ 85.2 (6)%
Assets .................................... 103.7 115.3 (10) 106.0 114.6 (8)
Demand deposits ......................... 20.6 20.7 - 20.5 21.2 (3)
Savings ................................. 2.8 N/A 2.7 N/A
Time (+ Savings in 2000) ................ 9.2 8.0 15 7.2 8.7 (17)
Foreign offices ......................... 10.0 10.5 (5) 8.9 9.9 (10)
--------- -------- --------- ---------
Total deposits ............................ 42.6 39.2 9 39.3 39.8 (1)
Common equity ............................. 7.2 6.9 4 7.2 6.7 7
CREDIT QUALITY (in millions):
Net commercial charge-offs ................ $ 230 $ 109 N/M $ 718 $ 303 N/M
Net commercial charge-off ratio ........... 1.22% 0.50% 1.20% 0.47%
Nonperforming assets:
Commercial nonperforming loans ............ $ 1,901 $ 1,243 53 %
Other including OREO .................... 30 11 N/M
--------- --------
Total nonperforming assets ................ 1,931 1,254 54
Allowance for loan losses ................. $ 3,067 N/A
Allowance to period end loans ........ 4.09% N/A
Allowance to nonperforming loans .......... 161 N/A
Nonperforming assets to related assets..... 2.57 1.43%
CORPORATE BANKING (in billions):
Loans-ending balance ...................... $ 40.5 $ 54.4 (26)%
-average balance .................... 41.4 54.1 (23) $ 45.7 $ 53.3 (14)%
Deposits-ending balance ................... 24.1 19.5 24
-average balance .................. 23.9 21.4 12 20.9 21.3 (2)
Credit Quality (in millions):
Net commercial charge-offs .............. $ 131 $ 76 72 % $ 472 $ 237 99 %
Net commercial charge-off ratio ......... 1.27% 0.56% 1.38% 0.59%
Nonperforming loans ..................... $ 1,051 $ 788 33
Nonperforming loans to loans ............ 2.60% 1.45%
7
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- --------------------------------
2001 2000 % Change 2001 2000 % Change
---------- --------- ---------- -------- ------- ----------
SYNDICATIONS:
Lead Arranger Deals:
Volume (in billions) ....................... $ 9.7 $ 16.6 (42)% $ 37.0 $ 43.9 (16)%
Number of transactions ..................... 56 60 (7) 161 156 3
League table standing-rank ................. 4 4
League table standing-market share ......... 4% 5%
MIDDLE MARKET BANKING (in billions):
Loans-ending balance ......................... $ 34.5 $ 33.2 4 %
-average balance ....................... 34.2 32.6 5 $ 34.3 $ 31.9 8%
Deposits-ending balance ...................... 20.3 19.0 7
-average balance ..................... 18.7 17.8 5 18.4 18.4 -
Credit Quality (in millions):
Net commercial charge-offs ................. $ 99 $ 33 N/M $ 246 $ 66 N/M
Net commercial charge-off ratio ............ 1.16% 0.40% 0.96% 0.28%
Nonperforming loans ........................ $ 850 $ 455 87 %
Nonperforming loans to loans ............... 2.46% 1.37%
-----
(4) Treasury Management Services includes both fees and fee equivalent from
compensating balances.
(5) Capital Markets includes trading revenues and underwriting, syndicated
lending and advisory fees.
(6) Full-time headcount for September 30, 2000 has been restated to
reflect the movement of support and other administrative personnel
into the respective business units reported.
(7) Third quarter 2000 amounts reclassified.
Quarterly Results
-----------------
Commercial Banking reported third quarter net income of $199 million, up $5
million, or 3%, from the year-ago quarter. These results included $21 million of
net income in the tax-oriented portfolio for the third quarter, which was
previously reported under the Corporate Investments line of business. Results
for prior periods conform to the current line of business organization.
At September 30, 2001, loans were $75.0 billion, down $12.6 billion, or
14%, from the end of the year-ago quarter and down $2.6 billion, or 3%, from the
end of the second quarter. Corporate Banking loans were $40.5 billion at
September 30, down $13.9 billion, or 26% from a year-ago and down $2.8 billion,
or 6%, from the end of the second quarter. Middle Market loans were $34.5
billion at quarter-end, up $1.3 billion, or 4%, from last year and up slightly
from the end of the second quarter.
Revenue totaled $1.067 billion, down $10 million, or 1%, from the year-ago
quarter and up $9 million, or 1%, from the second quarter, with the decline in
net interest income offset by growth in noninterest income.
Net interest income was $642 million, down $68 million, or 10%, from the
year-ago quarter and down $40 million, or 6%, from the second quarter. This
reflected lower average loan balances following efforts to reduce credit risk
exposure and the impact of lower rates on customers' compensating deposit
balances.
Noninterest income was $425 million, up $58 million, or 16%, from the
year-ago quarter. Service charges on deposits increased $57 million, or 49%,
reflecting strong improvement in Treasury Management volumes and pricing as well
as a shift in the payment of fees from net interest income due to the lower
value of customers' compensating deposit balances.
Compared with the second quarter, noninterest income increased $49 million,
or 13%. Service charges on deposits increased $26 million, or 18%, reflecting
the above-mentioned switch in the payment for services to fees from balances.
Other income improved $19 million as the second quarter included a loss on the
sale of assets.
The provision for credit losses was $246 million, up $20 million, or 9%,
from the year-ago quarter, and up $7 million, or 3%, from the second quarter.
Total net charge-offs declined from the second quarter to $230 million. This
represented 1.22% of average loans, up significantly from 0.50% in the year-ago
quarter, and up slightly from
8
the second quarter. Corporate Banking net charge-offs were $131 million, or
1.27% of average loans, up from 0.56% a year-ago, but down from 1.36% in the
second quarter. Third quarter charge-offs included $33 million relating to
nonperforming and other distressed loan sales, compared to $68 million in the
second quarter and the absence of any in the year-ago quarter. Middle Market net
charge-offs were $99 million, or 1.16% of average loans, up from 0.40% in the
year-ago quarter and 0.98% in the second quarter.
The allowance for credit losses at September 30, 2001, increased to $3.067
billion from $3.056 billion at the end of the second quarter. This represented
4.09% of period-end loans and 161% of nonperforming loans, compared with 3.94%
and 174%, respectively, at June 30, 2001. At September 30, 2001, nonperforming
loans were $1.901 billion, up $149 million, or 9%, from the second quarter.
Corporate Banking nonperforming loans at quarter-end were $1.051 billion,
essentially flat with the second quarter. Before reflecting the sale of
nonperforming loans, Corporate Banking nonperforming loans increased $43 million
during the quarter, compared to increases on a comparable basis of $245 million
in the second quarter and $262 million in the first quarter. Middle Market
nonperforming loans were $850 million at September 30, 2001, up $148 million
from the end of the second quarter.
Noninterest expense was $539 million, down $30 million, or 5%, from the
year-ago quarter and down $14 million, or 3%, from the second quarter. The
declines reflected the impact of waste-reduction efforts and lower headcount.
The efficiency ratio in the third quarter was 51%, improved from 53% and 52% in
the year-ago and second quarters, respectively.
Year-to-Date Results-Adjusted Basis
-----------------------------------
Commercial Banking reported net income of $577 million, down $88 million,
or 13% from 2000, reflecting higher credit costs and the continuation of
strategic efforts to reduce Corporate Banking loans and exposures and improve
relationship profitability.
Net interest income was $2.021 billion, down $105 million, or 5% from 2000,
for the same reasons mentioned in the quarterly results. The cost associated
with nonperforming loans increased in the current year due to higher volumes and
lower cash basis collections.
Noninterest income was $1.187 billion, up $141 million, or 13% from the
year-ago period, reflecting an increase in fixed income and asset backed finance
underwriting activities, strong improvement in Treasury Management volumes and
pricing and improved fixed income trading. These were partially offset by losses
on asset sales.
The provision for credit losses was $749 million, up $239 million, or 47%,
from the 2000 period. Total net-charge offs were $718 million, in the first nine
months of 2001, including $190 million related to problem loan sales. This
represented 1.20% of average loans, up significantly from 0.47% in the prior
year. Nonperforming loans at September 30, 2001, were $1.901 billion, up $658
million, or 53%, from the prior year reflecting deterioration in the portfolio.
Noninterest expense was $1.650 billion, down $59 million, or 3%, reflecting
the impact of waste reduction efforts and lower headcount. The efficiency ratio
improved to 51% from 54%.
9
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 $67 billion in
managed credit card receivables and 58.4 million cardmembers.
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- ---------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
---------- --------- ----------- -------- --------- -----------
Net interest income-FTE basis................ $ 1,606 $ 1,442 11% $ 4,455 $ 4,418 1%
Non-deposit service charges ............... 1 4 (75) 4 9 (56)
Credit card revenue ....................... 309 284 9 834 588 42
Fiduciary and investment management fees .. 22 20 10 66 65 2
Investment securities gains ............... - - - - 11 N/M
Trading ................................... - (1) N/M - (1) N/M
Other income (loss) ....................... 22 17 29 95 (237) N/M
------- -------- -------- --------
Noninterest income .......................... 354 324 9 999 435 N/M
------- -------- -------- --------
Total revenue ............................... 1,960 1,766 11 5,454 4,853 12
Provision for credit losses ................. 981 853 15 2,893 2,757 5
Salaries and employee benefits ............ 123 121 2 376 395 (5)
Other expense ............................. 412 512 (20) 1,195 1,914 (38)
------- -------- -------- --------
Noninterest expense ......................... 535 633 (15) 1,571 2,309 (32)
------- -------- -------- --------
Pretax income (loss)-FTE basis .............. 444 280 59 990 (213) N/M
Tax expense (benefit) and FTE basis
adjustment ................................. 165 103 60 370 (78) N/M
------- -------- -------- --------
Net income (loss) ........................... $ 279 $ 177 58 $ 620 $ (135) N/M
======= ======== ======== ========
Memo: Net securitization amortization ....... $ (22) $ (22) - $ (42) $ (93) 55%
FINANCIAL PERFORMANCE:
% of average outstandings:
Net interest income-FTE basis ............. 9.57% 8.71% 9.15% 8.89%
Provision for credit losses ............... 5.84 5.15 5.94 5.55
Noninterest income ........................ 2.11 1.96 2.05 0.88
------- -------- -------- --------
Risk adjusted margin .................... 5.84 5.52 5.26 4.22
Noninterest expense ....................... 3.19 3.82 3.23 4.65
------- -------- -------- --------
Pretax income (loss)-FTE basis ............ 2.64 1.69 2.03 (0.43)
Net income (loss) ......................... 1.66 1.07 1.27 (0.27)
Return (loss) on equity ..................... 17% 12% 13% (3)%
Efficiency ratio ............................ 27 36 29 48
Headcount-full-time ......................... 10,245 10,856 (6)%
ENDING BALANCES (in billions):
Owned ..................................... $ 8.4 $ 4.8 75%
Seller's interest ......................... 18.4 19.7 (7)
------- --------
Loans on balance sheet .................... 26.8 24.5 9
Securitized................................ 40.0 41.4 (3)
------- --------
Loans ....................................... 66.8 65.9 1
Assets ...................................... 70.8 69.2 2
Common equity ............................... 6.4 6.1 5
10
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- ---------------------------------
2001 2000 % Change 2001 2000 % Change
------- ------- ---------- -------- -------- -----------
AVERAGE BALANCES (in billions):
Owned.................................... $ 7.9 $ 4.7 68% $ 6.4 $ 4.7 36%
Seller's interest ....................... 17.8 18.3 (3) 18.3 17.9 2
------- ------- -------- --------
Loans on balance sheet .................. 25.7 23.0 12 24.7 22.6 9
Securitized ............................. 40.9 42.9 (5) 40.4 43.8 (8)
------- ------- -------- --------
Loans ..................................... 66.6 65.9 1 65.1 66.4 (2)
Assets .................................... 70.2 69.2 1 67.9 70.9 (4)
Common equity ............................. 6.4 6.1 5 6.3 6.1 3
CREDIT QUALITY (in millions):
Net charge-offs:
Credit card-managed ..................... $ 981 $ 828 18% $ 2,893 $ 2,697 7%
Net charge-off ratios:
Credit card-managed ..................... 5.89% 5.03% 5.93% 5.42%
12-month lagged (8) ..................... 5.95 4.79 5.81 5.20
Delinquency ratio-30+ days ................ 4.25 4.14
-90+ days ................ 1.80 1.79
Allowance for loan losses ................. $ 397 N/A
Allowance to period end owned loans ....... 4.73% N/A
OTHER DATA:
Charge volume (in billions) ............. $ 35.2 $ 34.6 2% $ 102.1 $ 105.4 (3)%
New accounts opened (in thousands) ...... 1,149 727 58 2,927 2,503 17
Cards issued ............................ 58,441 53,650 9
Number of FUSA.com
customers (in millions) ............... 2.8 1.9 47
________
(8)Third quarter 2001 ratio includes Wachovia's net charge-offs but excludes
third quarter 2000 loans.
Quarterly Results
-----------------
First USA reported third quarter net income of $279 million, up $102
million, or 58%, from the year-ago quarter. This reflected higher net interest
income, lower expenses, and the addition of the Wachovia credit card business on
July 27, 2001, partially offset by increased credit costs. Net income increased
$86 million, or 45%, from the second quarter, driven primarily by higher net
interest income, lower credit costs and reduced expenses on the legacy First USA
portfolio, and the addition of the Wachovia credit card business. Third quarter
results represented a 2.64% pre-tax return on outstandings, up from 1.97% in the
prior quarter.
Net interest income was $1.606 billion, up $164 million, or 11%, from the
year-ago quarter, reflecting the addition of the Wachovia portfolio and higher
net interest margin.
Average managed loans for the third quarter were $66.6 billion, up $700
million from the year-ago period and $3.4 billion from the second quarter.
Excluding the Wachovia portfolio, average loans were $61.7 billion, down $4.2
billion from the year-ago period and $1.5 billion from the second quarter. End
of period managed loans increased to $66.8 billion. Excluding the Wachovia
portfolio, end of period loans were $60.7 billion. First USA opened over 1.1
million new accounts during the quarter, up 58% and 15%, respectively, from the
year-ago and second quarters. At September 30, 2001, 58.4 million cards were
issued. First USA continues to be a leader in online card marketing and customer
service with over 2.8 million registered users of its website, FirstUSA.com, up
47% from a year ago.
Noninterest income was $354 million, up $30 million, or 9%, from the
year-ago quarter and $18 million, or 5%, from the second quarter, reflecting the
addition of the Wachovia portfolio.
11
The managed provision for credit losses was $981 million, up $128 million,
or 15%, from the year-ago quarter, including the addition of the Wachovia
portfolio. The managed charge-off rate increased to 5.89% from 5.03% a year ago,
reflecting lower average loans on the First USA portfolio and higher losses, but
decreased from 6.09% in the second quarter. The managed 30-day and 90-day
delinquency rates were 4.25% and 1.80%, respectively, up from 4.14% and 1.79% in
the year-ago quarter and 4.10% and 1.78% in the second quarter.
Noninterest expense totaled $535 million, down $98 million, or 15%, from
the year-ago quarter, reflecting lower operating costs, partially offset by the
addition of the Wachovia portfolio. Noninterest expense increased $13 million
from the second quarter, driven by lower operating expenses that were more than
offset by the addition of the Wachovia portfolio. The efficiency ratio for the
current period was 27%, down from 36% in the prior year and 29% in the second
quarter.
Year-to-Date Results-Adjusted Basis
-----------------------------------
First USA reported net income of $620 million for the 2001 period, up $263
million, or 74%, from the 2000 period. The improvement was driven by lower
expenses and the addition of the Wachovia credit card business, partially offset
by lower net interest income on the legacy First USA portfolio and increased
credit costs.
Net interest income was $4.455 billion, up $37 million, or 1%, from the
year-ago period reflecting the addition of Wachovia and lower interest rates
partially offset by lower average outstandings and loan fee income.
Noninterest income was $999 million, up $104 million, or 12%, from the 2000
period reflecting the addition of the Wachovia portfolio and increased
securitization activity.
The managed provision for credit losses was $2.893 billion, up $171
million, or 6%, from the 2000 period reflecting the addition of the Wachovia
portfolio and increased net charge-offs.
Noninterest expense totaled $1.571 billion, down $456 million, or 22%, from
the 2000 period, reflecting lower operating costs 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
second quarter of 2000. These reductions were partially offset by the addition
of Wachovia.
12
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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------ ------ --------- ------ ------ --------
Net interest income-FTE basis ................ $ 106 $ 104 2% $ 317 $ 305 4%
Non-deposit service charges ................ 182 128 42 518 392 32
Service charges on deposits ................ 4 4 - 12 12 -
Fiduciary and investment management fees ... 130 151 (14) 395 440 (10)
Other income ............................... 1 3 (67) 7 17 (59)
------ ------ ------ ------
Noninterest income ........................... 317 286 11 932 861 8
------ ------ ------ ------
Total revenue ................................ 423 390 8 1,249 1,166 7
Provision for credit losses .................. 9 2 N/M 25 6 N/M
Salaries and employee benefits ............. 140 142 (1) 430 430 -
Other expense .............................. 113 110 3 368 351 5
------ ------ ------ ------
Noninterest expense .......................... 253 252 - 798 781 2
------ ------ ------ ------
Pretax income-FTE basis ...................... 161 136 18 426 379 12
Tax expense and FTE basis adjustment ......... 60 50 20 160 139 15
------ ------ ------ ------
Net income ................................... $ 101 $ 86 18 $ 266 $ 240 11
====== ====== ====== ======
Memo: Insurance revenues ..................... $114.9 $ 85.2 35 $318.8 $252.1 26
FINANCIAL PERFORMANCE:
Return on equity .............................. 36% 38% 36% 36%
Efficiency ratio .............................. 60 65 64 67
Headcount-full-time ........................... 6,253 6,583 (5)%
ENDING BALANCES (in billions):
Loans ......................................... $ 7.0 $ 6.8 3%
Assets ........................................ 8.5 7.8 9
Demand deposits ............................. 2.1 1.6 31
Savings ..................................... 2.9 1.8 61
Time ........................................ 3.3 3.8 (13)
Foreign offices ............................. 0.2 0.2 -
------ ------
Total deposits ................................. 8.5 7.4 15
Common equity .................................. 1.1 0.9 22
AVERAGE BALANCES (in billions):
Loans .......................................... $ 6.9 $ 6.6 5% $ 6.9 $ 6.5 6%
Assets ......................................... 8.2 7.6 8 8.1 7.6 7
Demand deposits ............................. 1.9 2.3 (17) 1.9 2.5 (24)
Savings ..................................... 2.8 1.8 56 2.7 1.9 42
Time ........................................ 3.3 3.9 (15) 3.3 3.9 (15)
Foreign offices ............................. 0.2 0.2 - 0.2 0.2 -
------ ------ ------ ------
Total deposits ................................. 8.2 8.2 - 8.2 8.5 (4)
Common equity .................................. 1.1 0.9 22 1.0 0.9 11%
13
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- ---------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------ ------ ---------- ------ ------ ----------
CREDIT QUALITY (in millions):
Net charge-offs:
Commercial ................................... $ 7 N/A $ 17 N/A
Consumer ..................................... 2 N/A 5 N/A
------ ----- ------ ------
Total net charge-offs ........................ 9 N/A 22 N/A
Net charge-off ratios:
Commercial ................................... 0.76% N/A 0.68% N/A
Consumer ..................................... 0.24 N/A 0.20 N/A
------ ----- ------ ------
Total net charge-offs ........................ 0.52 N/A 0.43% N/A
Nonperforming assets:
Commercial ................................... $ 37 N/A
Consumer ..................................... 3 N/A
------ ------
Total nonperforming loans .................... 40 N/A
Other including OREO ...................... 1 N/A
------ ------
Total nonperforming assets ................... 41 N/A
Allowance for loan losses ....................... $ 25 N/A
Allowance to period end loans ................... 0.36% N/A
Allowance to nonperforming loans ................ 61 N/A
Nonperforming assets to related assets .......... 0.59 N/A
ASSETS UNDER MANAGEMENT
ENDING BALANCES (in billions):
Mutual funds .................................... $ 75.3 $ 69.4 9%
Other ........................................... 55.5 64.5 (14)
------ ------
Total ........................................ 130.8 133.9 (2)
By type:
Money market .................................... $ 50.6 $ 41.6 22%
Equity .......................................... 43.4 57.7 (25)
Fixed income .................................... 36.8 34.6 6
------ ------
Total ........................................ 130.8 133.9 (2)
By channel:
Private client services ......................... $ 48.8 $ 60.6 (19)%
Retail brokerage ................................ 9.0 9.2 (2)
Institutional ................................... 55.6 49.6 12
Commercial cash sweep ........................... 9.0 7.8 15
All other ....................................... 8.4 6.7 25
------ ------
Total ........................................ 130.8 133.9 (2)
Morningstar Rankings:
Percentage of customer assets in 4 and 5
ranked funds .................................. 61% 54%
Percentage of customer assets in 3+ ranked
funds ......................................... 90 98
TRUST ASSETS
ENDING BALANCES:
Trust assets under administration (in billions) . $333.8 N/A
CORPORATE TRUST SECURITIES
ENDING BALANCES:
Corporate trust securities under
administration (in billions) .................. $917.1 N/A
14
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------ ------ -------- ------ ------ --------
RETAIL BROKERAGE:
Mutual fund sales (in millions) $ 548 $ 625 (12)% $1,721 $2,056 (16)%
Annuity sales 683 403 69 1,789 1,277 40
------ ------ ------ ------
Total sales 1,231 1,028 20 3,510 3,333 5
Number of accounts
-end of period (in thousands) 394 379 4
Market value customer assets
-end of period (in billions) $ 22.4 $ 24.1 (7)
Number of registered sales representatives 703 694 1
Number of licensed retail bankers 2,985 2,581 16
PRIVATE CLIENT SERVICES:
Number of Private Client advisors 658 777 (15)%
Number of Private Client offices 105 104 1
Client Assets:
Assets under management (in billions) $ 48.8 $ 60.6 (19)
Ending Balances (in billions):
Loans 6.8 6.6 3
Deposits 7.0 6.7 4
Average Balances (in billions):
Loans 6.8 6.5 5 $ 6.8 $ 6.4 6%
Deposits 6.8 6.8 - 6.9 7.0 (1)
Quarterly Results
Investment Management reported third quarter net income of $101 million, up
$15 million, or 18%, from the year-ago quarter, reflecting a $33 million, or 8%,
increase in revenue partially offset by higher provision. Compared to the prior
quarter, net income increased $18 million, or 22%, reflecting modest revenue
growth, lower expenses and lower provision expense.
Period-end assets under management were $130.8 billion, down 2% from the
year-ago quarter and 1% from the second quarter, driven by the drop in the
equity markets late in the quarter. One Group(R) mutual fund assets under
management increased to $75.3 billion in the third quarter, a 9% increase
year-over-year and a 1% increase from the second quarter. Overall, One Group net
fund flows remained positive. In the third quarter, the mix of assets under
management shifted from equity assets to money market and fixed income as the
equity markets declined. Equity assets declined 13% from the second quarter,
while both money market and fixed income assets increased 6%.
During the third quarter, overall One Group funds performance remained
strong. The percent of client assets in funds rated 4 and 5 by Morningstar at
September 30, 2001, was 61%, up from 54% in the second quarter, while 90% of
assets were in funds rated three stars or higher, down from 95% in the second
quarter.
Net interest income totaled $106 million, up $2 million, or 2%, from the
year-ago period primarily due to a 5% increase in average loans.
Noninterest income was $317 million, up $31 million, or 11%, 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
third quarter. Excluding the impact of this change, noninterest income was up $7
million from a year ago and $9 million from the second quarter, driven primarily
by an increase in sales of annuity products.
15
Retail brokerage sales of mutual funds and annuities were $1.2 billion in
the third quarter, an increase of $203 million, or 20%, from the year-ago
quarter, and $90 million, or 8%, from the second quarter. Annuity sales were
robust with growth rates of 69% from a year ago and 17% from the prior quarter,
partially offset by weaker mutual fund sales.
Noninterest expense of $253 million was essentially unchanged from the
year-ago quarter. Excluding the expenses associated with the administration of
the One Group funds, non-interest expense declined 8% from the year-ago quarter
and 6% from the second quarter, driven by lower headcount, tighter cost controls
and reduced operating losses. The efficiency ratio in the current quarter was
60%, down from 65% in both the year-ago and second quarters.
Year-to-Date Results-Adjusted Basis
-----------------------------------
Investment Management reported 2001 net income of $266 million, up $20
million, or 8%, from the year ago period. Net interest income was $317 million,
up $12 million, or 4% from 2000.
Noninterest income was $932 million, up $71 million, or 8%, from the year
ago period. Excluding the impact of the in-house administration of the One Group
mutual funds, noninterest income was essentially flat. For the 2001 period,
retail brokerage sales of mutual funds and annuities were $3.5 billion, an
increase of 5%, from the year ago period reflecting an increase in annuity sales
partially offset by slower mutual funds sales.
Noninterest expense was $798 million, up $26 million or 3% from the year
ago period. Excluding the expenses associated with the administration of the One
Group funds, noninterest expense declined 5%, driven by lower headcount and
waste reduction initiatives.
Corporate/Unallocated
Corporate/Unallocated includes Treasury, unallocated corporate expenses,
and any gains or losses from corporate transactions. Corporate/Unallocated
includes the fixed income and principal investment portfolios previously
reported in Corporate Investments. Results for prior periods conform to the
current line of business organization.
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
------ ------ ---------- ------ ------ ----------
Net interest income-FTE basis .................. $ (141) $ (147) 4% $ (582) $ (330) (76)%
Non-deposit service charges ................. 3 N/A (5) N/A
Credit card revenue ......................... (1) N/A (2) N/A
Service charges on deposits ................. 7 N/A 15 N/A
Fiduciary and investment management fees .... - N/A 1 N/A
Investment securities losses ................ (30) N/A (58) N/A
Trading ..................................... (11) N/A (28) N/A
Other income ................................ 34 N/A 240 N/A
------ ----- ------ ------
Noninterest income ............................. 2 99 (98) 163 63 N/M
------ ----- ------ ------
Total revenue (loss) ........................... (139) (48) N/M (419) (267) (57)
Provision for credit losses .................... - - - -
Salaries and employee benefits .............. 146 N/A 410 N/A
Other expense ............................... (44) N/A (235) N/A
------ ----- ------ ------
Noninterest expense ............................ 102 180 (43) 175 903 (81)
------ ----- ------ ------
Pretax loss-FTE basis .......................... (241) (228) (6) (594) (1,170) 49
Tax benefit and FTE basis adjustment ........... (106) (101) (5) (291) (422) 31
------ ----- ------ ------
Net loss ....................................... $ (135) $(127) (6) $ (303) $ (748) 59
====== ===== ====== ======
FINANCIAL PERFORMANCE:
Headcount-full-time ............................ 11,786 13,694 (14)%
16
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
----- ----- -------- ----- ----- --------
ENDING BALANCES (in billions):
Loans .......................................... $ 0.4 $ 0.4 -
Assets ......................................... 49.4 47.3 4%
Deposits ....................................... 21.9 30.5 (28)
Common equity .................................. (0.8) (0.9) 11
AVERAGE BALANCES (in billions):
Loans .......................................... $ 0.8 $ 0.5 60% $ 0.8 $ 0.3 N/M
Assets ......................................... 46.3 45.0 3 46.7 43.5 7
Deposits ....................................... 23.3 26.7 (13) 25.9 25.4 2
Common equity .................................. (1.1) (0.9) (22) (1.4) - -
Quarterly Results
-----------------
Corporate/Unallocated reported a net loss of $135 million, compared with
net losses of $127 million in the year-ago quarter and $80 million in the second
quarter.
Net interest expense was $141 million in the third quarter, relatively
unchanged from a year ago. The $99 million improvement from the second quarter
reflected the benefit of lower interest rates.
Noninterest income was $2 million in the third quarter, compared to $99
million in the year-ago quarter and $130 million in the second quarter. The
current quarter included write-downs in the venture capital portfolio that were
partially offset by gains on the sale of investment securities and other
corporate transactions. Noninterest expense was $102 million in the third
quarter, down from $180 million one year ago.
Year-to-Date Results-Adjusted Basis
-----------------------------------
Corporate/Unallocated reported a net loss of $303 million, compared with a
net loss of $88 million in the prior year. Venture capital results were the
principal cause of the reduction.
Net interest expense was $582 million, compared to $330 million from the
year ago period. The $252 million decrease was due to management accounting
changes, which transferred income to the lines of business, and lower capital.
Noninterest income declined $332 million to $163 million, or 67%, driven by
deterioration in the equity market which caused declined venture capital
portfolio results. Additionally, the results included gains of $166 million
pretax on corporate transactions, compared with $39 million pretax in the prior
year.
Noninterest expense was $175 million, down 53% from the 2000 period,
reflecting lower asset write-offs and severance-related expenses. The
year-over-year improvement in noninterest expense also reflects the 14% decrease
in headcount.
17
2000 Second Quarter Significant Items
Results in the nine-months ended September 30, 2000 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
for the nine-months ended September 30, 2000 were $1.914 billion, or $1.65 per
diluted share. The tables below reconcile 2000 managed results with results
adjusted for the significant items.
2000 Year to Date Significant Items -- Table 1
================================================================================================================================
Nine Months Ended Nine Months Ended
Nine Months September 30, 2001 September 30, 2001
Ended Nine Months Ended Actual Actual
September 30, September 30, vs. vs.
2001 2000 Nine Months Ended Nine Months Ended
------------------------------ September 30, 2000 September 30, 2000
(Dollars in millions) Actual Actual Adjustments Adjusted Actual Adjusted
------------------------------------------------------------------------------------------------
Consolidated
------------
Net interest income ........... $10,002 $10,187 $ (9) $10,196 $ (185) (2)% $ (194) (2)%
Noninterest income ............ 4,359 2,898 (1,361) 4,259 1,461 50 100 2
Provision for credit losses ... 4,359 4,406 674 3,732 (47) (1) 627 17
Noninterest expense ........... 6,845 8,761 896 7,865 (1,916) (22) (1,020) (13)
Net income .................... 2,097 1 (1,913) 1,914 2,096 N/M 183 10
Retail
------
Net interest income ........... $ 3,790 $ 3,668 $ (9) $ 3,677 $ 122 3% $ 113 3%
Noninterest income ............ 1,079 537 (425) 962 542 N/M 117 12
Provision for credit losses ... 692 506 11 495 186 37 197 40
Noninterest expense ........... 2,651 3,058 73 2,985 (407) (13) (334) (11)
Net income .................... 981 406 (328) 734 575 N/M 247 34
Commercial Banking
------------------
Net interest income ........... $ 2,021 $ 2,126 $ - $ 2,126 $ (105) $ (5)% $ (105) (5)%
Noninterest income ............ 1,187 1,002 (44) 1,046 185 18 141 13
Provision for credit losses ... 749 1,138 628 510 (389) (34) 239 47
Noninterest expense ........... 1,650 1,710 1 1,709 (60) (4) (59) (3)
Net income .................... 577 238 (427) 665 339 N/M (88) (13)
First USA
---------
Net interest income ........... $ 4,455 $ 4,418 $ - $ 4,418 $ 37 1% $ 37 1%
Noninterest income ............ 999 435 (460) 895 564 N/M 104 12
Provision for credit losses ... 2,893 2,757 35 2,722 136 5 171 6
Noninterest expense ........... 1,571 2,309 282 2,027 (738) (32) (456) (22)
Net income (loss) ............. 620 (135) (492) 357 755 N/M 263 74
Investment Management
---------------------
Net interest income ........... $ 317 $ 305 $ - $ 305 $ 12 4% $ 12 4%
Noninterest income ............ 932 861 - 861 71 8 71 8
Provision for credit losses ... 25 6 - 6 19 N/M 19 N/M
Noninterest expense ........... 798 781 9 772 17 2 26 3
Net income .................... 266 240 (6) 246 26 11 20 8
Corporate / Unallocated
-----------------------
Net interest income ........... $ (582) $ (330) $ - $ (330) $ (252) (76)% $ (252) (76)%
Noninterest income ............ 163 63 (432) 495 100 N/M (332) (67)
Provision for credit losses ... - - - - - N/M - N/M
Noninterest expense ........... 175 903 531 372 (728) (81) (197) (53)
Net loss ...................... (303) (748) (660) (88) 445 (59) (215) N/M
18
The significant items recorded in the second quarter 2000 by each business
segment and income statement line are summarized as follows:
Business Segments -- Table 2
Investment Corporate/
(In millions) Retail Commercial First USA Management Unallocated Total
------ ---------- --------- ---------- ----------- ------
Pretax expense (income):
Provision for credit losses ................. $ - $628 $ - $ - $ - $ 628
Writedown of auto lease residuals ........... 307 307
Repositioning of investment securities
portfolio ............................... 415 415
Operational and other ....................... 44 45 27 9 217 342
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 3
Investment Corporate/
(In millions) Retail Commercial First USA Management Unallocated Total
------ ---------- --------- ---------- ----------- ------
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 ............ 415 415
Trading ................................. 44 44
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 expense ........................... 19 1 305 325
Merger-related and restructuring
charges ................................ 54 7 172 233
---- ---- ---- --- ---- ------
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 are now considered part of the general portfolio.
CONSOLIDATED RESULTS
Summary of Financial Results
The Corporation reported net income of $754 million, or $0.64 per diluted
share, for the third quarter of 2001, compared to net income of $581 million, or
$0.50 per diluted share, for the third quarter of 2000.
19
For the nine months ended September 30, 2001, the Corporation reported net
income of $2.097 billion, or $l.78 per diluted share, compared to net income of
$1 million, or a loss of $0.01 per share after preferred dividends, for the nine
months ended September 30, 2000. The year-to-date 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). The impact of the 2000 significant items,
noted in tables 1-3 above, amounted to $1.66 per diluted share for the nine
months ended September 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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 % Change 2001 2000 % Change
-------- -------- -------- -------- -------- --------
Managed:
Net interest income-FTE basis ............... $ 3,450 $ 3,346 3% $ 10,002 $ 10,187 (2)%
Average earning assets ...................... 276,239 285,371 (3) 279,219 284,048 (2)
Net interest margin ......................... 4.95% 4.66% 4.79% 4.79%
Reported:
Net interest income-FTE basis ............... $ 2,193 $ 2,242 (2)% $ 6,496 $ 6,727 (3)%
Average earning assets ...................... 235,352 242,516 (3) 238,861 240,227 (1)
Net interest margin ......................... 3.70% 3.68% 3.64% 3.74%
Managed net interest income and net interest margin improved for the third
quarter of 2001 compared to the third quarter of 2000. This improvement
reflected the addition of the Wachovia credit card portfolio as well as the
benefit of lower interest rates. Managed net interest margin for the nine-month
period was unchanged from a year ago, while managed net interest income declined
reflecting reduced loan volumes partially offset by the Wachovia portfolio and
lower interest rates.
Noninterest Income
The components of managed noninterest income for the periods indicated are:
Three Months Ended Nine Months Ended
September 30 Percent September 30 Percent
------------------- Increase ----------------- Increase
(Dollars in millions) 2001 2000 (Decrease) 2001 2000 (Decrease)
------ ------ ---------- ------ ------ ----------
Non-deposit service charges ..................... $ 445 $ 382 16% $1,287 $1,134 13%
Credit card revenue (1) ......................... 372 337 10 1,017 779 31
Service charges on deposits ..................... 388 320 21 1,079 975 11
Fiduciary and investment management fees ........ 190 196 (3) 561 591 (5)
Investment securities gains (losses) ............ (42) 47 N/M (69) (149) 54
Trading ......................................... 70 58 21 196 119 65
Other income (loss) ............................. 35 62 (44) 288 (551) N/M
------ ------ --- ------ ------ ---
Managed noninterest income ................... $1,458 $1,402 4% $4,359 $2,898 50%
====== ====== === ====== ====== ===
--------
(1) Excludes net credit card revenue due to securitization totaling $395
million in 2001 and $332 million in 2000 for the three months ended
September 30. For the nine months ended September 30, the amounts totaled
$892 million in 2001 and $945 million in 2000.
20
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.
Managed non-deposit service charges increased from the year-ago quarter and
prior nine months by $63 million and $153 million, respectively. These increases
were primarily the result of increased annuity sales and 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 third quarter of 2001 increased $35
million, or 10%, over the prior year period due to the addition of the Wachovia
portfolio. For the first nine months of 2001, credit card revenue increased $238
million, or 31%, compared to the previous period primarily due to significant
items recorded in 2000 (see table 3 on page 19).
Service charges on deposits increased $68 million for the third quarter of
2001 and $104 million for the first nine months of 2001 compared to the year-ago
periods. A lower rate environment produced a shift to the payment of fees from
net interest income in both these periods due to the lower value of customers'
compensating deposit balances.
Investment securities losses were $42 million for the third quarter of
2001, compared to a gain of $47 million in the third quarter of 2000 and were
primarily attributed to venture capital losses. For the nine months ended
September 30, 2001, investment securities losses were $69 million due to venture
capital losses and changes in market valuation.
Other income for the third quarter decreased $27 million, or 44%, compared
to the previous year. This decrease primarily consists of losses on sale and
write-downs of assets. For the first nine months of 2001, other income was $288
million compared to a $551 million loss in the first nine months of 2000. This
improvement resulted from significant items recorded in 2000 (see table 3 on
page 19).
Noninterest Expense
The components of noninterest expense for the periods indicated are:
Three Months Ended Nine Months Ended
September 30 Percent September 30 Percent
------------------ Increase ----------------- Increase
(Dollars in millions) 2001 2000 (Decrease) 2001 2000 (Decrease)
-------- -------- ---------- -------- -------- ----------
Salaries and employee benefits:
Salaries ........................................ $ 916 $ 991 (8)% $2,721 $2,968 (8)%
Employee benefits ............................... 130 168 (23) 417 534 (22)
------- ------- ------ ------
Total salaries and employee benefits .......... 1,046 1,159 (10) 3,138 3,502 (10)
Occupancy expense .................................. 175 175 - 506 520 (3)
Equipment expense .................................. 107 135 (21) 347 445 (22)
Outside service fees and processing ................ 303 345 (12) 872 1,131 (23)
Marketing and development .......................... 212 205 3 634 691 (8)
Telecommunications ................................. 105 88 19 309 289 7
Other intangible amortization ...................... 30 22 36 69 378 (82)
Goodwill amortization .............................. 17 17 - 52 52 -
Other .............................................. 308 449 (31) 921 1,545 (40)
------- ------- ------ ------
Total noninterest expense before
merger-related and restructuring charges .... 2,303 2,595 (11) 6,848 8,553 (20)
Merger-related and restructuring charges ........... - (2) N/M (3) 208 N/M
------- ------- ------ ------
Total noninterest expense (1) ................. $ 2,303 $ 2,593 (11) $6,845 $8,761 (22)
======= ======= ====== ======
Employees .......................................... 75,801 81,291
======= =======
Efficiency ratio-managed basis ..................... 46.9% 54.6% 47.7% 60.0%
==== ==== ==== ====
(1) Certain capitalized expenses have been reclassified from salaries to other
expenses in all periods.
21
Components of noninterest expense that are primarily related to a single
business segment are discussed within that business segment rather than the
consolidated section.
Salaries and employee benefits, including certain severance charges, in the
third quarter and first nine months of 2001 declined 10% from the year-ago
periods. These decreases reflected expense savings from reduced headcount, lower
incentive compensation and cost reductions associated with the modification of
the Corporation's benefit plans.
Equipment expense in the third quarter and first nine months of 2001
decreased $28 million and $98 million, respectively, from the year-ago periods,
primarily due to reduced furniture and equipment rental and lower maintenance
and depreciation expense.
Outside service fees and processing expense decreased $42 million, or 12%,
in the third quarter of 2001 and $259 million, or 23%, for the first nine months
of 2001 compared to the year-ago periods. These decreases were primarily due to
a reduction in consulting expense. The decrease for the first nine months also
reflected reductions due to contract renegotiations and other waste-reduction
initiatives.
Marketing and development expense increased slightly in the third quarter
of 2001 compared to the prior year quarter due to increased advertising
expenditures for First USA. For the first nine months of 2001, marketing and
development expense decreased $57 million, or 8%, compared to the year-ago
period as continued expense reductions in the Retail line of business more than
offset increased expenditures for First USA.
Other intangible amortization expense increased $8 million in the third
quarter of 2001 compared to the year-ago quarter due to the addition of the
Wachovia credit card business. For the first nine months of 2001 expense
decreased $309 million, or 82%, from the year-ago period, primarily due to
significant items recorded in 2000 (see table 3 on page 19).
Other operating expense in the third quarter and first nine months of 2001
decreased compared to the year-ago periods by $141 million and $624 million,
respectively. These decreases reflected the continuation of the Corporation's
waste-reduction initiatives to lower expenses for such items as travel and
entertainment and other miscellaneous items. Also contributing to the decline in
the first nine months of 2001 were significant items recorded in the second
quarter of 2000 (see table 3 on page 19).
The Corporation successfully converted the Texas/Louisiana deposit system
during the 2001 third quarter. The Corporation is on track for the Arizona/Utah
conversions in the fourth quarter and is working to complete the remaining
system conversions around year-end 2002.
As previously announced, the Corporation anticipates a roughly $200 million
after-tax restructuring charge in the 2001 fourth quarter for additional
severance and real estate costs to accomplish more rapid expense reductions,
accelerated systems conversions and other consolidations.
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 September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(Dollars in millions) 2001 2000 2001 2000
-------------- -------------- -------------- --------------
Income (loss) before income taxes and the cumulative
effect of change in accounting principle ........ $1,093 $833 $3,064 $(187)
Applicable income taxes (benefit) ................. 339 252 923 (188)
Effective tax rate ................................ 31.0% 30.3% 30.1% N/M
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.
22
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 June 30, 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 September 30, 2001 was consistent
with that at June 30, 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.
23
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 September 30, 2001 and June 30, 2001 (in millions) is
as follows:
September 30, 2001 June 30, 2001
------------------ -------------
Risk Type
Interest rate ..................... $12 $11
Equity ............................ 1 1
--- ---
Aggregate portfolio market risk ...... $13 $12
=== ===
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 and
exchange rate risk was immaterial.
Interest rate risk was the predominant type of market risk incurred during
the third quarter of 2001. At September 30, 2001, approximately 92% of primary
market risk exposures were related to interest rate risk. Exchange rate, equity
and commodity risks accounted for 8% 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 pre-tax 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.
The Corporation's 12-month pre-tax earnings sensitivity profile as of
September 30, 2001 and June 30, 2001 is as follows:
Immediate Change in Rates
-------------------------
(In millions) -100 bp +100 bp
--------- --------
September 30, 2001 ....................... $ 215 $ (300)
========= =======
June 30, 2001 ............................ $ 155 $ (163)
========= =======
The increase in earnings sensitivity during the quarter is primarily due to
the longer duration of the Corporation's earning assets.
24
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.
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:
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2001 2001 2001 2000 2000
----------- ---------- --------- ------------ -------------
Loans outstanding ................................... $164,251 $166,576 $171,427 $174,251 $176,419
Average loans ....................................... 165,416 169,140 173,677 175,588 173,259
Nonperforming loans ................................. 3,112 2,854 2,559 2,475 2,026
Other, including other real estate owned ............ 116 97 106 98 110
----------- ---------- -------- -------- --------
Nonperforming assets ................................ 3,228 2,951 2,665 2,573 2,136
Allowance for credit losses ......................... 4,479 4,229 4,205 4,110 3,090
Net charge-offs ..................................... 566 516 489 487 319
Nonperforming assets to related assets .............. 1.96% 1.77% 1.55% 1.48% 1.21%
Allowance for credit losses/loans outstanding ....... 2.73 2.54 2.45 2.36 1.75
Allowance for credit losses/nonperforming loans ..... 144 148 164 166 153
Net charge-offs/average loans ....................... 1.37 1.22 1.13 1.11 0.74
Allowance for credit losses/net charge-offs ......... 198 205 215 211 242
25
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:
September 30 June 30 March 31 December 31 September 30
2001 2001 2001 2000 2000
------------------ ------------------ ------------------ ----------------- ------------------
(Dollars in millions) Amount % (1) Amount %1 (1) Amount % (1) Amount % (1) Amount % (1)
---------- ------ --------- ------- --------- ------ ---------- ------ --------- -------
Loan Category
-------------
Commercial:
Domestic:
Commercial ........... $ 57,865 26% $ 59,308 26% $ 63,071 28% $ 65,270 28% $ 65,446 27%
Real estate:
Construction ....... 5,706 3 6,029 3 5,775 3 5,757 2 6,295 3
Other .............. 15,482 7 15,923 7 16,710 7 16,778 7 18,220 8
Lease financing ...... 5,627 2 5,634 3 5,734 2 5,818 3 5,514 2
Foreign ............... 6,019 3 6,726 3 6,689 3 6,837 3 7,344 3
---------- ----- --------- ------ --------- ----- -------- ---- -------- -----
Total commercial .. 90,699 41 93,620 42 97,979 43 100,460 43 102,819 43
Consumer:
Residential real
estate ............. 39,813 18 40,581 18 40,561 18 40,596 17 39,299 17
Automotive-
loans / leases ..... 18,959 8 19,707 9 19,955 8 20,741 9 21,860 9
Other ................ 6,380 3 6,467 3 7,415 3 7,710 3 7,643 3
---------- ----- --------- ------ --------- ----- -------- ---- -------- -----
Total consumer ... 65,152 29 66,755 30 67,931 29 69,047 29 68,802 29
Credit card:
On balance sheet ..... 8,400 4 6,201 3 5,517 2 4,744 2 4,798 2
Securitized .......... 58,353 26 56,814 25 58,515 26 62,241 26 61,086 26
---------- ----- --------- ------ --------- ----- -------- ---- -------- -----
Managed credit
card ............... 66,753 30 63,015 28 64,032 28 66,985 28 65,884 28
---------- ----- --------- ------ --------- ----- -------- ---- -------- -----
Total managed ............ $ 222,604 100% $ 223,390 100% $ 229,942 100% $236,492 100% $237,505 100%
========== ===== ========= ====== ========= ===== ======== ==== ======== =====
Total reported ........... $ 164,251 $ 166,576 $ 171,427 $174,251 $176,419
========== ========= ========= ======== ========
-------
(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:
September 30 June 30 March 31 December 31 September 30
2001 2001 2001 2000 2000
------------------- ------------------ ------------------ ----------------- -----------------
(Dollars in millions) Amount % (1) Amount % (1) Amount % (1) Amount % (1) Amount % (1)
---------- ------ --------- -------- --------- ------ --------- ------ --------- ------
Line of Business
--------------------------------
Retail ......................... $ 73,371 33% $ 75,063 34% $ 76,102 33% $ 77,301 33% $ 76,798 32%
Commercial Banking ............. 75,000 34 77,602 35 82,233 36 85,129 36 87,594 37
Other lines of business ........ 7,480 3 7,710 3 7,575 3 7,077 3 7,229 3
First USA:
On balance sheet ........... 8,400 4 6,201 3 5,517 2 4,744 2 4,798 2
Securitized ................ 58,353 26 56,814 25 58,515 26 62,241 26 61,086 26
-------- -------- -------- -------- -------- --- -------- --- -------- ---
Managed credit
card ..................... 66,753 30 63,015 28 64,032 28 66,985 28 65,884 28
-------- -------- -------- -------- -------- --- -------- --- -------- ---
Total managed .................. $222,604 100% $223,390 100% $229,942 100% $236,492 100% $237,505 100%
======== ======== ======== ======== ======== === ======== === ======== ===
Total reported ................. $164,251 $166,576 $171,427 $174,251 $176,419
======== ======== ======== ======== ========
------
(1) Percentages shown for line of business are determined as a percentage of
total managed loans.
26
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 are as follows:
September 30, 2001 June 30, 2001 March 31, 2001 December 31, 2000
--------------------- --------------------- --------------------- -------------------
Carrying Carrying Carrying Carrying
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent
--------------------- --------------------- --------------------- -------------------
Commercial real estate ............... $21,188 23.4% $21,952 23.4% $22,485 23.0% $ 22,535 22.4%
Wholesale trade ...................... 5,298 5.8 5,874 6.3 5,783 5.9 6,080 6.0
Industrial materials ................. 4,078 4.5 5,064 5.4 5,125 5.2 4,775 4.8
Oil and gas .......................... 3,707 4.1 3,745 4.0 4,040 4.1 4,207 4.2
Metals and products .................. 3,574 3.9 3,793 4.1 3,841 3.9 4,128 4.1
Consumer staples ..................... 3,473 3.8 4,311 4.6 4,308 4.4 3,880 3.9
Other ................................ 49,381 54.5 48,881 52.2 52,397 53.5 54,855 54.6
------- ----- ------- ------ ------- ------ --------- ------
Total commercial ................ $90,699 100.0% $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 September 30, 2001, this group's loan
outstandings totaled $9.2 billion, or 44%, of the commercial real estate
portfolio. Middle Market Banking originates primarily owner-occupied real estate
loans located in the Middle Market footprint. At September 30, 2001, commercial
real estate loans totaled $21.2 billion, or 23% of total commercial loans,
compared with $22.0 billion, or 23% of total commercial loans, at June 30, 2001.
The commercial real estate loans for the National Commercial Real Estate
Group by property type are as follows:
PROPERTY-TYPE September 30, 2001 June 30, 2001 March 31, 2001 December 31, 2000
---------------------- --------------------- ---------------------- ---------------------
Carrying Carrying Carrying Carrying
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent
---------------------- --------------------- ---------------------- ---------------------
Retail ............................... $ 1,632 17.7% $ 1,618 17.5% $ 1,582 16.8% $ 1,608 16.9%
Apartment complexes .................. 1,571 17.0 1,504 16.3 1,520 16.1 1,525 16.1
Office buildings ..................... 1,298 14.0 1,342 14.5 1,346 14.5 1,412 14.9
REIT/REOC ............................ 1,310 14.2 938 10.2 991 10.5 1,228 12.9
Industrial ........................... 475 5.1 515 5.6 523 5.6 491 5.2
Lodging .............................. 308 3.3 337 3.6 375 4.0 402 4.2
Other ................................ 2,649 28.7 2,989 32.3 3,060 32.5 2,823 29.8
-------- ------ -------- ------ -------- ------ -------- -----
Total National
Commercial
Real Estate
Group loans ..................... 9,243 100.0% 9,243 100.0% 9,415 100.0% 9,489 100.0%
===== ===== ===== =====
Other commercial
real estate loans (1) ............ 11,945 12,709 13,070 13,046
-------- -------- -------- -------
Total commercial
real estate loans ................ $21,188 $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 September
30, 2001.
27
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:
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2001 2001 2001 2000 2000
------------ --------- ---------- ----------- ------------
Nonperforming Loans:
Retail ............................................ $ 1,158 $ 1,050 $ 959 $ 912 $ 695
Commercial Banking ................................ 1,901 1,752 1,544 1,523 1,243
Other lines of business ........................... 53 52 56 40 88
-------- -------- -------- -------- --------
Total ........................................... 3,112 2,854 2,559 2,475 2,026
Other, primarily other real estate owned ............. 116 97 106 98 110
-------- -------- -------- -------- --------
Total nonperforming assets ...................... $ 3,228 $ 2,951 $ 2,665 $ 2,573 $ 2,136
======== ======== ======== ======== ========
Nonperforming assets/related assets .................. 1.96% 1.77% 1.55% 1.48% 1.21%
======== ======== ======== ======== ========
Loans 90 days or more past due and accruing interest:
Credit Card ....................................... $ 114 $ 59 $ 63 $ 57 $ 52
Other ............................................. 9 9 7 5 15
-------- --------- -------- --------- --------
Total ........................................... $ 123 $ 68 $ 70 $ 62 $ 67
======== ========= ======== ======== ========
The Corporation has experienced credit quality deterioration in a number of
distinct market segments. The events of September 11/th/ are anticipated to
adversely affect the economy, which may weaken credit quality in the coming
quarters, the extent of which will be determined by the severity of the
downturn. 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, telecommunications and selected
utilities. The Corporation will continue to monitor these potential risks.
28
The Corporation's net charge-offs by line of business for the periods
indicated are as follows:
September 30, 2001 June 30, 2001 March 31, 2001
----------------------------- ------------------------------- -----------------------------
Net Net Net Net Net Net
charge- Average charge- charge- Average charge- charge- Average charge-
(Dollars in millions) offs Balance off rate offs balance off rate offs balance off rate
----------------------------- ------------------------------- -----------------------------
Retail (1) .............. $ 209 $ 74,182 1.13% $ 177 $ 75,279 0.94% $ 166 $ 76,746 0.87%
Commercial banking ...... 230 75,567 1.22 239 80,131 1.19 249 84,335 1.18
First USA ............... 981 66,641 5.89 962 63,179 6.09 950 65,443 5.81
Other lines of business . 9 7,732 - 13 7,763 - - 7,358 -
------- --------- ------- --------- ------- ---------
Total-Managed (1) ....... 1,429 224,122 2.55% 1,391 226,352 2.46% 1,365 233,882 2.33%
===== ===== =====
Securitized ............. (863) (58,706) (875) (57,212) (876) (60,205)
------- --------- ------- --------- ------- ---------
Total-Reported .......... $ 566 $ 165,416 1.37% $ 516 $ 169,140 1.22% $ 489 $ 173,677 1.13%
======= ========= ===== ======= ========= ===== ======= ========= =====
December 31, 2000 September 30, 2000
----------------------------- -----------------------------
Net Net Net Net
charge- Average charge- charge- Average charge-
offs balance off rate offs balance off rate
----------------------------- -----------------------------
Retail (1) ............................................ $ 159 $ 76,654 0.83% $ 151 $ 74,746 0.81%
Commercial banking .................................... 259 86,616 1.20 109 86,687 0.50
First USA ............................................. 887 65,631 5.41 828 65,849 5.03
Other lines of business ............................... 4 7,407 - 3 7,122 -
------- --------- ------- ---------
Total-Managed (1) ..................................... 1,309 236,308 2.22% 1,091 234,404 1.86%
====== =====
Securitized ........................................... (822) (60,720) (772) (61,145)
------- --------- ------- ---------
Total-Reported ........................................ $ 487 $ 175,588 1.11% $ 319 $ 173,259 0.74%
======= ========= ===== ======= ========= =====
__________
(1) September 30, 2001, June 30, 2001, and March 31, 2001 amounts exclude $14
million, $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 3 for further detail.
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.
29
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:
September 30 June 30 March 31 December 31 September 30
(In millions) 2001 2001 2001 2000 2000
-------------- -------------- -------------- -------------- -------------
Line of Business
---------------------------------------------------
Balance, beginning of period ....................... $ 4,229 $ 4,205 $ 4,110 $ 3,090 $ 2,983
Charge-offs:
Retail (1) ...................................... 246 222 216 199 189
Commercial Banking .............................. 256 266 287 284 122
First USA (1) ................................... 123 94 78 69 59
Other lines of business ......................... 11 14 5 6 18
------- ------- ------- ------- -------
Total charge-offs .......................... 636 596 586 558 388
Recoveries:
Retail .......................................... 37 45 50 40 38
Commercial Banking .............................. 26 27 38 25 13
First USA (1) ................................... 5 7 4 4 3
Other lines of business ......................... 2 1 5 2 15
------- ------- ------- ------- -------
Total recoveries .......................... 70 80 97 71 69
Net charge-offs:
Retail (1) ...................................... 209 177 166 159 151
Commercial Banking .............................. 230 239 249 259 109
First USA (1) ................................... 118 87 74 65 56
Other lines of business ......................... 9 13 -- 4 3
------- ------- ------- ------- -------
Total net charge-offs ...................... 566 516 489 487 319
Provision for credit losses:
Retail (1) ...................................... 247 201 244 364 207
Commercial Banking .............................. 246 239 264 1,079 226
First USA (1) ................................... 118 87 74 65 56
Other lines of business ......................... 9 13 3 (1) 27
------- ------- ------- ------- -------
Total provision for credit losses .......... 620 540 585 1,507 516
Transfers / other (2) .............................. 196 -- (1) -- (90)
------- ------- ------- ------- -------
Balance, end of period ............................. $ 4,479 $ 4,229 $ 4,205 $ 4,110 $ 3,090
======= ======= ======= ======= =======
__________
(1) On a reported basis.
(2) Transfers to the allowance for credit losses as of September 30, 2001
primarily represent the addition of the Wachovia credit card portfolio and
all periods reflect transfers from the allowance of allocable credit
reserves associated with consumer loan sale transactions, including
securitization transactions.
30
The composition of the Corporation's allowance for credit losses by line of
business is as follows:
(Dollars in millions) September 30, 2001 June 30, 2001 March 31, 2001 December 31, 2000
-------------------- -------------------- -------------------- ----------------------
Retail...................... $ 990 22% $ 949 22% $ 924 22% $ 846 21%
Commercial Banking ......... 3,067 68 3,056 72 3,058 72 3,044 73
First USA .................. 397 9 197 5 197 5 197 5
Other lines of business .... 25 1 27 1 26 1 23 1
------- ---- -------- ---- ------- ---- ------ -----
Total .................. $ 4,479 100% $ 4,229 100% $ 4,205 100% $4,110 100%
======= ==== ======= ==== ======= ==== ====== ====
Allowance as a % of
total loans:
Retail .................... 1.35% 1.27% 1.21% 1.09%
Commercial Banking ........ 4.09 3.94 3.72 3.58
First USA ................. 4.73 3.18 3.58 4.19
Other lines of business.... 0.33 0.35 0.34 0.33
---- ---- ---- ----
Total .................. 2.73% 2.54% 2.45% 2.36%
==== ==== ==== ====
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 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 beginning on page 38.
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 recognition
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 $114 million after-tax
31
($180 million pre-tax) over the next twelve months. The maximum length of time
exposure to the variability of future cash flows for forecasted transactions
hedged is 15 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. The effect on earnings from the
discontinuance of cash flow hedges as the forecasted transaction was not likely
to occur was immaterial.
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.
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 nine months ended September 30, 2001, related to hedges of
the foreign currency exposures of net investments in foreign operations, totaled
$7 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 for the three months ended September 30, 2001 and
2000, would have been lower by $17 million and $22 million, respectively. For
the nine months ended September 30, 2001 and 2000, net interest income would
have been lower by $38 million and $31 million, respectively.
The amount of hedge ineffectiveness recognized for cash flow and fair value
hedges in the quarter-ended September 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) September 30, 2001 June 30, 2001
------------------ ------------------
Gross replacement cost...................................................... $ 13,942 $10,535
Less: Adjustment due to master netting agreements ...................... (10,681) (7,390)
-------- -------
Balance sheet credit exposure .............................................. $ 3,261 $ 3,145
======== =======
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.
32
At September 30, 2001, the notional value of ALM interest rate swaps tied
to specific assets or liabilities, firm commitments and forecasted transactions
totaled $14.8 billion as follows:
Receive Fixed Pay Fixed
(In millions) Pay Floating Receive Floating
---------------------- ---------------------------
Fair Value Fair Value Cash Flow Total Swaps
---------------------- --------------------------- ----------------
Interest rate swaps associated with:
Investment securities....................... $ -- $ 50 $ -- $ 50
Funds borrowed (including long-term debt) .. 10,239 -- 4,522 14,761
------- ----- ------ -------
Total .................................. $10,239 $ 50 $4,522 $14,811
======= ===== ====== =======
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 special purposes entity
which issues the beneficial interests. 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 $198 million at September 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
September 30, 2001:
(In millions)
Owned credit card loans-held in portfolio................................................ $ 4,757
Owned credit card loans-held for future securitization .................................. 3,643
Seller's interest in credit card loans (investment securities) .......................... 18,397
--------
Total credit card loans reflected on balance sheet ...................................... 26,797
Securities sold to investors and removed from balance sheet ............................. 39,956
--------
Managed credit card loans ............................................................... $ 66,753
========
At September 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 ............................................................................... $ 18,244
Interest-only strip 215
--------
Total interests in credit card securitizations ............................................... $ 18,459
========
33
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
Reported Securitizations Managed Reported Securitizations Managed
-------- --------------- ------- -------- --------------- -----------
(Dollars in millions) Three Months Ended September 30, Three Months Ended September 30,
2001 2000
------------------------------------------------------------------------
Net interest income-FTE basis.................. $ 2,193 $ 1,257 $ 3,450 $ 2,242 $ 1,104 $ 3,346
Provision for credit losses ................... 620 863 1,483 516 772 1,288
Noninterest income ............................ 1,853 (395) 1,458 1,734 (332) 1,402
Noninterest expense ........................... 2,303 - 2,303 2,593 - 2,593
Net income .................................... 754 - 754 581 - 581
Total average loans ........................... $ 165,416 $ 58,706 $ 224,122 $ 173,259 $ 61,145 $ 234,404
Total average earning assets .................. 235,352 40,887 276,239 242,516 42,855 285,371
Total average assets .......................... 265,846 40,887 306,733 273,014 42,855 315,869
Net interest margin ........................... 3.70% 12.20% 4.95% 3.68% 10.25% 4.66%
Credit card delinquencies over 30 days as a
percentage of ending credit card loan
balances .................................. 3.19% 4.41% 4.25% 2.70% 4.26% 4.14%
Credit card delinquencies over 90 days as a
percentage of ending credit card loan
balances .................................. 1.40% 1.86% 1.80% 1.09% 1.84% 1.79%
Net credit card charge-offs as a percentage
of average credit card loan balances ...... 5.94% 5.88% 5.89% 4.73% 5.05% 5.03%
Nine Months Ended September 30, Nine Months Ended September 30,
2001 2000
------------------------------------------------------------------------
Net interest income-FTE basis ................. $ 6,496 $ 3,506 $ 10,002 $ 6,727 $ 3,460 $ 10,187
Provision for credit losses ................... 1,745 2,614 4,359 1,891 2,515 4,406
Noninterest income ............................ 5,251 (892) 4,359 3,843 (945) 2,898
Noninterest expense ........................... 6,845 - 6,845 8,761 - 8,761
Net income .................................... 2,097 - 2,097 1 - 1
Total average loans ........................... $ 169,381 $ 58,702 $ 228,083 $ 170,485 $ 61,660 $ 232,145
Total average earning assets .................. 238,861 40,358 279,219 240,227 43,821 284,048
Total average assets .......................... 267,860 40,358 308,218 271,524 43,821 315,345
Net interest margin ........................... 3.64% 11.61% 4.79% 3.74% 10.55% 4.79%
Net credit card charge-offs as a percentage
of average credit card loan balances ...... 5.81% 5.94% 5.93% 5.15% 5.44% 5.42%
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.
34
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 September 30, 2001, and June
30, 2001. Tier 1 and Total Capital ratios were 8.4% and 8.2% and 11.7% and
11.6%, respectively, at September 30, 2001, and June 30, 2001.
The Corporation's capital ratios that adhere to regulatory guidelines
appear in the table below:
Well-
Capitalized
September 30 June 30 March 31 December 31 September 30 Regulatory
2001 2001 2001 2000 2000 Guidelines
------------- ---------- ----------- ------------ ------------ ------------
Risk-based capital ratios:
Tier 1 (1) ....................... 8.4% 8.2% 7.8% 7.3% 7.5% 6.0
Total (1) ........................ 11.7 11.6 11.2 10.8 10.9 10.0
Common equity/managed assets .......... 6.5 6.2 6.0 6.0 5.9
Tangible common equity/tangible
managed assets ................... 5.8 5.8 5.6 5.5 5.4
Double leverage ratio ............. 102 105 106 108 109
Dividend payout ratio ................. 35 37 36 N/M 42
______
N/M-Not meaningful.
(1) Excludes $190 million of preferred stock called for redemption as of
September 30, 2001.
The components of the Corporation's regulatory risk-based capital and
risk-weighted assets are as follows:
September 30 June 30 March 31 December 31 September 30
(In millions) 2001 2001 2001 2000 2000
------------ ---------- --------- ----------- ------------
Regulatory risk-based capital:
Tier 1 capital..................... $ 21,330 $ 21,243 $ 20,727 $ 19,824 $ 20,433
Tier 2 capital .................... 8,547 8,930 9,148 9,316 9,119
------------ ---------- --------- ----------- ------------
Total capital ..................... $ 29,877 $ 30,173 $ 29,875 $ 29,140 $ 29,552
============ ========== ========= =========== ============
Total risk-weighted assets ............. $ 254,943 $ 259,372 $ 266,077 $ 270,182 $ 272,095
============ ========== ========= =========== ============
In deriving Tier 1 and total capital, goodwill and other nonqualifying
intangible assets are deducted as indicated:
September 30 June 30 March 31 December 31 September 30
(In millions) 2001 2001 2001 2000 2000
------------ ---------- --------- ----------- ------------
Goodwill ............................... $ 1,577 $ 824 $ 841 $ 858 $ 876
Other nonqualifying intangibles ........ 289 273 299 375 405
------------ ---------- --------- ----------- ------------
Subtotal ........................... 1,866 1,097 1,140 1,233 1,281
Qualifying intangibles ................. 442 205 205 214 235
------------ ---------- --------- ----------- ------------
Total intangibles .................. $ 2,308 $ 1,302 $ 1,345 $ 1,447 $ 1,516
============ ========== ========= =========== ============
35
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 October 16,
2001, the Corporation declared a quarterly common cash dividend of 21 cents per
share, payable on January 1, 2002.
Double Leverage
Double leverage is the extent to which the Corporation's resources are used
to finance investments in subsidiaries. Double leverage was 102% at September
30, 2001, 105% at June 30, 2001 and 109% at September 30, 2000. Trust Preferred
Capital Securities of $3.315 billion for the third quarter of 2001, $2.790
billion for the second quarter of 2001, and $2.489 billion in the prior year
quarter were included in capital for purposes of this calculation.
Stock Repurchase Program and Other Capital Activities
On September 17, 2001, the Corporation's Board of Directors approved the
repurchase of up to $500 million of the Corporation's common stock. This buyback
is part of the remaining 28.4 million shares of a buyback program authorized in
May 1999. The timing of the purchases and the exact number of shares to be
repurchased will depend on market conditions. The share repurchase program does
not include specific price targets or timetables and may be suspended at any
time. In the third quarter 2001 the Corporation purchased 1.5 million shares of
common stock at an average price of $29.47 per share, leaving 26.9 million
shares available for repurchase under the buyback program.
On November 1, 2001, the Corporation redeemed all outstanding preferred
stock with cumulative and adjustable dividends, Series B and C, totaling $190
million. The redemption price for both of the Series B and C preferred stock was
$100.00 per share, plus accrued and unpaid dividends totaling $1.00 per share
and $1.083 per share, respectively.
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.
36
. Competitive pressures among financial services companies may increase
significantly.
. 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.
37
Consolidated Balance Sheets
BANK ONE CORPORATION and Subsidiaries
September 30 December 31 September 30
(Dollars in millions) 2001 2000 2000
------------- ----------- ------------
Assets
Cash and due from banks .................................................... $ 16,553 $ 17,291 $ 15,388
Interest-bearing due from banks ............................................ 3,307 5,210 9,919
Federal funds sold and securities under resale agreements .................. 9,459 4,737 12,666
Trading assets ............................................................. 5,952 2,788 7,140
Derivative product assets .................................................. 3,261 2,322 3,492
Investment securities ...................................................... 52,070 50,561 45,262
Loans ...................................................................... 164,251 174,251 176,419
Allowance for credit losses .............................................. (4,479) (4,110) (3,090)
----------- ----------- -----------
Loans, net ............................................................... 159,772 170,141 173,329
Premises and equipment, net ................................................ 2,604 2,894 2,976
Customers' acceptance liability ............................................ 296 402 511
Other assets ............................................................... 16,978 12,954 12,690
----------- ----------- -----------
Total assets ............................................. $ 270,252 $ 269,300 $ 283,373
=========== =========== ===========
Liabilities
Deposits:
Demand .............................................................. $ 29,958 $ 30,738 $ 28,424
Savings ............................................................. 69,786 63,414 62,456
Time:
Under $100,000 .................................................... 21,741 25,302 24,495
$100,000 and over ................................................. 20,178 22,656 22,450
Foreign offices ..................................................... 20,722 24,967 26,305
----------- ----------- -----------
Total deposits ........................................... 162,385 167,077 164,130
Federal funds purchased and securities under repurchase agreements ......... 16,696 12,120 23,983
Other short-term borrowings ................................................ 10,901 18,003 19,800
Long-term debt ............................................................. 41,046 38,428 40,152
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated debt.........................................................
3,315 2,483 2,489
Acceptances outstanding .................................................... 296 402 511
Derivative product liabilities ............................................. 2,743 2,212 3,149
Other liabilities .......................................................... 12,488 9,940 9,927
----------- ----------- -----------
Total liabilities ........................................ 249,870 250,665 264,141
Stockholders' Equity
Preferred stock ............................................................ 190 190 190
Common stock-$0.01 par value ............................................... 12 12 12
Number of common shares (in thousands):
9/30/01 12/31/00 9/30/00
----------- ----------- -----------
Authorized ........................................................... 4,000,000 2,500,000 2,500,000
Issued ............................................................... 1,181,382 1,181,386 1,181,386
Surplus .................................................................... 10,332 10,487 10,584
Retained earnings .......................................................... 10,413 9,060 9,819
Accumulated other adjustments to stockholders' equity ...................... 203 (5) (71)
Deferred compensation ...................................................... (138) (121) (157)
Treasury stock, at cost, 14,301,000, 21,557,000, and 25,096,000 shares,
respectively ........................................................... (630) (988) (1,145)
----------- ----------- -----------
Total stockholders' equity ............................... 20,382 18,635 19,232
----------- ----------- -----------
Total liabilities and stockholders' equity ............... $ 270,252 $ 269,300 $ 283,373
=========== =========== ===========
The accompanying notes are an integral part of this statement.
38
Consolidated Income Statements
BANK ONE CORPORATION and Subsidiaries
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
(In millions, except per share data) 2001 2000 2001 2000
-------- -------- -------- --------
Net Interest Income:
Interest income ........................................................... $ 4,179 $ 5,185 $ 13,485 $ 14,904
Interest expense .......................................................... 2,016 2,977 7,082 8,282
-------- -------- -------- --------
Total net interest income ............................................. 2,163 2,208 6,403 6,622
Noninterest Income:
Non-deposit service charges .................................................... 445 382 1,287 1,134
Credit card revenue ............................................................ 767 669 1,909 1,724
Service charges on deposits .................................................... 388 320 1,079 975
Fiduciary and investment management fees ....................................... 190 196 561 591
Investment securities gains (losses) ........................................... (42) 47 (69) (149)
Trading ........................................................................ 70 58 196 119
Other income (losses) .......................................................... 35 62 288 (551)
-------- -------- -------- --------
Total noninterest income .............................................. 1,853 1,734 5,251 3,843
-------- -------- -------- --------
Total revenue, net of interest expense ................................ 4,016 3,942 11,654 10,465
Provision for credit losses .................................................... 620 516 1,745 1,891
Noninterest Expense:
Salaries and employee benefits ................................................. 1,046 1,159 3,138 3,502
Occupancy expense .............................................................. 175 175 506 520
Equipment expense .............................................................. 107 135 347 445
Outside service fees and processing ............................................ 303 345 872 1,131
Marketing and development ...................................................... 212 205 634 691
Telecommunications ............................................................. 105 88 309 289
Other intangible amortization .................................................. 30 22 69 378
Goodwill amortization .......................................................... 17 17 52 52
Other .......................................................................... 308 449 921 1,545
-------- -------- -------- --------
Total noninterest expense before merger and restructuring
charges ............................................................ 2,303 2,595 6,848 8,553
Merger-related and restructuring charges ....................................... -- (2) (3) 208
-------- -------- -------- --------
Total noninterest expense ............................................. 2,303 2,593 6,845 8,761
Income (loss) before income taxes and cumulative effect of
change in accounting principle ............................................... 1,093 833 3,064 (187)
Applicable income taxes (benefit) .............................................. 339 252 923 (188)
-------- -------- -------- --------
Income before cumulative effect of change in accounting principle .............. 754 581 2,141 1
Cumulative effect of change in accounting principle, net of taxes of $25........ -- -- (44) --
-------- -------- -------- --------
Net Income ..................................................................... $ 754 $ 581 $ 2,097 $ 1
======== ======== ======== ========
Net Income (Loss) Attributable to Common Stockholders' Equity .................. $ 751 $ 578 $ 2,088 $ (8)
======== ======== ======== ========
Earnings (loss) per share before cumulative effect of change in accounting
principle:
Basic ..................................................................... $ 0.64 $ 0.50 $ 1.82 $ (0.01)
======== ======== ======== ========
Diluted ................................................................... $ 0.64 $ 0.50 $ 1.82 $ (0.01)
======== ======== ======== ========
Earnings (loss) per share:
Basic ..................................................................... $ 0.64 $ 0.50 $ 1.79 $ (0.01)
======== ======== ======== ========
Diluted ................................................................... $ 0.64 $ 0.50 $ 1.78 $ (0.01)
======== ======== ======== ========
The accompanying notes are an integral part of this statement.
39
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) $(1,576) $20,090
Net income (loss) ........................ 1 1
Change in fair value, investment
securities-available for sale, net
of taxes ............................... 192 192
-------- ------ -------
Net income and changes in accumulated
other adjustments to stockholders'
equity ................................. 1 192 193
Cash dividends declared:
Common stock ........................... (1,210) (1,210)
Preferred stock ........................ (9) (9)
Issuance of stock ........................ (146) 457 311
Purchase of common stock ................. (16) (16)
Employee Stock Program ................... (59) (59)
Awards granted, net of forfeitures and
amortization ............................. (70) (70)
Other .................................... (10) 31 (19) 2
---- --- ------- -------- ------ ----- ------- -------
Balance-September 30, 2000 ............... $190 $12 $10,584 $ 9,819 $ (71) $(157) $(1,145) $19,232
==== === ======= ======== ====== ===== ======= =======
Balance-December 31, 2000 $190 $12 $10,487 $ 9,060 $ (5) $(121) $ (988) $18,635
Net income ............................... 2,097 2,097
Change in fair value, investment
securities-available for sale, net
of taxes ............................... 382 382
Change in fair value of cash-flow type
hedge derivative securities net of
taxes .................................. (171) (171)
Translation loss, net of hedge results
and taxes .............................. (3) (3)
-------- ------ -------
Net income and changes in accumulated
other adjustments to stockholders'
equity ................................. 2,097 208 2,305
Cash dividends declared:
Common stock ........................... (735) (735)
Preferred stock ........................ (9) (9)
Issuance of stock ........................ (157) 403 246
Purchase of common stock ................. (45) (45)
Awards granted, net of forfeitures and
amortization ............................. (17) (17)
Other .................................... 2 2
---- --- ------- -------- ------ ----- ------- -------
Balance-September 30, 2001 ............... $190 $12 $10,332 $ 10,413 $ 203 $(138) $ (630) $20,382
==== === ======= ======== ====== ===== ======= =======
The accompanying notes are an integral part of this statement.
40
Consolidated Statement of Cash Flows
BANK ONE CORPORATION and Subsidiaries
Nine Months Ended
September 30
-------------------------
(In millions) 2001 2000
----------- ----------
Cash Flows from Operating Activities
Net income ............................................................................................ $ 2,097 $ 1
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization ...................................................................... 423 745
Cumulative effect of accounting change ............................................................. 69 --
Provision for credit losses ........................................................................ 1,745 1,891
Investment securities losses, net .................................................................. 69 149
Net decrease (increase) in net derivative product assets ........................................... 236 (303)
Net (increase) decrease in trading assets .......................................................... (3,241) 7,338
Net increase in other assets ....................................................................... (753) (439)
Net increase in other liabilities .................................................................. 2,070 1,614
Merger-related and restructuring charges ........................................................... (3) 208
Other operating adjustments ........................................................................ (784) 65
-------- --------
Net cash provided by operating activities ............................................................. 1,928 11,269
Cash Flows from Investing Activities
Net increase in federal funds sold and securities under resale agreements ............................. (4,721) (2,884)
Securities available for sale:
Purchases .......................................................................................... (41,756) (49,933)
Maturities ......................................................................................... 19,328 9,768
Sales .............................................................................................. 17,028 36,805
Credit card receivables securitized ................................................................... 3,845 --
Net decrease (increase) in loans ...................................................................... 12,221 (13,721)
Purchase of Wachovia credit card business ............................................................. (5,776) --
Loan recoveries ....................................................................................... 247 205
Additions to premises and equipment ................................................................... (209) --
Proceeds from sales of premises and equipment ......................................................... 72 --
All other investing activities, net ................................................................... 259 (1,055)
-------- --------
Net cash provided by (used in) investing activities ................................................... 538 (20,815)
Cash Flows from Financing Activities
Net (decrease) increase in deposits ................................................................... (4,722) 1,752
Net increase (decrease) in federal funds purchased and securities under repurchase
agreements ......................................................................................... 4,575 5,263
Net (decrease) in other short-term borrowings ......................................................... (7,103) (1,411)
Proceeds from issuance of long-term debt .............................................................. 10,881 12,433
Repayment of long-term debt ........................................................................... (8,997) (6,071)
Purchase of common stock for treasury ................................................................. (45) --
Cash dividends paid ................................................................................... (742) (976)
Proceeds from issuance of trust preferred capital securities .......................................... 825 915
Proceeds from issuance of common and treasury stock ................................................... 164 136
All other financing activities, net ................................................................... 23 (36)
-------- --------
Net cash (used in) provided by financing activities ................................................... (5,141) 12,005
Effect of Exchange Rate Changes on Cash and Cash Equivalents .......................................... 34 127
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents .................................................. (2,641) 2,586
Cash and Cash Equivalents at Beginning of Period ...................................................... 22,501 22,721
-------- --------
Cash and Cash Equivalents at End of Period ............................................................ $ 19,860 $ 25,307
======== ========
The accompanying notes are an integral part of this statement
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK ONE CORPORATION and Subsidiaries
Note 1-Summary of Significant Accounting Policies
Consolidated financial statements of 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
securities 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 31 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.
42
Recognition and Impairment of Certain Investments
Effective April 1, 2001, the Corporation adopted Emerging Issues Task Force
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.
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 not be amortized, but 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.
Impairment or Disposal of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 144 addresses the financial accounting and reporting
for the impairment or disposal of long-lived assets. The Corporation currently
believes that the impact, if any, of adopting this statement will not be
significant to its financial position and net income.
43
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 Nine Months Ended
September 30 September 30
-------------------- --------------------
(In millions, except per share data) 2001 2000 2001 2000
--------- --------- --------- ---------
Basic:
Income before cumulative effect of accounting change ............ $ 754 $ 581 $ 2,141 $ 1
Cumulative effect of accounting change ...................... -- -- (44) --
------- ------- ------- -------
Net income .................................................. 754 581 2,097 1
Preferred stock dividends ................................... (3) (3) (9) (9)
------- ------- ------- -------
Net income (loss) attributable to common stockholders'
equity ................................................... $ 751 $ 578 $ 2,088 $ (8)
======= ======= ======= =======
Diluted:
Income before cumulative effect of accounting change ............ $ 754 $ 581 $ 2,141 $ 1
Cumulative effect of accounting change ...................... -- -- (44) --
------- ------- ------- -------
Net income (loss) ........................................... 754 581 2,097 1
Interest on convertible debentures, net of tax .............. -- 1 -- --
Preferred stock dividends ................................... (3) (3) (9) (9)
------- ------- ------- -------
Diluted income (loss) available to common stockholders ...... $ 751 $ 579 $ 2,088 $ (8)
======= ======= ======= =======
Average shares outstanding ...................................... 1,168 1,156 1,166 1,152
Dilutive shares:
Stock options ............................................... 7 8 8 --
Convertible debentures ...................................... -- 3 -- --
Employee stock purchase plan ................................ 1 -- 1 --
------- ------- ------- -------
Average shares outstanding assuming full dilution ............... 1,176 1,167 1,175 1,152
======= ======= ======= =======
Earnings (loss) per share before cumulative effect of change in
accounting principle:
Basic ....................................................... $ 0.64 $ 0.50 $ 1.82 $ (0.01)
======= ======= ======= =======
Diluted ..................................................... $ 0.64 $ 0.50 $ 1.82 $ (0.01)
======= ======= ======= =======
Earnings (loss) per share:
Basic ....................................................... $ 0.64 $ 0.50 $ 1.79 $ (0.01)
======= ======= ======= =======
Diluted ..................................................... $ 0.64 $ 0.50 $ 1.78 $ (0.01)
======= ======= ======= =======
Note 4-Acquisition
On July 27, 2001 the Corporation completed its cash purchase of Wachovia's
approximately $7.5 billion portfolio of consumer credit card receivables. The
acquisition was accounted for under the provisions of SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. The first
component of the transaction was the primary portfolio of $6.2 billion in
receivables of credit card holders who are not customers of Wachovia's retail
bank. The second component was the agent bank portfolio of $1.3 billion. On
September 7, 2001 the Corporation announced its agreement with Wachovia to end
the agent bank relationship and sell back to Wachovia the approximately $1.3
billion of consumer credit card receivables of customers who also have a
Wachovia retail banking relationship. Under the terms of the agreement, Wachovia
paid a $350 million termination fee and will reimburse the Corporation for the
premium paid for the repurchased receivables and conversion costs related to the
repurchase. The Corporation expects the primary Wachovia portfolio to add
approximately $100 million annually to after-tax earnings.
44
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 $59 million as of September 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.
During the third quarter, certain organizational changes were made
impacting the Corporate Investments and Commercial Banking businesses. The
tax-oriented portfolio of Corporate Investments was transferred to Commercial
Banking, while the principal investments and fixed income portfolios were
transferred to Corporate/Unallocated. All results for prior periods conform to
the current line of business organization.
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 2-19 for details).
Note 7-Interest Income and Interest Expense
Details of interest income and expense are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------
(In millions) 2001 2000 2001 2000
---------- --------- --------- --------
Interest Income
Loans, including fees .............................................. $ 3,191 $ 3,919 $ 10,388 $ 11,265
Bank balances ...................................................... 19 138 126 371
Federal funds sold and securities under resale agreements .......... 96 168 348 437
Trading assets ..................................................... 78 139 246 340
Investment securities .............................................. 795 821 2,377 2,491
-------- -------- -------- --------
Total ..................................................... 4,179 5,185 13,485 14,904
Interest Expense
Deposits ........................................................... 1,163 1,619 3,995 4,495
Federal funds purchased and securities under repurchase
agreements ...................................................... 145 311 553 858
Other short-term borrowings ........................................ 113 319 594 924
Long-term debt ..................................................... 595 728 1,940 2,005
-------- -------- -------- --------
Total ..................................................... 2,016 2,977 7,082 8,282
Net Interest Income ................................................ 2,163 2,208 6,403 6,622
Provision for credit losses ........................................ 620 516 1,745 1,891
-------- -------- -------- --------
Net Interest Income After Provision for Credit Losses .............. $ 1,543 $ 1,692 $ 4,658 $ 4,731
======== ======== ======== ========
Note 8-Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of September 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.
45
Note 9-Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
As of September 30, 2001 the Corporation has sponsored ten trusts with a
total aggregate issuance of $3.315 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 VI .............. September 28, 2001 $525 7.20% $541.2 October 15, 2031 October 15, 2006
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 258 February 1, 2027 February 1, 2007
plus 0.55%
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.
46
Note 10-Supplemental Disclosures for Accumulated Other Adjustments to
Stockholders' Equity
Accumulated other adjustments to stockholders' equity is as follows:
(In millions) September 30 September 30
2001 2000
------------ ------------
Fair value adjustment on investment securities-available for sale:
Balance, beginning of period ............................................................... $ (15) $(271)
Change in fair value, net of taxes of $(222) and $24, for the nine months ended
September 30, 2001 and 2000, respectively ................................................ 396 (35)
Reclassification adjustment, net of taxes of $8 and $(131), for the nine months
ended September 30, 2001 and 2000, respectively .......................................... (14) 227
----- -----
Balance, end of period ..................................................................... 367 (79)
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 $65, for the nine months ended September 30, 2001 ............................... (132) --
Net reclassification into earnings, net of taxes of $29, for the nine months ended
September 30, 2001 ....................................................................... 59 --
----- -----
Balance, end of period ..................................................................... (171) --
Accumulated translation adjustment:
Balance, beginning of period ............................................................... 10 8
Translation gain (losses), net of hedge results and taxes .................................. (3) --
----- -----
Balance, end of period ..................................................................... 7 8
----- -----
Total accumulated other adjustments to stockholders' equity ................................... $ 203 $ (71)
===== =====
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.
47
Note 12-Investment Securities
The following is a summary of the available for sale investment portfolio:
Gross Unrealized Gross Unrealized Fair Value
September 30, 2001 (In millions) Amortized Cost Gains Losses (Book Value)
---------------- ---------------- ---------------- ------------
U.S. Treasury...................................... $ 1,445 $ 33 $(13) $ 1,465
U.S. government agencies .......................... 21,124 490 (6) 21,608
States and political subdivisions ................. 1,281 39 (2) 1,318
Interests in credit card securitized receivables... 18,382 77 - 18,459
Other debt securities ............................. 5,162 41 (48) 5,155
Equity securities (1) ............................. 2,458 2 (28) 2,432
------- ---- ---- -------
Total available for sale securities ............... $49,842 $682 $(97) 50,437
======= ==== ====
Venture capital and other investments (2) ......... 1,633
-------
Total investment securities .............. $52,070
=======
_________
(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.
48
Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2001 June 30, 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 ................................ $ 12,704 $ 117 3.65% $ 15,050 $ 172 4.58%
Trading assets ........................................ 6,982 78 4.43 7,276 85 4.69
Investment securities:
U.S. government and federal agencies .............. 21,655 312 5.72 20,013 282 5.65
States and political subdivisions ................. 1,303 25 7.61 1,265 23 7.29
Other ............................................. 27,292 473 6.88 26,227 445 6.81
--------- --------- ------ -------- --------- -------
Total investment securities .................... 50,250 810 6.40 47,505 750 6.33
Loans: (1) ............................................ 165,416 3,204 7.68 169,140 3,408 8.08
--------- --------- ------ -------- --------- ------
Total earning assets (2) ....................... 235,352 $ 4,209 7.10% 238,971 $ 4,415 7.41%
========= ====== ======== ========= ======
Allowance for credit losses ........................... (4,499) (4,255)
Other assets .......................................... 34,993 33,543
--------- --------
Total assets ................................... $ 265,846 $268,259
========= ========
Liabilities and Stockholders' Equity
Deposits-interest-bearing:
Savings ........................................... $ 14,969 $ 42 1.11% $ 15,888 $ 45 1.14%
Money market ...................................... 53,189 305 2.28 48,914 330 2.71
Time .............................................. 42,891 621 5.74 45,649 688 6.05
Foreign offices (3) ............................... 21,817 195 3.55 22,782 249 4.38
--------- --------- ------ -------- --------- ------
Total deposits-interest-bearing ................ 132,866 1,163 3.47 133,233 1,312 3.95
Federal funds purchased and securities under repurchase
agreements ......................................... 17,038 145 3.38 16,890 177 4.20
Other short-term borrowings ........................... 11,217 113 4.00 15,024 198 5.29
Long-term debt (4) .................................... 42,862 595 5.51 42,191 643 6.11
--------- --------- ------ -------- --------- ------
Total interest-bearing liabilities ............. 203,983 $ 2,016 3.92% 207,338 $ 2,330 4.51%
========= ====== ========= ======
Demand deposits ....................................... 28,576 28,575
Other liabilities ..................................... 13,203 13,039
Preferred stock ....................................... 190 190
Common stockholders' equity ........................... 19,894 19,117
--------- --------
Total liabilities and stockholders' equity ..... $ 265,846 $ 268,259
========= =========
Interest income/earning assets (2) .................... $ 4,209 7.10% $ 4,415 7.41%
Interest expense/earning assets ....................... 2,016 3.40 2,330 3.91
--------- ------ --------- ------
Net interest margin ................................... $ 2,193 3.70% $ 2,085 3.50%
========= ====== ========= ======
____
(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.
49
---------------------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000 September 30, 2000
---------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------------
$ 12,221 $ 185 6.14% $ 16,272 $ 272 6.65% $ 18,673 $ 306 6.52%
5,703 83 5.90 6,140 101 6.54 8,252 138 6.65
19,327 274 5.75 14,765 228 6.14 12,163 212 6.93
1,269 24 7.67 1,283 25 7.75 1,308 25 7.60
30,141 572 7.70 29,485 620 8.37 28,861 603 8.31
--------- ------ ----- --------- ------ ----- -------- ------- -----
50,737 870 6.95 45,533 873 7.63 42,332 840 7.89
173,677 3,816 8.91 175,588 3,961 8.97 173,259 3,935 9.04
--------- ------ ----- --------- ------ ----- -------- ------- -----
242,338 $4,954 8.29% 243,533 $5,207 8.51% 242,516 $ 5,219 8.56%
====== ===== ====== ===== ======= =====
(4,216) (3,499) (3,036)
31,392 33,319 33,534
--------- --------- --------
$ 269,514 $ 273,353 $273,014
========= ========= ========
$ 15,491 $ 51 1.34% $ 15,543 $ 57 1.46% $ 16,287 $ 62 1.51%
47,006 384 3.31 47,084 429 3.62 47,080 419 3.54
47,267 743 6.38 47,480 759 6.36 45,906 728 6.31
24,081 342 5.76 25,950 397 6.09 26,228 410 6.22
--------- ------ ----- --------- ------ ----- -------- ------- -----
133,845 1,520 4.61 136,057 1,642 4.80 135,501 1,619 4.75
17,129 231 5.47 18,564 284 6.09 19,331 311 6.40
18,252 283 6.29 17,833 292 6.51 18,933 319 6.70
41,781 702 6.81 41,395 742 7.13 41,018 728 7.06
--------- ------ ----- --------- ------ ----- -------- ------- -----
211,007 $2,736 5.26% 213,849 $2,960 5.51% 214,783 $ 2,977 5.51%
====== ===== ====== ===== ======= =====
26,827 27,194 26,456
12,675 12,943 12,706
190 190 190
18,815 19,177 18,879
--------- --------- --------
$ 269,514 $ 273,353 $273,014
========= ========= ========
$4,954 8.29% $5,207 8.51% $ 5,219 8.56%
2,736 4.58 2,960 4.84 2,977 4.88
------ ----- ------ ----- ------- -----
$2,218 3.71% $2,247 3.67% $ 2,242 3.68%
====== ===== ====== ===== ======= =====
50
Selected Statistical Information
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2001 September 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 ..................................... $ 13,327 $ 474 4.76% $ 17,166 $ 808 6.29%
Trading assets ............................................. 6,658 246 4.94 7,205 338 6.27
Investment securities:
U.S. government and federal agencies ................... 20,340 868 5.71 14,285 730 6.83
States and political subdivisions ...................... 1,279 72 7.53 1,396 80 7.65
Other .................................................. 27,876 1,490 7.15 29,690 1,742 7.84
---------- -------- ----- --------- -------- -----
Total investment securities ......................... 49,495 2,430 6.56 45,371 2,552 7.51
Loans: (1) ................................................. 169,381 10,428 8.23 170,485 11,311 8.86
---------- -------- ----- --------- -------- -----
Total earning assets (2) ............................ 238,861 $ 13,578 7.60% 240,227 $ 15,009 8.35%
======== ===== ======== =====
Allowance for credit losses ................................ (4,320) (2,646)
Other assets ............................................... 33,319 33,943
---------- ---------
Total assets ........................................ $ 267,860 $ 271,524
========== =========
Liabilities and Stockholders' Equity
Deposits-interest-bearing:
Savings ................................................ $ 15,447 $ 138 1.19% $ 16,732 $ 183 1.46%
Money market ........................................... 49,726 1,019 2.74 47,710 1,229 3.44
Time ................................................... 45,253 2,052 6.06 42,237 1,887 5.97
Foreign offices (3) .................................... 22,885 786 4.59 28,166 1,196 5.67
---------- -------- ----- --------- -------- -----
Total deposits-interest-bearing ..................... 133,311 3,995 4.01 134,845 4,495 4.45
Federal funds purchased and securities under repurchase
agreements .............................................. 17,019 553 4.34 19,094 858 6.00
Other short-term borrowings ................................ 14,806 594 5.36 19,363 924 6.37
Long-term debt (4) ......................................... 42,282 1,940 6.13 38,723 2,005 6.92
---------- -------- ----- --------- -------- -----
Total interest-bearing liabilities .................. 207,418 $ 7,082 4.56% 212,025 $ 8,282 5.22%
======== ===== ======== =====
Demand deposits ............................................ 27,999 27,353
Other liabilities .......................................... 12,974 12,505
Preferred stock ............................................ 190 190
Common stockholders' equity ................................ 19,279 19,451
---------- ---------
Total liabilities and stockholders' equity .......... $ 267,860 $ 271,524
========== =========
Interest income/earning assets (2) ......................... $ 13,578 7.60% $ 15,009 8.35%
Interest expense/earning assets ............................ 7,082 3.96 8,282 4.61
-------- ----- -------- -----
Net interest margin ........................................ $ 6,496 3.64% $ 6,727 3.74%
======== ===== ======== =====
_______
(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.
51
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 September 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 October 31, 2001.
Class Number of Shares Outstanding
-------------------------------- ----------------------------
Common Stock $0.01 par value 1,166,044,287
52
Form 10-Q Cross-Reference Index
PART I-FINANCIAL INFORMATION
----------------------------
ITEM 1. Financial Statements
-----------------------------
Page
----
Consolidated Balance Sheets-
September 30, 2001 and 2000, and December 31, 2000 38
Consolidated Income Statements-
Three months ended September 30, 2001 and 2000
Nine months ended September 30, 2001 and 2000 39
Consolidated Statements of Stockholders' Equity-
Nine months ended September 30, 2001 and 2000 40
Consolidated Statements of Cash Flows-
Nine months ended September 30, 2001 and 2000 41
Notes to Consolidated Financial Statements 42
Selected Statistical Information 49
ITEM 2. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations 2-37
-----------------------------------
PART II-OTHER INFORMATION
-------------------------
ITEM 1. Legal Proceedings 54
--------------------------
ITEM 2. Changes in Securities 54
------------------------------
ITEM 3. Defaults Upon Senior Securities 54
----------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 54
------------------------------------------------------------
ITEM 5. Other Information 54
--------------------------
ITEM 6. Exhibits and Reports on Form 8-K 54
-----------------------------------------
Signatures 55
53
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
------------------------------------------------------------
None
ITEM 5. Other Information
--------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibit 12-Statement re computation of ratios.
(b) The Registrant filed the following Current Reports on Form 8-K
during the quarter ended September 30, 2001.
Date Item Reported
---- --------------
July 17, 2001 Registrant's July 17, 2001 press release
announcing its 2001 second quarter earnings.
July 27, 2001 Registrant's July 26, 2001 press release
announcing highlights of its investor and analyst
presentations that day.
September 7, 2001 Registrant's September 7, 2001 press release
announcing that it and Wachovia Corporation will
end their agent bank relationship.
September 17, 2001 Registrant's September 17, 2001 press release
announcing its plan to repurchase up to $500
million of its common stock.
54
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 November 14, 2001 /s/ James Dimon
------------------------------------- -------------------------------
James Dimon
Principal Executive Officer
Date November 14, 2001 /s/ Charles W. Scharf
------------------------------------- -------------------------------
Charles W. Scharf
Principal Financial Officer
Date November 14, 2001 /s/ Melissa J. Moore
------------------------------------- -------------------------------
Melissa J. Moore
Principal Accounting Officer
55
BANK ONE CORPORATION
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
12 -Statement re computation of ratios.
56