BANK ONE CORPORATION
INDEX TO FINANCIAL REVIEW
1 Five Quarter Summary of Selected Financial Information
2 Five Quarter Summary of Other Financial Data
3 Summary of Operating Results
3 Balance Sheet Analysis
4 Business Segment Results and Other Data
22 Consolidated Results
25 Risk Management
25 Market Risk Management
27 Credit Portfolio Composition
31 Asset Quality
35 Derivative Financial Instruments
36 Loan Securitizations and Off-Balance Sheet Activities
39 Capital Management
41 Forward-Looking Statements
42 Consolidated Financial Statements
46 Notes to Consolidated Financial Statements
52 Management's Certification of Periodic Report
55 Selected Statistical Information
56 Form 10-Q
FIVE QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Three Months Ended
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June 30 March 31 December 31 September 30 June 30
(In millions, except ratios and per share data) 2002 (3) 2002 (3) 2001 2001 2001
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INCOME STATEMENT DATA
Total revenue, net of interest expense $ 4,274 $ 4,152 $ 4,207 $ 4,016 $ 3,846
Net interest income--
fully taxable-equivalent ("FTE") basis 2,078 2,235 2,273 2,193 2,085
Noninterest income 2,232 1,952 1,972 1,853 1,791
Provision for credit losses 607 665 765 620 540
Noninterest expense 2,438 2,345 2,706 2,303 2,306
Income before cumulative effect of change
in accounting principle 843 787 541 754 708
Net income 843 787 541 754 664
PER COMMON SHARE DATA
Income before cumulative effect of change
in accounting principle:
Basic $ 0.72 $ 0.67 $ 0.46 $ 0.64 $ 0.60
Diluted 0.71 0.67 0.46 0.64 0.60
Net income:
Basic $ 0.72 $ 0.67 $ 0.46 $ 0.64 $ 0.57
Diluted 0.71 0.67 0.46 0.64 0.56
Cash dividends declared 0.21 0.21 0.21 0.21 0.21
Book value 18.37 17.81 17.33 17.30 16.49
BALANCE SHEET DATA - ENDING BALANCES
Loans:
Managed $205,442 $209,519 $218,102 $222,604 $223,390
Reported 147,728 152,126 156,733 164,251 166,576
Deposits 157,518 158,803 167,530 162,385 164,299
Long-term debt (1) 43,756 44,194 43,418 44,361 41,693
Total assets:
Managed 306,140 297,998 306,304 310,207 312,244
Reported 270,343 262,947 268,954 270,252 272,412
Common stockholders' equity 21,563 20,913 20,226 20,192 19,261
Total stockholders' equity 21,563 20,913 20,226 20,382 19,451
CREDIT QUALITY RATIOS
Net charge-offs to average loans-managed (2) 2.73% 2.82% 2.84% 2.58% 2.50%
Allowance to period end loans 3.06 2.97 2.89 2.73 2.54
Nonperforming assets to related assets 2.65 2.58 2.35 1.96 1.77
FINANCIAL PERFORMANCE:
Return on average assets 1.32% 1.21% 0.80% 1.13% 0.99%
Return on average common equity 15.7 15.3 10.5 15.0 13.9
Net interest margin:
Managed 5.12 5.35 5.20 4.95 4.65
Reported 3.69 3.91 3.84 3.70 3.50
Efficiency ratio:
Managed 47.6 46.6 53.5 46.9 48.5
Reported 56.6 56.0 63.7 56.9 59.5
Employees 73,579(4) 73,864(4) 73,519 75,801 78,491
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1
FIVE QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION - CONTINUED
BANK ONE CORPORATION and Subsidiaries
Three Months Ended
---------------------------------------------------------------
June 30 March 31 December 31 September 30 June 30
(In millions, except ratios and per share data) 2002 (3) 2002 (3) 2001 2001 2001
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CAPITAL RATIOS
Risk-based capital:
Tier 1 9.4% 9.0% 8.6% 8.4% 8.2%
Total 13.0 12.7 12.2 11.7 11.6
Tangible common equity/tangible managed assets 6.3 6.2 5.9 5.8 5.8
COMMON STOCK DATA
Average shares outstanding:
Basic 1,174 1,170 1,166 1,168 1,166
Diluted 1,184 1,179 1,174 1,176 1,176
Stock price, quarter-end $ 38.48 $ 41.78 $ 39.05 $ 31.47 $ 35.80
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(1) Includes trust preferred capital securities.
(2) Quarterly results include $1 million, $1 million, $14 million, $14 million
and $24 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, these items
result in a higher provision in excess of net charge-offs.
(3) Results include the effects of the consolidation of Paymentech, Inc. and
Anexsys, LLC.
(4) Includes the addition of employees due to the consolidation of Paymentech
and Anexsys.
FIVE QUARTER SUMMARY OF OTHER FINANCIAL DATA
The Corporation's consolidated operating financial results and ratios are
as follows:
Three Months Ended (2)
-----------------------------------------------------------------
June 30 March 31 December 31 September 30 June 30
(In millions, except ratios and per share data) 2002 (1) 2002 (1) 2001 2001 2001
----------------------------------------------------------------------------------------------------------------------
Operating income $ 803 $ 787 $ 765 $ 754 $ 706
Operating earnings per share-diluted $ 0.68 $ 0.67 $ 0.65 $ 0.64 $ 0.60
Return on average assets 1.26% 1.21% 1.14% 1.13% 1.06%
Return on average common equity 14.9 15.3 14.9 15.0 14.8
Net interest margin:
Managed 5.12 5.35 5.20 4.95 4.65
Reported 3.69 3.91 3.84 3.70 3.50
Efficiency ratio:
Managed 48.9 46.6 46.5 46.9 48.6
Reported 58.0 56.0 55.4 56.9 59.6
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(1) Results include the effects of the consolidation of Paymentech and Anexsys.
(2) These results and ratios exclude restructuring-related charges and
reversals for all periods and June 30, 2001 excludes the cumulative effect
of a change in accounting principle.
2
SUMMARY OF OPERATING RESULTS
Operating income for BANK ONE CORPORATION and its subsidiaries ("Bank One"
or the "Corporation") was $803 million, or $0.68 per diluted share, for the
second quarter 2002 compared to $706 million, or $0.60 per diluted share, in the
second quarter 2001, excluding restructuring reversals and the 2001 accounting
change. Bank One reported 2002 second quarter net income of $843 million, or
$0.71 per diluted share, including a $40 million after tax benefit from
reversals of prior restructuring charges. This is compared to reported net
income of $664 million, or $0.56 per diluted share, including a $44 million
after tax charge for the cumulative effect of an accounting change in the prior
year quarter.
For the first half of 2002, operating income totaled $1.6 billion, or $1.35
per diluted share, compared to $1.4 billion, or $1.18 per diluted share, in the
prior year. Reported net income for the first half of 2002 was $1.6 billion, or
$1.38 per diluted share, compared to $1.3 billion, or $1.14 per diluted share, a
year ago.
Net interest income of $2.0 billion in the second quarter 2002 and $4.2
billion for the six months ended June 30, 2002 remained relatively unchanged
when compared to the prior year periods. Decreases resulting from intentional
reductions in certain segments of the loan portfolio and a decline in deposits
of large commercial customers, were offset by increases in Retail core deposits
and the benefit of lower interest rates which reduced the Corporation's funding
costs.
Reported noninterest income increased $441 million in the second quarter
and $786 million in the first six months of 2002 compared to the prior year
periods. These increases are primarily due to the addition of the Wachovia
credit card business in the third quarter of 2001, the consolidation of
Paymentech beginning January 1, 2002, increased annuity and mutual fund sales,
growth in the loan syndication and asset-backed finance businesses, and net
gains on investment securities. Net investment securities gains were $97
million, which included a $261 million gain on sale of the interest in the GE
Monogram joint venture, partially offset by net writedowns of $164 million in
the investment securities and principal investments portfolios.
Total noninterest expense increased from the year-ago quarter and six
months by $192 million and $301 million, respectively. These increases were
primarily the result of the consolidations of Paymentech and Anexsys, $89
million in expenses for terminating and renegotiating certain vendor contracts,
increased marketing expenditures, and general costs associated with the
Corporation's conversion efforts. Salaries and employee benefits included $12
million of expense related to adopting the fair value method of accounting for
stock-based compensation.
Provision for credit losses was $607 million for the second quarter and
$1.3 billion for the first six months of 2002, compared to $540 million and $1.1
billion for 2001, respectively. Since the fourth quarter of 2001, the
Corporation has experienced lower net charge-offs, resulting in a reduction of
provision for credit losses in the current quarter. Lower credit card
delinquencies also contributed to the recent provision reduction.
BALANCE SHEET ANALYSIS
The Corporation's loan portfolio was $147.7 billion at June 30, 2002
compared with $152.1 billion at March 31, 2002, a decrease of $4.4 billion.
Retail loans totaled $66.3 billion at June 30, 2002 compared with $67.6 billion
at March 31, 2002, a decrease of $1.3 billion due to the intentional reduction
of certain segments of the auto lease and brokered home equity portfolios.
Commercial banking loans totaled $64.9 billion at June 30, 2002 compared to
$69.0 billion at March 31, 2002, a decrease of $4.2 billion, or 6%. Managed
reductions of $2.5 billion and $1.4 billion in commercial and commercial real
estate loans, respectively, reflect the conscious management of credit risk in
the current economic environment. Credit Card loans totaled $9.1 billion at June
30, 2002 compared to $7.4 billion at March 31, 2002, an increase of $1.7 billion
or 23%, reflecting renewed organic growth in the portfolio. During the quarter,
1.28 million accounts were opened, an increase of 36% compared to first quarter
2002.
At June 30, 2002 investment securities totaled $65.7 billion compared with
$58.7 billion at March 31, 2002. This increase of $7.0 billion, or 12%, was
driven by a $4.9 billion, or 20% increase in U.S. government agencies, and an
increase of $3.1 billion, or 91%, in other debt securities, primarily
asset-backed securities. Partially offsetting these increases was a decrease of
$634 million, or 16% in equity securities and the previously mentioned
writedowns in the investment securities and principal investments portfolios
which management believes will help reduce the volatility of future earnings.
3
Total deposits at June 30, 2002 were $157.5 billion compared to $158.8
billion at March 31, 2002 a decrease of $1.3 billion, or 1%. Demand deposits
totaled $26.8 billion at June 30, 2002 compared to $29.1 billion at March 31,
2002 a decrease of $2.3 billion, or 8%. Time deposits totaled $34.7 billion at
June 30, 2002 compared to $36.2 billion at March 31, 2002, a decrease of $1.6
billion, or 4%, primarily due to a decrease in lower yielding CDs. This decrease
was partially offset by an increase of $1.2 billion, or 9%, in foreign office
deposits.
Other short-term borrowings, which consists primarily of short-term bank
notes, totaled $9.8 billion at June 30, 2002 compared to $5.5 billion at March
31, 2002 an increase of $4.3 billion, or 78%. Federal funds purchased and
securities sold under repurchase agreements totaled $16.7 billion at June 30,
2002 compared to $15.2 billion at March 31, 2002 an increase of $1.6 billion, or
10%.
BUSINESS SEGMENT RESULTS AND OTHER DATA
The Corporation is managed on a line of business basis. The business
segments' financial results presented reflects the current organization of the
Corporation. For a detailed discussion of the various business activities of
Bank One's business segments, see pages 27-40 of the Corporation's 2001 Annual
Report.
The following table summarizes certain financial information by line of
business for the periods indicated:
Operating Income (Loss) Average Managed Assets
(In millions) (In billions)
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Three Months Ended June 30 2002 2001 2002 2001
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Retail $ 348 $ 313 $ 70 $ 77
Commercial Banking 144 197 94 110
Credit Card 296 193 70 65
Investment Management 115 83 9 8
Corporate (100) (80) 48 49
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Total business segment operating income, net of tax $ 803 $ 706 $ 291 $ 309
==========================================================================================================
Operating Income (Loss) Average Managed Assets
(In millions) (In billions)
----------------------------------------------------------------------------------------------------------
Six Months Ended June 30 2002 2001 2002 2001
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Retail $ 691 $ 654 $ 72 $ 77
Commercial Banking 287 393 97 110
Credit Card 535 341 71 67
Investment Management 229 165 8 8
Corporate (152) (168) 48 47
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Total business segment operating income, net of tax $ 1,590 $ 1,385 $ 296 $ 309
==========================================================================================================
The information provided in the line of business tables beginning with the
caption entitled "Financial Performance" are included herein for analytical
purposes only and are based on management information systems, assumptions and
methodologies that are under continual review.
4
Retail
Retail provides a broad range of financial products and services, including
deposits, investments, loans, insurance, and interactive banking to consumers
and small business customers.
Three Months Ended June 30 Six Months Ended June 30
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Change Change
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2002 2001 Amount % 2002 2001 Amount %
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(Dollars in millions)
Net interest income-FTE $ 1,203 $ 1,219 $ (16) (1)% $ 2,458 $ 2,518 $ (60) (2)%
Banking fees and commissions (1) 113 111 2 2 231 233 (2) (1)
Credit card revenue (2) 44 41 3 7 84 77 7 9
Service charges on deposits (3) 196 197 (1) (1) 397 382 15 4
Trading (4) (4) - (4) N/M (5) - (5) N/M
Other income 7 8 (1) (13) 11 24 (13) (54)
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Noninterest income 356 357 (1) - 718 716 2 -
------------------------------------------------------------------------- -------------------------
Total revenue 1,559 1,576 (17) (1) 3,176 3,234 (58) (2)
Provision for credit losses 215 200 15 8 482 444 38 9
Salaries and employee benefits 358 381 (23) (6) 722 744 (22) (3)
Other expense 449 505 (56) (11) 907 1,022 (115) (11)
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Noninterest expense 807 886 (79) (9) 1,629 1,766 (137) (8)
------------------------------------------------------------------------- -------------------------
Pretax operating income-FTE 537 490 47 10 1,065 1,024 41 4
Tax expense and FTE adjustment 189 177 12 7 374 370 4 1
------------------------------------------------------------------------- -------------------------
Operating income $ 348 $ 313 $ 35 11 $ 691 $ 654 $ 37 6
Restructuring-related charges (reversals),
net of tax (11) (2) (9) N/M (11) (2) (9) N/M
------------------------------------------------------------------------- -------------------------
Net income $ 359 $ 315 $ 44 14 $ 702 $ 656 $ 46 7
=================================================================================================================
5
Retail - continued
Three Months Ended June 30 Six Months Ended June 30
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Change Change
--------------------- -------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
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FINANCIAL PERFORMANCE:
Return on equity (5) 23% 21% 2% 22% 22% -%
Efficiency ratio (5) 52 56 (4) 51 55 (4)
Headcount--full-time 32,610 35,322 (2,712) (8)%
ENDING BALANCES (in billions):
Small business commercial $ 10.0 $ 9.8 $ 0.2 2
Home equity 29.7 30.3 (0.6) (2)
Vehicles:
Loans 13.6 14.1 (0.5) (4)
Leases 4.7 7.3 (2.6) (36)
Other personal 8.3 10.9 (2.6) (24)
-------------------------------------------------------------------
Total loans 66.3 72.4 (6.1) (8)
Assets 69.6 76.1 (6.5) (9)
Demand deposits 26.2 24.1 2.1 9
Savings 37.9 33.8 4.1 12
Time 24.6 29.7 (5.1) (17)
-------------------------------------------------------------------
Total deposits 88.7 87.6 1.1 1
Equity 6.2 6.2 - -
AVERAGE BALANCES (in billions):
Small business commercial $ 10.0 $ 9.6 $ 0.4 4 $ 10.0 $ 9.4 $ 0.6 6
Home equity 29.8 30.5 (0.7) (2) 29.9 30.8 (0.9) (3)
Vehicles:
Loans 13.6 14.1 (0.5) (4) 13.5 14.2 (0.7) (5)
Leases 5.0 7.6 (2.6) (34) 5.4 7.9 (2.5) (32)
Other personal 8.4 10.9 (2.5) (23) 9.2 11.1 (2.0) (18)
------------------------------------------------------------------- ---------------------------
Total loans 66.8 72.7 (5.9) (8) 68.0 73.4 (5.5) (7)
Assets 70.2 76.6 (6.4) (8) 71.6 77.4 (5.8) (7)
Demand deposits 25.9 23.8 2.1 9 25.5 23.8 1.7 7
Savings 37.8 33.5 4.3 13 37.5 33.0 4.5 14
Time 24.9 30.6 (5.7) (19) 25.1 31.3 (6.2) (20)
------------------------------------------------------------------- ---------------------------
Total deposits 88.6 87.9 0.7 1 88.1 88.1 - -
Equity 6.2 6.1 0.1 2 6.2 6.0 0.2 3
CREDIT QUALITY (in millions):
Net charge-offs:
Small business commercial $ 23 $ 17 $ 6 35 $ 37 $ 27 $ 10 37
Home equity 102 93 9 10 232 166 66 40
Vehicles:
Loans (6) 42 52 (10) (19) 108 112 (4) (4)
Leases 15 20 (5) (26) 45 49 (4) (7)
Other personal 34 19 15 79 60 53 7 13
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Total consumer (6) 193 184 9 5 445 380 65 17
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Total net charge-offs (6) 216 201 15 7 482 407 75 18
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6
Retail - continued
Three Months Ended June 30 Six Months Ended June 30
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Change Change
------------------ -----------------
2002 2001 Amount Percent 2002 2001 Amount Percent
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CREDIT QUALITY - continued (in millions):
Net charge-off ratios:
Small business commercial 0.92% 0.71% 0.21% 0.74% 0.57% 0.17%
Home equity 1.37 1.22 0.15 1.55 1.08 0.47
Vehicles:
Loans (6) 1.24 1.47 (0.23) 1.60 1.58 0.02
Leases 1.20 1.07 0.13 1.67 1.23 0.44
Other personal 1.62 0.70 0.92 1.30 0.95 0.35
--------------------------------------------------------------------- --------------------------
Total consumer (6) 1.36 1.17 0.19 1.53 1.19 0.34
--------------------------------------------------------------------- --------------------------
Total net charge-offs (6) 1.29 1.11 0.18 1.42 1.11 0.31
Nonperforming assets:
Small business commercial $ 287 $ 245 $ 42 17%
Consumer (7) 1,062 804 258 32
--------------------------------------------------------------------
Total nonperforming loans 1,349 1,049 300 29
Other, including
Other Real Estate Owned ("OREO") 168 69 99 N/M
---------------------------------------------------------------------
Total nonperforming assets 1,517 1,118 399 36
Allowance for credit losses $ 1,029 $ 938 $ 91 10
Allowance to period-end loans 1.55% 1.30% 0.25%
Allowance to nonperforming loans 76% 89% (13)
Nonperforming assets to related assets 2.28% 1.54% 0.74
DISTRIBUTION:
Number of banking centers 1,773 1,808 (35) (2)
Number of ATMs 4,956 5,703 (747) (13)
Number of on-line customers (in thousands) 1,269 1,035 234 23
Number of households (in thousands) 7,102 7,499 (397) (5)
Number of business customers (in thousands) 488 530 (42) (8)
Number of debit cards issued (in thousands) 4,492 4,378 114 3
INVESTMENTS:
Investment sales volume (in millions) $ 1,451 $ 1,141 $ 310 27 $ 2,828 $ 2,279 $ 549 24
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N/M-Not meaningful.
(1) Banking fees and commissions include insurance fees, documentary fees, loan
servicing fees, commitment fees, mutual fund commissions, syndicated
management fees, leasing fees, safe deposit fees, official checks fees, ATM
interchange and miscellaneous other fee revenue.
(2) Credit card revenue includes credit card fees, merchant fees and
interchange fees.
(3) Service charges on deposits include service charges on deposits, deficient
balance fees, non-sufficient funds/overdraft fees and waived fees.
(4) Trading includes trading and foreign exchange.
(5) Ratios are based on operating income.
(6) Second quarter 2002 and 2001 results include $1 million and $24 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 credit performance of
the portfolio. In the Corporation's financial statements, these items
results in a higher provision in excess of net charge-offs.
(7) Includes consumer balances that are placed on nonaccrual status when the
collection of contractual principal or interest becomes 90 days past due.
7
Quarterly Results
-----------------
Retail had second quarter operating income of $348 million, up $35 million,
or 11%, from the year-ago quarter, primarily reflecting lower noninterest
expense. Operating income was up $5 million, or 1%, from the first quarter of
2002 due to lower provision and expense, partially offset by the reduction in
seasonal revenue from tax refund anticipation lending.
Net interest income declined $16 million, or 1%, from the year-ago quarter
due to the intentional reduction of certain segments of the auto lease and
brokered home equity portfolios. Average core deposits increased $6 billion, or
11%, driving deposit revenue growth that nearly equaled the decline in loan
revenue. Noninterest income was $356 million, relatively unchanged from the
year-ago quarter, reflecting continued strong growth in the sale of mutual funds
and annuities offset by lower mortgage origination fees.
Noninterest expense was $807 million, down $79 million, or 9%, from the
year-ago quarter, driven by lower staffing levels, the absence of goodwill
amortization and lower expense due to completed systems conversions.
The provision for credit losses was $215 million, up $15 million, or 8%,
from the prior year due to increased net charge-offs in other personal and home
equity loans. Compared to the first quarter of 2002, provision expense was down
$52 million or 19%, due to lower net charge-offs in virtually all loan
portfolios.
Nonperforming assets were $1.5 billion, up $399 million, or 36%, from the
year-ago quarter, due to increases in home equity loans. Nonperforming assets
declined $44 million, or 3%, from the prior quarter.
Year-to-Date Results
--------------------
Retail had year to date operating income of $691 million, up $37 million,
or 6%, from the year ago period largely due to lower noninterest expense.
Net interest income declined $60 million, or 2%, driven by the intentional
reduction of certain segments of the auto lease and broker home equity
portfolios. Noninterest income was $718 million, relatively unchanged from last
year.
Noninterest expense declined $137 million, or 8%, driven by lower staffing
levels and the absence of goodwill amortization.
The provision for credit losses was $482 million, up $38 million, or 9%,
from the prior year due primarily to higher net charge-offs in home equity loans
partially offset by the absence of reserve increases. Nonperforming assets were
$1.5 billion, up $399 million, or 36%, from the year-ago quarter, due to
increases in home equity loans.
8
Commercial Banking
Commercial Banking offers a broad array of products, including global cash
management, capital markets, commercial cards, investment management, and
lending to Corporate Banking and Middle Market Banking customers.
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------
Change Change
-------------- ---------------
2002 (8) 2001 Amount % 2002 (8) 2001 Amount %
----------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Net interest income-FTE $ 598 $ 699 $ (101) (14)% $ 1,253 $ 1,414 $ (161) (11)%
Banking fees and commissions 224 183 41 22 399 346 53 15
Credit card revenue 20 22 (2) (9) 34 44 (10) (23)
Service charges on deposits 173 149 24 16 357 281 76 27
Fiduciary and investment
management fees (9) - (1) 1 N/M (1) (2) 1 (50)
Investment securities losses (1) - (1) N/M (1) - (1) N/M
Trading 81 67 14 21 107 144 (37) (26)
Other income (loss) (43) (42) (1) (2) (70) (48) (22) (46)
-------------------------------------------------------------------------- ---------------------------
Noninterest income 454 378 76 20 825 765 60 8
-------------------------------------------------------------------------- ---------------------------
Total revenue 1,052 1,077 (25) (2) 2,078 2,179 (101) (5)
Provision for credit losses 274 240 34 14 555 504 51 10
Salaries and employee benefits (12) 261 252 9 4 520 511 9 2
Other expense (12) 331 308 23 7 632 614 18 3
-------------------------------------------------------------------------- ---------------------------
Noninterest expense 592 560 32 6 1,152 1,125 27 2
-------------------------------------------------------------------------- ---------------------------
Pretax operating income-FTE 186 277 (91) (33) 371 550 (179) (33)
Tax expense and FTE adjustment 42 80 (38) (48) 84 157 (73) (46)
-------------------------------------------------------------------------- ---------------------------
Operating income $ 144 $ 197 $ (53) (27) $ 287 $ 393 $ (106) (27)
Restructuring-related charges (reversals),
net of tax (3) - (3) N/M (3) - (3) N/M
-------------------------------------------------------------------------- ---------------------------
Net income $ 147 $ 197 $ (50) (25) $ 290 $ 393 $ (103) (26)
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Memo: Revenue by activity (10):
Lending-related revenue 437 510 (73) (14) 849 1,049 (200) (19)
Global Treasury Services 399 393 6 2 828 776 52 7
Capital Markets (11) 196 166 30 18 364 330 34 10
Other 20 8 12 N/M 37 24 13 54
FINANCIAL PERFORMANCE:
Return on equity (5) 8% 11% (3)% 8% 11% (3)%
Efficiency ratio (5) 56 52 4 55 52 3
Headcount-full-time (12):
Corporate Banking
(including Capital Markets) 2,315 2,899 (584) (20)
Middle Market 3,023 3,388 (365) (11)
Global Treasury Services 3,299 3,072 227 7
Operations, Technology,
and other Administration 2,270 2,201 69 3
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Total headcount-full-time 10,907 11,560 (653) (6)
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9
Commercial Banking - continued
Three Months Ended June 30 Six Months Ended June 30
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Change Change
---------------- ----------------
2002 (8) 2001 Amount Percent 2002 (8) 2001 Amount Percent
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ENDING BALANCES (in billions):
Loans $ 64.9 $ 80.2 $ (15.3) (19)%
Assets 94.3 109.4 (15.1) (14)
Demand deposits 24.2 22.1 2.1 10
Savings 2.8 2.9 (0.1) (3)
Time 8.7 8.2 0.5 6
Foreign offices 8.4 9.9 (1.5) (15)
---------------------------------------------------------------------
Total deposits 44.1 43.1 1.0 2
Equity 7.4 7.3 0.1 1
AVERAGE BALANCES (in billions):
Loans $ 67.0 $ 82.7 $ (15.7) (19) $ 69.1 $ 84.9 $ (15.8) (19)
Assets 94.4 109.7 (15.3) (14) 96.8 109.9 (13.1) (12)
Demand deposits 22.4 20.8 1.6 8 22.5 20.6 1.9 9
Savings 2.8 2.7 0.1 4 2.9 2.7 0.2 7
Time 9.7 6.6 3.1 47 13.5 6.3 7.2 N/M
Foreign offices 8.3 9.5 (1.2) (13) 8.2 8.3 (0.1) (1)
--------------------------------------------------------------------- ----------------------------
Total deposits 43.2 39.6 3.6 9 47.1 37.9 9.2 24
Equity 7.4 7.3 0.1 1 7.4 7.3 0.1 1
CREDIT QUALITY (in millions):
Net Commercial Banking charge-offs $ 274 $ 239 $ 35 15 $ 555 $ 488 $ 67 14
Net Commercial Banking charge-off ratio 1.64% 1.16% 0.48% 1.61% 1.15% 0.46%
Nonperforming assets:
Commercial Banking
nonperforming loans $ 2,297 $ 1,753 $ 544 31
Other, including OREO 30 18 12 67
---------------------------------------------------------------------
Total nonperforming assets 2,327 1,771 556 31
Allowance for credit losses $ 3,071 $ 3,067 $ 4 -
Allowance to period-end loans 4.73% 3.82% 0.91%
Allowance to nonperforming loans 134 175 (41)
Nonperforming assets to related assets 3.58 2.21 1.38
CORPORATE BANKING (in billions):
Loans-ending balance $ 31.8 $ 43.3 $ (11.5) (27)
-average balance 33.3 45.7 (12.4) (27) 34.7 47.8 (13.1) (27)
Deposits-ending balance $ 22.9 $ 23.1 $ (0.2) (1)
-average balance 21.7 20.8 0.9 4 25.4 19.4 6.0 31
Credit quality (in millions):
Net charge-offs $ 168 $ 155 $ 13 8 $ 331 $ 341 $ (10) (3)
Net charge-off ratio 2.02% 1.36% 0.66% 1.91% 1.43% 0.48%
Nonperforming loans $ 1,161 $ 1,050 $ 111 11
Nonperforming loans to total loans 3.65% 2.42% 1.23%
SYNDICATIONS:
Lead arranger deals:
Volume (in billions) $ 18.1 $ 12.8 $ 5.3 41 $ 33.0 $ 27.3 $ 5.7 21
Number of transactions 70 56 14 25 115 105 10 10
--------------------------------------------------------------------------------------------------------------------
10
Commercial Banking - continued
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 (8) 2001 Amount Percent 2002 (8) 2001 Amount Percent
-------------------------------------------------------------------------------------------------------------------------
SYNDICATIONS - continued
League table standing-rank 4 4 - -
League table standing-market share 5% 3% 2%
-------------------------------------------------------------------------------------------------------------------------
MIDDLE MARKET BANKING (in billions):
Loans--ending balance $ 33.1 $ 36.9 $ (3.8) (10)%
--average balance 33.7 37.0 (3.3) (9) 34.4 37.1 (2.7) (7)
Deposits--ending balance 21.2 20.0 1.2 6
--average balance 21.5 18.9 2.6 14 21.7 18.5 3.2 17
Credit quality (in millions):
Net charge-offs $ 106 $ 84 $ 22 26 $ 224 $ 147 $ 77 52
Net charge-off ratio 1.26% 0.91% 0.35% 1.30% 0.79% 0.51%
Nonperforming loans $1,136 $ 703 $ 433 62
Nonperforming loans to total loans 3.43% 1.91% 1.53%
-------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see page 7.
(8) Results include the effect of consolidating Anexsys, which had an
immaterial impact on revenue and expense and no impact on net income for
the three months ended June 30, 2002 or the year to date.
(9) Fiduciary and investment management fees include asset management fees,
personal trust fees, other trust fees and advisory fees.
(10) Prior periods have been adjusted to conform to the current organization.
(11) Capital markets includes trading revenues and underwriting, syndicated
lending and advisory fees.
(12) Prior period data has been adjusted for the transfer of the National Retail
Lockbox Operations and Cash Vault Services business from Commercial to
Corporate.
Quarterly Results
-----------------
Commercial Banking had second quarter operating income of $144 million,
down $53 million, or 27%, from the year-ago quarter. Results reflected lower net
interest income, a higher provision for credit losses and higher noninterest
expense, partially offset by higher noninterest income. Operating income was
essentially unchanged from the previous quarter, reflecting higher revenue,
offset by higher noninterest expense.
Net interest income of $598 million declined $101 million, or 14%, driven
by a reduction in average loans of $15.7 billion, or 19%, from the year-ago
quarter. Net interest income declined $57 million, or 9%, from the previous
quarter due to a $7.9 billion reduction in average deposits (primarily due to
several large commercial customer balances that fluctuate quarter to quarter)
and a reduction in average loans of $4.1 billion.
Noninterest income was $454 million, up $76 million, or 20%, from the
second quarter of 2001. Banking fees and commissions increased $41 million, or
22%, primarily due to growth in the loan syndication and asset-backed finance
businesses. Service charges on deposits increased $24 million, or 16%, from the
year-ago quarter as Global Treasury Services clients shifted their payment
method to fees due to the lower value of their compensating deposit balances.
Trading revenue increased $14 million, or 21%, reflecting an increase in the
fair value of credit derivatives used to manage credit risk, partially offset by
lower fixed income trading. Other income/loss was essentially unchanged from the
year-ago quarter, but declined $16 million from the previous quarter, primarily
due to $20 million of writedowns on loans accounted for as held for sale.
Noninterest expense was $592 million, up $32 million, or 6%, from the
year-ago quarter, which included $18 million from the consolidation of Anexsys
in the first quarter of 2002, as well as higher technology expenses.
Corporate Banking net charge-offs were $168 million, or 2.02% of average
loans, up from 1.36% a year-ago and 1.81% in the first quarter. Second quarter
net charge-offs included $36 million of loans sold or initially reclassified to
held for sale, compared to $68 million in the year-ago quarter and $63 million
in the first quarter. Middle Market net charge-offs were $106 million, or 1.26%
of average loans, up from 0.91% in the year-ago quarter and down from 1.34% in
the first quarter.
The allowance for credit losses at June 30, 2002, was $3.1 billion,
unchanged from the first quarter, and represented 4.73% of period-end loans.
Nonperforming loans at June 30, 2002, were $2.3 billion, up $40 million, or 2%,
from the first quarter, driven by an increase of $49 million, or 5%, in Middle
Market nonperforming loans.
11
Year-to-Date Results
--------------------
Commercial Banking had year-to-date operating income of $287 million, down
$106 million, or 27%, from the prior year. Results reflected lower net interest
income, a higher provision for credit losses and higher noninterest expense,
partially offset by higher noninterest income.
Net interest income was $1.3 billion, down $161 million, or 11%, from the
prior year, driven by a reduction in average loans of $15.8 billion, or 19%,
primarily in Corporate Banking.
Noninterest income was $825 million, up $60 million, or 8%, from the first
half of 2001. Banking fees and commissions increased $53 million, or 15%,
primarily due to growth in the asset-backed finance, loan syndication and debt
underwriting businesses. Service charges on deposits increased $76 million, or
27%, as Global Treasury Services clients shifted their payment method to fees
due to the lower value of their compensating deposit balances. Trading revenue
decreased $37 million, or 26%, primarily due to lower fixed income and foreign
exchange trading. Other income (loss) deteriorated $22 million, or 46%,
primarily due to writedowns in loans held for sale.
Noninterest expense was $1.2 billion, up $27 million, or 2%, from the prior
year, which included $34 million from the consolidation of Anexsys effective
January 1, 2002.
The provision for credit losses was $555 million, up $51 million or 10%,
from 2001. Total net charge-offs were $555 million in the first half of 2002,
including $118 million for loans sold and initially reclassified to held for
sale, compared to $157 million in the first half of 2001. This represented 1.61%
of average loans, up from 1.15% in the prior year. Nonperforming loans at June
30, 2002 were $2.3 billion, up $544 million, or 31%, from the prior year period
driven by a $433 million, or 62%, increase in Middle Market nonperforming loans.
12
Credit Card
Credit Card is the third largest credit card provider in the United States
and the largest VISA(R) credit card issuer in the world with $67 billion in
managed credit card receivables.
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 (13) 2001 Amount % 2002 (13) 2001 Amount %
-------------------------------------------------------------------------------------------------------------------------
(Dollars in millions-managed basis)
Net interest income--FTE $ 1,526 $ 1,458 $ 68 5% $3,081 $2,849 $ 232 8%
Banking fees and commissions 17 22 (5) (23) 42 47 (5) (11)
Credit card revenue 441 278 163 59 836 525 311 59
Other income (loss) 28 36 (8) (22) 10 73 (63) (86)
-------------------------------------------------------------------- -------------------------------
Noninterest income 486 336 150 45 888 645 243 38
-------------------------------------------------------------------- -------------------------------
Total revenue 2,012 1,794 218 12 3,969 3,494 475 14
Provision for credit losses 926 962 (36) (4) 1,869 1,912 (43) (2)
Salaries and employee benefits 142 124 18 15 288 253 35 14
Other expense 462 398 64 16 937 783 154 20
-------------------------------------------------------------------- -------------------------------
Noninterest expense 604 522 82 16 1,225 1,036 189 18
-------------------------------------------------------------------- -------------------------------
Pretax operating income--FTE 482 310 172 55 875 546 329 60
Tax expense and FTE adjustment 186 117 69 59 340 205 135 66
-------------------------------------------------------------------- -------------------------------
Operating income $ 296 $ 193 $ 103 53 $ 535 $ 341 $ 194 57
Restructuring-related charges
(reversals), net of tax (12) - (12) N/M (12) - (12) N/M
-------------------------------------------------------------------- -------------------------------
Net income $ 308 $ 193 $ 115 60 $ 547 $ 341 $ 206 60
-------------------------------------------------------------------------------------------------------------------------
Memo: Net securitization gains
(amortization) (13) (19) 6 32 (44) (20) (24) N/M
FINANCIAL PERFORMANCE:
% of average outstandings:
Net interest income--FTE 9.29% 9.25% 0.04% 9.40% 8.94% 0.46%
Provision for credit losses 5.64 6.11 (0.47) 5.70 6.00 (0.30)
Noninterest income 2.96 2.13 0.83 2.71 2.02 0.69
Risk adjusted margin 6.61 5.27 1.34 6.41 4.96 1.45
Noninterest expense 3.68 3.31 0.37 3.74 3.25 0.49
Pretax income--FTE 2.93 1.97 0.96 2.67 1.71 0.96
-------------------------------------------------------------------- -------------------------------
Operating income 1.80 1.22 0.58 1.63 1.07 0.56
Restructuring-related charges
(reversals), net of tax (0.07) - (0.07) (0.04) - (0.04)
-------------------------------------------------------------------- -------------------------------
Net income 1.87 1.22 0.65 1.67 1.07 0.60
-------------------------------------------------------------------------------------------------------------------------
Return on equity (5) 19 12 7 17 11 6
Efficiency ratio (5) 30 29 1 31 30 1
Headcount--full-time 10,298 10,785 (487) (5)
ENDING BALANCES (in billions):
Owned-held in portfolio $ 5.1 $ 2.8 2.3 82
Owned-held for sale 4.0 3.4 0.6 18
Seller's interest 21.9 17.0 4.9 29
-------------------------------------------------------------------
Loans on balance sheet 31.0 23.2 7.8 34
Securitized loans 35.8 39.8 (4.0) (10)
-------------------------------------------------------------------
Managed loans 66.8 63.0 3.8 6
Assets 69.8 64.9 4.9 8
Equity 6.4 6.3 0.1 2
-------------------------------------------------------------------------------------------------------------------------
13
Credit Card - continued
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------------------------
Change Change
------------------- ------------------
2002 (13) 2001 Amount Percent 2002 (13) 2001 Amount Percent
------------------------------------------------------------------------------------------------------------------------------------
(Managed basis)
AVERAGE BALANCES (in billions):
Owned $ 8.5 $ 6.0 $ 2.5 42% $ 7.9 $ 5.6 $ 2.3 41%
Seller's interest 21.9 16.6 5.3 32 22.2 18.6 3.6 19
-------------------------------------------------------------------------------- -----------------------------
Loans on balance sheet 30.4 22.6 7.8 35 30.1 24.2 5.9 24
Securitized 35.5 40.6 (5.1) (13) 36.0 40.1 (4.1) (10)
-------------------------------------------------------------------------------- -----------------------------
Loans 65.9 63.2 2.7 4 66.1 64.3 1.8 3
Assets 70.0 65.3 4.7 7 70.7 66.8 3.9 6
Equity 6.4 6.3 0.1 2 6.4 6.3 0.1 2
CREDIT QUALITY (in millions):
Net charge-offs:
Credit card-managed $ 926 $ 962 $ (36) (4) $ 1,869 $ 1,912 $ (43) (2)
Net charge-off ratios:
Credit card-managed 5.62% 6.09% (0.47)% 5.66% 5.95% (0.29)%
12-month lagged (14) 5.86 5.82 0.04 5.81 5.74 0.07
Delinquency ratio:
30+ days 3.83 4.10 (0.27)
90+ days 1.72 1.78 (0.06)
Allowance for credit losses $ 396 $ 197 $ 199 N/M
Allowance to period-end
owned loans (15) 4.35% 3.18% 1.17%
OTHER DATA:
Charge volume (in billions) $ 38.4 $ 34.4 $ 4.0 12 $ 72.4 $ 66.9 $ 5.5 8
New accounts opened (in thousands) 1,283 1,003 280 28 2,224 1,778 446 25
Credit cards issued (in thousands) 53,346 50,449 2,897 6
Number of FirstUSA.com
customers (in millions) 2.6 2.6 - -
Paymentech:
Bank card volume (in millions) $ 30,076 $ 28,603 $ 1,473 5 $58,037 $55,784
For additional footnote detail see page 7 and 11.
(13) Results include the effect of consolidating Paymentech beginning in the
first quarter of 2002. The impact to second quarter and year to date
results was to increase net interest income by $3 million and $6 million,
noninterest income by $76 million and $153 million, expense by $67 million
and $137 million, respectively; there was no impact on net income.
(14) 2002 ratios include Wachovia net charge-offs but exclude Wachovia 2001
loans.
(15) Excluding loans held for sale, the allowance to period end loans would have
been 7.74% in the second quarter of 2002 and 7.10% in the second quarter of
2001.
Quarterly Results
-----------------
Credit Card had second quarter operating income of $296 million, up $103
million, or 53%, from the year-ago quarter, reflecting lower net credit losses,
lower operating expenses and the addition of the Wachovia business. Operating
income improved $57 million, or 24%, from the first quarter due to a gain on the
sale of a portfolio, increased securitization activity, lower credit costs and
lower operating expenses. The 2002 results reflected the consolidation of the
Corporation's interest in Paymentech, a leading merchant processor, which was
recorded under the equity method of accounting prior to 2002. Year-over-year,
this consolidation increased certain balance sheet categories, noninterest
income by $76 million, and noninterest expense by $67 million, but had no impact
on net income.
Managed loans were $66.8 billion at June 30, 2002, up $3.8 billion, or 6%,
from the year-ago period, including the addition of the Wachovia business.
Managed loans increased $2.0 billion, or 3%, from March 31, 2002. Credit Card
opened 1.28 million new accounts during the quarter, a 28% increase from the
year-ago quarter and the highest level in nearly three years.
14
Total revenue was $2.0 billion for the quarter, up $218 million, or 12%,
from one year ago, mostly driven by the addition of the Wachovia business and
the consolidation of Paymentech.
Noninterest expense totaled $604 million, up $82 million, or 16%, from the
year-ago quarter, reflecting the Paymentech consolidation, higher marketing
expense and the addition of the Wachovia business, partially offset by lower
processing costs.
The managed provision for credit losses was $926 million, a decrease of $36
million, or 4%, from the year-ago quarter. Second quarter results included the
provision for credit losses on the Wachovia business, which were not included in
the year-ago quarter. The managed charge-off rate was 5.62%, compared to 6.09%
in the year-ago quarter and 5.69% in the first quarter. The managed 30-day
delinquency rate was 3.83%, down from 4.10% in the year-ago quarter and 4.27% in
the first quarter.
Year-to-Date Results
--------------------
Credit Card had operating income of $535 million for the 2002 period, up
$194 million, or 57%, from the 2001 period, reflecting lower net credit losses
and the addition of the Wachovia business.
Total revenue was $4.0 billion for the 2002 period, up $475 million, or 14%,
from the 2001 period, driven by the addition of the Wachovia business, the
consolidation of Paymentech, the benefit of lower interest rates and a gain on
the sale of a portfolio, partially offset by lower volume-related revenue.
Noninterest expense totaled $1.2 billion for the 2002 period, up $189
million, or 18%, from the 2001 period, reflecting the Paymentech consolidation,
higher marketing expense and the addition of the Wachovia business, partially
offset by lower processing costs.
The managed provision for credit losses was $1.9 billion for the 2002
period, a $43 million, or 2%, decrease from the 2001 period, reflecting lower
losses.
15
Investment Management
The Investment Management Group (IMG) provides investment, insurance, trust
and private banking services to individuals. IMG also provides investment and
investment related services, including retirement and custody services,
securities lending and corporate trust to institutions.
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -----------------------
2002 2001 Amount % 2002 2001 Amount %
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Net interest income-FTE $ 105 $ 107 $ (2) (2)% $ 220 $ 211 $ 9 4%
Banking fees and commissions 142 119 23 19 274 229 45 20
Service charges on deposits 4 4 - - 9 8 1 13
Fiduciary and investment
management fees 187 184 3 2 377 372 5 1
Other income 9 1 8 N/M 11 6 5 83
------------------------------------------------------------------------------ -----------------------------
Noninterest income 342 308 34 11 671 615 56 9
------------------------------------------------------------------------------ -----------------------------
Total revenue 447 415 32 8 891 826 65 8
Provision for credit losses - 13 (13) N/M 5 16 (11) (69)
Salaries and employee benefits 138 145 (7) (5) 280 290 (10) (3)
Other expense 125 123 2 2 240 255 (15) (6)
------------------------------------------------------------------------------ -----------------------------
Noninterest expense 263 268 (5) (2) 520 545 (25) (5)
------------------------------------------------------------------------------ -----------------------------
Pretax operating income-FTE 184 134 50 37 366 265 101 38
Tax expense and FTE adjustment 69 51 18 35 137 100 37 37
------------------------------------------------------------------------------ -----------------------------
Operating income $ 115 $ 83 $ 32 39 $ 229 $ 165 $ 64 39
Restructuring-related (reversals) charges,
net of tax (1) - (1) N/M (1) - (1) N/M
------------------------------------------------------------------------------ -----------------------------
Net income $ 116 $ 83 $ 33 40 $ 230 $ 165 $ 65 39
---------------------------------------------------------------------------------------------------------------------------------
Memo: Insurance revenues $ 116 $ 103 $ 13 12 $ 239 $ 204 $ 35 17
FINANCIAL PERFORMANCE:
Return on equity (5) 42% 33% 9% 42% 33% 9%
Efficiency ratio (5) 59 65 (6) 58 66 (8)
Headcount--full-time 5,936 6,371 (435) (7)
ENDING BALANCES (in billions):
Loans $ 7.1 $ 7.1 $ - -
Assets 8.5 8.4 0.1 1
Demand deposits 2.4 2.3 0.1 4
Savings 3.9 2.5 1.4 56
Time 3.2 3.3 (0.1) (3)
Foreign offices 0.3 0.1 0.2 N/M
------------------------------------------------------------------------------
Total deposits 9.8 8.2 1.6 20
Equity 1.1 1.0 0.1 10
AVERAGE BALANCES (in billions):
Loans $ 7.0 $ 6.9 $ 0.1 1 $ 7.0 $ 6.9 $ 0.1 1
Assets 8.5 8.1 0.4 5 8.4 8.1 0.3 4
Demand deposits 2.0 1.9 0.1 5 2.0 2.0 - -
Savings 4.0 2.7 1.3 48 3.9 2.7 1.2 44
Time 3.4 3.3 0.1 3 3.3 3.3 - -
Foreign offices 0.2 0.2 - - 0.2 0.2 - -
------------------------------------------------------------------------------ -----------------------------
Total deposits 9.6 8.1 1.5 19 9.4 8.2 1.2 15
Equity 1.1 1.0 0.1 10 1.1 1.0 0.1 10
---------------------------------------------------------------------------------------------------------------------------------
16
Investment Management - continued
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
-------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY (in millions):
Net charge-offs:
Commercial $ (1) $ 10 $ (11) N/M $ 1 $ 10 $ (9) (90)
Consumer 1 3 (2) (67) 4 3 1 33
------------------------------------------------------------------- ---------------------------------------
Total net charge-offs - 13 (13) N/M 5 13 (8) (62)
Net charge-off ratios:
Commercial -0.18% 1.07% (1.25)% 0.05% 0.61% (0.56)%
Consumer 0.13 0.37 (0.24) 0.21 0.17 0.04
------------------------------------------------------------------- ----------------------------
Total net charge-off ratio - 0.75 (0.75) 0.14 0.38 (0.24)
Nonperforming assets:
Commercial $ 33 $ 37 $ (4) (11)%
Consumer 5 5 - -
-------------------------------------------------------------------
Total nonperforming loans 38 42 (4) (10)
Other, including OREO 1 - 1 -
-------------------------------------------------------------------
Total nonperforming assets 39 42 (3) (7)
Allowance for credit losses $ 25 $ 25 $ - -
Allowance to period-end loans 0.35% 0.35% -
Allowance to nonperforming loans 66 60 6
Nonperforming assets to related assets 0.55 0.59 (0.04)
ASSETS UNDER MANAGEMENT
ENDING BALANCES (in billions):
Mutual funds $ 90.2 $ 74.4 $ 15.8 21
Other 55.8 57.9 (2.1) (4)
-------------------------------------------------------------------
Total 146.0 132.3 13.7 10
By type:
Money market $ 62.8 $ 47.8 $ 15.0 31
Equity 42.2 49.8 (7.6) (15)
Fixed income 41.0 34.7 6.3 18
-------------------------------------------------------------------
Total 146.0 132.3 13.7 10
By channel: (10)
Private Client Services $ 46.4 $ 52.1 $ (5.7) (11)
Retail Brokerage 7.2 7.3 (0.1) (1)
Institutional 63.4 56.4 7.0 12
Commercial Cash Sweep 9.2 8.9 0.3 3
Capital Markets 3.7 0.5 3.2 N/M
External (16) 7.5 1.2 6.3 N/M
All other direct (17) 8.6 5.9 2.7 46
--------------------------------------------------------------------------------
Total 146.0 132.3 13.7 10
Morningstar Rankings: (18)
% of 4 and 5 ranked funds 51% 54% (3)%
% of 3+ ranked funds 91 95 (4)
TRUST ASSETS ENDING BALANCES:
Trust assets under
administration (in billions) $334.8 $342.3 $ (7.5) (2)
-------------------------------------------------------------------------------------------------------------------------
17
Investment Management - continued
Three Months Ended June 30 Six Months Ended June 30
---------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
------------------------------------------------------------------------------------------------------------------------------------
CORPORATE TRUST SECURITIES
ENDING BALANCES:
Corporate trust securities
under administration (in billions) $1,094.7 $892.3 $202.4 23
RETAIL BROKERAGE:
Mutual fund sales (in millions) $ 637 $ 559 $ 78 14% $1,217 $1,173 $ 44 4%
Annuity sales 814 582 232 40 1,611 1,106 505 46
-------------------------------------------------------------------------------- -----------------------------
Total sales 1,451 1,141 310 27 2,828 2,279 549 24
Number of customers--end of
period (10) (in thousands) 667 618 49 8
Market value customer assets--end of
period (in billions):
Brokerage 16.2 16.8 (0.6) (4)
Annuity account value (in billions) 10.2 7.6 2.6 34
--------------------------------------------------------------------------------
Total market value (10) 26.4 24.4 2.0 8
Number of registered sales representatives 761 704 57 8
Number of licensed retail bankers 3,131 2,904 227 8
PRIVATE CLIENT SERVICES:
Number of Private Client advisors 668 682 (14) (2)
Number of Private Client offices 105 105 - -
Market value customer assets--end of
period (10) (in billions) $ 66.4 $ 76.0 $ (9.6) (13)
Ending balances (in billions):
Loans $ 7.0 $ 6.9 $ 0.1 1
Deposits 8.2 6.6 1.6 24
Average balances (in billions):
Loans $ 6.9 $ 6.9 $ - - $ 6.9 $ 6.9 $ - -
Deposits 8.4 6.9 1.5 22 8.3 7.0 1.3 19
------------------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see pages 7, 11 and 14.
(16) Includes broker/dealers, trust companies, and registered investment
advisors that sell, or offer, One Group funds.
(17) One Group funds invested in other One Group funds and other mutual funds
sub-advised.
(18) Morningstar changed the rating process effective June 30, 2002 with no
prior period restatements.
Quarterly Results
-----------------
Investment Management had second quarter operating income of $115 million,
up $32 million, or 39%, from the year-ago quarter, driven by higher revenue,
lower provision and reduced expenses. Compared to the first quarter of 2002,
operating income increased $1 million, or 1%.
Assets under management at quarter-end were $146 billion, up $13.7 billion,
or 10%, from a year ago. One Group(R) mutual fund assets grew to $90.2 billion
in the second quarter, up $15.8 billion, or 21%, year-over-year. The increase
was primarily due to significant growth in money market assets.
One Group funds performance remained strong during the second quarter.
Based on one-year Lipper rankings, 45% of client assets were in funds rated in
the top quartile, up from 33% in the first quarter, and 74% of assets were in
funds rated in the top two quartiles, up from 70% in the first quarter.
Revenue increased $32 million, or 8%, year-over-year to $447 million,
primarily driven by the 27% increase in the sale of mutual funds and annuities
to retail clients and the 10% growth in assets under management. Additionally,
effective April 1 the distribution function for the One Group funds was brought
in house, resulting in an increase in revenue and corresponding increase in
expense of $9 million.
18
Noninterest expense was $263 million, down $5 million, or 2%, from a year
ago, driven primarily by lower compensation costs, partially offset by higher
commission costs. Overall headcount was down 7%, however the number of
registered sales representatives increased 8%, driving higher retail brokerage
sales production.
Year-to-Date Results
--------------------
Investment Management reported year-to-date operating income of $229
million, up $64 million, or 39%, from the year-ago period, driven by higher
revenue, lower provision and reduced expenses.
Year-to-date revenue increased $65 million, or 8%, from the year-ago period
to $891 million, primarily driven by the 24% increase in the sale of mutual
funds and annuities to retail clients and the 10% growth in assets under
management. Additionally, effective April 1st the distribution company for the
One Group funds was in-sourced resulting in an increase in revenue and
corresponding increase in expense of $9 million.
Noninterest expense was $520 million, down $25 million, or 5%, from the
year-ago period, driven primarily by lower compensation costs, partially offset
by higher commission costs.
19
Corporate
Corporate includes Treasury, fixed income and principal investment
portfolios, unallocated corporate expenses, and any gains or losses from
corporate transactions.
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 2001 Amount % 2002 2001 Amount %
-------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Net interest income (expense)-FTE (19) $ (96) $ (240) $ 144 60% $(137) $(441) $ 304 69%
Banking fees and commissions (4) (1) (3) N/M (9) (8) (1) (13)
Credit card revenue 1 (2) 3 N/M - (1) 1 N/M
Service charges on deposits 3 7 (4) (57) 6 8 (2) (25)
Fiduciary and investment
management fees 1 1 - - 1 1 - -
Investment securities gains (losses) 97 69 28 (41) 79 (28) 107 N/M
Trading (7) (7) - - (16) (17) 1 6
Other income (loss) 53 63 (10) (16) 113 206 (93) (45)
------------------------------------------------------------------- ---------------------------
Noninterest income (20) 144 130 14 11 174 161 13 8
------------------------------------------------------------------- ---------------------------
Total revenue (loss) 48 (110) 158 N/M 37 (280) 317 N/M
Provision for credit losses - - - - 15 - 15 N/M
Salaries and employee benefits 202 170 32 19 387 294 93 32
Other expense 33 (97) 130 N/M (67) (221) 154 70
------------------------------------------------------------------- ---------------------------
Noninterest expense (21) 235 73 162 N/M 320 73 247 N/M
------------------------------------------------------------------- ---------------------------
Pretax operating loss-FTE (187) (183) (4) (2) (298) (353) 55 16
Tax expense (benefit) and FTE
adjustment (87) (103) 16 16 (146) (185) 39 21
------------------------------------------------------------------- ---------------------------
Operating income (loss) $ (100) $ (80) $ (20) (25) $(152) $(168) $ 16 10
Restructuring-related charges
(reversals), net of tax (13) - (13) N/M (13) - (13) N/M
------------------------------------------------------------------- ---------------------------
Net income (loss) $ (87) $ (80) $ (7) (9) $(139) $(168) $ 29 (17)
=========================================================================================================================
FINANCIAL PERFORMANCE:
Headcount--full-time (12) 13,828 14,453 (625) (4)
ENDING BALANCES (in billions):
Loans $ 0.3 $ 0.7 $ (0.4) (57)
Assets 63.9 53.5 10.4 19
Memo:
Treasury securities 38.4 28.2 10.2 36
Principal investments 2.4 3.4 (1.0) (29)
Deposits 14.9 25.4 (10.5) (41)
Equity 0.5 (1.5) 2.0 N/M
AVERAGE BALANCES (in billions):
Loans $ 0.4 $ 0.9 $ (0.5) (56) $ 0.4 $ 0.6 $ (0.2) (33)
Assets 48.3 49.1 (0.8) (2) 48.2 46.8 1.4 3
Deposits 14.2 26.2 (12.0) (46) 15.1 27.0 (11.9) (44)
Equity 0.5 (1.6) 2.1 N/M 0.2 (1.7) 1.9 N/M
-------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see pages 7, 11, 14 and 18.
(19) Net interest income primarily includes Treasury results and interest spread
on investment related activities.
(20) Noninterest income primarily includes the gains and losses from investment
activities and other corporate transactions.
(21) Noninterest expense primarily includes corporate expenses not allocated to
the lines of business.
Quarterly Results
-----------------
Corporate had an operating loss of $100 million in the second quarter,
compared with an operating loss of $80 million in the 2001 second quarter and
$52 million in the 2002 first quarter.
20
Net interest expense was $96 million in the second quarter, down $144
million from the year-ago quarter. The improvement reflected lower interest
rates, which reduced the Corporation's funding costs. The $55 million increase
from the previous quarter was predominately associated with transactions
executed to reduce the Corporation's earnings sensitivity to rising interest
rates.
Noninterest income of $144 million was up $14 million, or 11%, from the
year-ago quarter and $114 million higher than the previous quarter. Net
investment securities gains were $97 million, which included a $261 million gain
on sale of GE Monogram, partially offset by net writedowns in the investment
securities and principal investments portfolios. These results represented an
improvement of $28 million, or 41%, from the year-ago quarter and $115 million
from the previous quarter.
Provision for other loan assets was zero, compared to $15 million in the
previous quarter.
Unallocated corporate expenses were $235 million, compared to $73 million
in the year-ago quarter and $85 million in the previous quarter. The current
quarter included $89 million of expenses related to terminating and
renegotiating certain vendor contracts.
Salaries and employee benefits for the second quarter 2002 included $12
million expense related to adopting the fair value method of accounting for
stock option and stock purchase plans. For the six months ended June 30, 2002,
the net income and fully-diluted earnings per share impacts were $8 million and
$0.01, respectively. (The impact on the first quarter 2002 is immaterial as
annual stock option awards were granted in April.) The full year 2002 net income
and earnings per share impacts are estimated to be $28 million and $0.02,
respectively, based upon the following assumptions:
Pro-forma 2002
Estimate (27)
-------------
Net options granted or expected to be granted in 2002 (22) 19.4 million
Estimated fair value per option (23) $8.22 - $13.23
Fair value to be recognized in compensation expense over the
vesting period (primarily 5 years (24)) $243 million
Straight-line amortization period (24) 5 years
Estimated 2002 annual compensation expense (25) $44 million
Estimated 2002 net income impact (26) $28 million
Estimated fully-diluted net income per share impact $0.024
Assuming Bank One were to continue activity in its stock-based plans at
comparable levels for the next six years and assuming all fair value and vesting
assumptions remain essentially unchanged, then in 2007 the impact would be
approximately:
Pro-forma 2007
Estimate (27)
-------------
Estimated 2007 annual compensation expense (25) $250 million
Estimated 2007 net income impact $150 million
Estimated fully-diluted net income per share impact $ 0.13
(22) Options granted are net of expected forfeitures based upon Bank One's
historical experience and will change over time due to actual experience.
Under the terms of the stock option plan, up to 2% of the outstanding
common shares are authorized for issuance per year, or 24 million shares in
2002, and unused awards may be carried over to future years.
(23) Fair values vary for stock options and employee stock purchase plans
primarily due to varying assumptions. The fair value estimate for the April
2002 stock option grant was $13.23 per option. Fair values are estimated
using the Black-Scholes option pricing model. Management will refine the
methodology of calculating fair value for new grants and consider the
market value of comparable traded securities.
(24) Stock options generally vest pro-rata over 5 years. Shares purchased under
the employee stock purchase plan, estimated to be 2 million shares, have an
18-24 month vesting period.
(25) Assumes amortization begins at the time of grant in the quarter issued.
(26) 2001 Annual Report disclosure includes pro-forma impacts for all
outstanding options. Under the requirements of SFAS 123, the fair value
method of accounting may only be applied to new option grants.
(27) The pro-forma information may not be representative of the actual impact in
current and future years.
21
Year-to-Date Results
--------------------
Corporate had an operating loss of $152 million, down $16 million, or 10%,
from the prior year.
Net interest expense was $137 million, down $304 million, or 69%, from the
prior year, driven by lower interest rates that positively impacted the
Corporation's funding costs.
Noninterest income was $174 million, up $13 million, or 8%, from the prior
year. Net investment securities gains were $79 million, up $107 million from the
prior year, driven by the gain on sale of GE Monogram, partially offset by net
writedowns in the investment securities and principal investments portfolios.
Other income was $113 million, down $93 million, or 45%, from the prior year.
The first half of 2001 included $73 million in gains from the sale of the
Corporation's portion of the controlling equity position in EquiServe Limited
Partnership and from the sale of the Corporation's investment in Star Systems,
an ATM network.
Provision for other loan assets in the first half of 2002 was $15 million,
compared to zero in the prior year.
Unallocated corporate expenses were $320 million, up $247 million, from the
prior year. The first half of 2002 included $89 million of expenses related to
terminating and renegotiating certain vendor contracts and $12 million of
expense related to adopting the fair value method of accounting for stock option
and stock purchase plans.
CONSOLIDATED RESULTS
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.
In order to understand fundamental trends in net interest income, average
earning assets and net interest margins, it is useful to analyze financial
performance on a managed portfolio basis, which adds data on securitized loans
to reported data on loans as presented below:
Three Months Ended June 30 Six Months Ended June 30
------------------------------------------ ------------------------------------------
Change Change
--------------------- -----------------------
2002 2001 Amount % 2002 2001 Amount %
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Managed:
Net interest income-FTE basis $ 3,336 $ 3,244 $ 92 3% $ 6,875 $ 6,551 $ 324 5%
Average earning assets 261,560 279,561 (18,001) (6) 264,964 280,735 (15,771) (6)
Net interest margin 5.12% 4.65% 0.47% 5.23% 4.71% 0.52%
Reported:
Net interest income-FTE basis $ 2,078 $ 2,085 $ (7) - $ 4,313 $ 4,304 $ 9 -
Average earning assets 226,005 238,971 (12,966) (5) 228,894 240,645 (11,751) (5)
Net interest margin 3.69% 3.50% 0.19% 3.80% 3.61% 0.19%
----------------------------------------------------------------------------------------------------------------------------
The year over year improvement in net interest income and the margin was
due to lower interest rates and improved balance sheet profitability. This
reflected an increase in the percentage of funding provided by consumer deposits
and net free funds, a reduction in low margin commercial loans, and an increase
in credit card assets.
22
Noninterest Income
The components of managed noninterest income for the periods indicated are:
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 2001 Amount % 2002 2001 Amount %
-------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Banking fees and commissions $ 492 $ 431 $ 61 14% $ 937 $ 842 $ 95 11%
Credit card revenue 506 338 168 50 954 645 309 48
Service charges on deposits 376 360 16 4 769 691 78 11
Fiduciary and investment
management fees 188 184 4 2 377 371 6 2
Investment securities
gains (losses) 96 69 27 39 78 (27) 105 N/M
Trading 70 61 9 15 86 126 (40) (32)
Other income 54 65 (11) (17) 75 253 (178) (70)
------------------------------------------------------------------- ---------------------------
Managed noninterest income $1,782 $1,508 $ 274 18% $3,276 $2,901 $ 375 13%
=========================================================================================================================
In order to provide more meaningful trend analysis, credit card revenue and
total noninterest income in the above table are shown on a managed basis. Credit
card 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.
Banking fees and commissions increased from the year-ago quarter and prior
six months by $61 million and $95 million, respectively. These increases were
primarily the result of increased annuity and mutual fund sales, as well as from
the growth in the loan syndication and asset-backed finance businesses.
Managed credit card revenue in the second quarter of 2002 increased $168
million, or 50%, over the prior year period and by $309 million, or 48%, for the
first six months of 2002 over the prior year six months. These increases were
primarily due to the addition of the Wachovia business in the third quarter of
2001 and the consolidation of Paymentech beginning January 1, 2002.
Service charges on deposits increased $16 million for the second quarter of
2002 compared to the year-ago period and by $78 million for the first six months
of 2002. These increases primarily reflected improvement in Global Treasury
Services volumes and pricing, and clients shifting their payment method to fees
due to the lower value of their compensating deposit balances.
Net investment securities gains were $96 million for the second quarter of
2002, compared to $69 million in the year ago quarter. The current period
includes the gain on sale of GE Monogram, partially offset by net writedowns in
the investment securities and principal investment portfolios.
Trading produced gains of $70 million in the second quarter compared to $61
million in the second quarter of 2001 reflecting an increase in the fair value
of credit derivatives used to manage credit risk, partially offset by lower
fixed income trading. For the first six months of 2002, trading revenue declined
$40 million from the same period in the prior year primarily due to lower fixed
income and foreign exchange trading.
Other income for the six months ended June 30, 2002 decreased $178 million,
or 70%, compared to the same period in the prior year. This decrease primarily
resulted from the consolidation of Paymentech and gains on the sale of ownership
interests in EquiServe Limited Partnership and Star Systems recognized in the
prior year period.
23
Noninterest Expense
The components of noninterest expense for the periods indicated are:
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------------------------------
Change Change
--------------------- -------------------
2002 2001 Amount % 2002 2001 Amount %
-------------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Salaries and employee benefits:
Salaries $ 941 $ 929 $ 12 1% $ 1,861 $ 1,805 $ 56 3%
Employee benefits 160 143 17 12 336 287 49 17
------------------------------------------------------------------- ----------------------------
Total salaries and employee
benefits 1,101 1,072 29 3 2,197 2,092 105 5
Occupancy 170 164 6 4 328 331 (3) (1)
Equipment 99 119 (20) (17) 202 240 (38) (16)
Outside service fees and processing 372 313 59 19 672 569 103 18
Marketing and development 264 210 54 26 522 422 100 24
Telecommunication 134 95 39 41 235 204 31 15
Other intangible amortization 29 19 10 53 62 39 23 59
Goodwill amortization - 18 (18) N/M - 35 (35) N/M
Other expense 332 299 33 11 628 613 15 2
------------------------------------------------------------------- ----------------------------
Total noninterest expense
before merger and
restructuring-related charges 2,501 2,309 192 8 4,846 4,545 301 7
Merger and restructuring-related
charges (reversals) (63) (3) (60) N/M (63) (3) (60) N/M
------------------------------------------------------------------- ----------------------------
Total noninterest expense 2,438 2,306 132 6 4,783 4,542 241 5
=========================================================================================================================
Employees (1) 73,579 78,491 (4,912) (6) 73,579 78,491 (4,912) (6)
Efficiency ratio--managed basis 47.6% 48.5% (0.9)% 47.1% 48.1% (1.0)%
=========================================================================================================================
Components of noninterest expense that are primarily related to a single
business segment are discussed within that business segment.
Salaries and employee benefits in the second quarter and for the first six
months of 2002 increased 3% and 5%, respectively from the year-ago periods.
These increases were due to increased incentive compensation and the
consolidations of Paymentech and Anexsys, partially offset by savings from
reduced headcount. Salaries and employee benefits for the second quarter and
year to date 2002 also included $12 million expense related to adopting the fair
value method of accounting for stock option and stock purchase plans.
Outside service fees and processing expense increased $59 million in the
second quarter and $103 million in the first six months of 2002 compared to the
prior year periods. Telecommunication expense increased $39 million in the
second quarter and $31 million in the first six months of 2002 compared to the
prior year periods. The increases in these expenses were primarily the result of
terminating and renegotiating certain vendor contracts. Also contributing to the
increase in outside service fees and processing expenses for the first six
months of 2002 were increased contract programming charges related to the
Corporation's conversion efforts.
Marketing and development expense increased in the second quarter and first
six months of 2002 by 26% and 24%, respectively, compared to the prior year
periods primarily due to increased advertising expenditures for Credit Card and
certain Retail products.
Other intangible amortization in the second quarter and first six months
increased $10 million and $23 million, respectively, compared to the prior year
periods primarily due to the amortization of purchased credit card relationships
associated with the addition of the Wachovia business. Additionally, the
Corporation no longer amortizes goodwill in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" and thus did not incur any goodwill
amortization expense in the first six months of 2002.
Other operating expense in the second quarter and the first six months of
2002 increased compared to the year-ago periods by $33 million, or 11%, and $15
million, or 2%, respectively, primarily due to conversion costs. The Corporation
successfully completed the Michigan and Florida conversion during the second
quarter, and hopes to complete the Illinois conversion by the end of 2002.
24
Applicable Income Taxes
The Corporation's income before income taxes and applicable income tax
expense and effective tax rate for each of the periods indicated are:
Three Months Ended June 30 Six Months Ended June 30
-------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle $1,229 $1,000 $2,371 $1,971
Applicable income taxes 386 292 741 584
Effective tax rate 31.4% 29.2% 31.3% 29.6%
-----------------------------------------------------------------------------------------------------------------
Applicable income tax expense for both periods included benefits for
tax-exempt income, tax-advantaged investments and general business tax credits,
offset by the effect of nondeductible expenses.
RISK MANAGEMENT
The Corporation's business activities generate liquidity, market, credit
and operational risks:
.. Liquidity risk is the risk that the Corporation is unable to meet all
current and future financial obligations in a timely manner.
.. Market risk is the risk that changes in future market rates or prices will
make the Corporation's positions less valuable.
.. Credit risk is the risk of loss from borrowers' and counterparties' failure
to perform according to the terms of a transaction.
.. Operational risk, among other things, includes the risk of loss due to
errors in product and service delivery, failure of internal controls over
information systems and accounting records, and internal and external
fraud.
The following discussion of the Corporation's risk management processes
focuses primarily on developments since March 31, 2001. The Corporation's risk
management processes for liquidity, market, credit and operational risks have
not substantially changed from year-end and are described in detail in the
Corporation's 2001 Annual Report, beginning on page 47.
At June 30, 2002, 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
-------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
Overview
Market risk refers to potential losses arising from changes in interest
rates, foreign exchange rates, equity prices and commodity prices. The portfolio
effect of diverse trading activities helps reduce market risk. 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 to closely manage
structural interest rate and foreign exchange rate risk.
Value-At-Risk-Trading Activities
The Corporation has developed policies and procedures to manage market risk
in its trading activities through a value-at-risk measurement and control
system, a stress testing process and dollar trading limits. The objective of
this process is to quantify and manage market risk in order to limit single and
aggregate exposures.
25
For trading portfolios, value-at-risk measures the maximum fair value the
Corporation could lose on a trading position, excluding credit derivatives,
given a specified confidence level and time horizon. Value-at-risk limits and
exposure are monitored daily 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 a statistical model applicable to cash and derivative
positions, including options.
The value-at-risk in the Corporation's trading portfolio was as follows
(excluding credit derivatives with a notional amount of $5.4 billion and $4.5
billion at June 30, 2002 and March 31, 2002, respectively. See a discussion of
credit derivatives on page 35):
(In millions) Second Quarter 2002
At June 30, ------------------- At March 31,
2002 Average High Low 2002
-----------------------------------------------------------------------------------------------
Risk type
Interest rate $ 11 $ 11 $ 12 $ 10 $ 12
Currency exchange rate 1 - 3 - 1
Equity 1 1 1 - 1
Diversification benefit (1) - N/A N/A (1)
-----------------------------------------------------------------------------------------------
Aggregate portfolio market risk $ 12 $ 12 $ 14 $ 11 $ 13
===============================================================================================
Interest rate risk was the predominant type of market risk incurred during
the second quarter of 2002. At June 30, 2002, approximately 85% of primary
market risk exposures were related to interest rate risk. Exchange rate, equity
and commodity risks accounted for 15% of primary market risk exposures.
Structural Interest Rate Risk Management
Interest rate risk exposure in the Corporation's core non-trading business
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 using sophisticated risk management
tools, including earnings simulation modeling and economic value of equity
sensitivity analysis, to capture near-term and longer-term interest rate risk
exposures.
Earnings simulation analysis, or earnings-at-risk, measures the sensitivity
of pretax earnings to various interest rate movements. The base-case scenario is
established using current interest rates. The comparative scenarios assume an
immediate parallel shock in increments of plus or minus 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 multiple years. 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 June
30, 2002 and March 31, 2002 is as follows:
Immediate Change in
Rates
------------------------------------------------------------------------------
(In millions) -100 bp +100 bp
------------------------------------------------------------------------------
June 30, 2002 $ (112) $ (52)
==============================================================================
March 31, 2002 $ 1 $ (152)
==============================================================================
Management regularly reviews alternative strategies to manage the
Corporation's exposure to interest rate movements under a wide range of market
based outcomes, balancing the risks and returns against the cost of incremental
strategies. During the quarter, the Corporation's earnings sensitivity to rising
interest rates declined, in part
26
due to a change in the market's expectations for future interest rate movements
and the resultant effect on balance sheet cash flows and trends.
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.
CREDIT PORTFOLIO COMPOSITION
Selected Statistical Information
The significant components of credit risk and the related ratios, presented
on a reported basis, for the periods indicated are as follows:
June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 2002 2002 2001 2001 2001
--------------------------------------------------------------------------------------------------
Loans outstanding $ 147,728 $ 152,126 $ 156,733 $ 164,251 $ 166,576
Average loans 149,674 154,942 160,150 165,416 169,140
Nonperforming loans (1) 3,720 3,737 3,551 3,112 2,854
Other, including OREO 204 197 137 116 97
--------------------------------------------------------------------------------------------------
Nonperforming assets 3,924 3,934 3,688 3,228 2,951
Allowance for credit losses 4,521 4,520 4,528 4,479 4,229
Net charge-offs 607 663 717 566 516
Nonperforming assets to related assets 2.65% 2.58% 2.35% 1.96% 1.77%
Allowance to period end loans (2) 3.06 2.97 2.89 2.73 2.54
Allowance to nonperforming loans (3) 122 121 128 144 148
Net charge-offs to average loans 1.62 1.71 1.79 1.37 1.22
Allowance to net charge-offs 186 170 158 198 205
--------------------------------------------------------------------------------------------------
(1) Includes loans held for sale of $107 million and $66 million at June 30,
2002 and March 31, 2002, respectively. For December 31, 2001, September 30,
2001 and June 30, 2001 there were no nonperforming loans included in loans
held for sale.
(2) Excluding loans held for sale, the allowance to period end loans would have
been 3.19%, 3.06%, 2.97%, 2.81% and 2.61% at June 30, 2002, March 31, 2002,
December 31, 2001, September 30, 2001 and June 30, 2001, respectively.
(3) Excluding loans held for sale, the allowance to nonperforming loans would
have been 125%, 123%, 128%, 144% and 148% at June 30, 2002, March 31, 2002,
December 31, 2001, September 30, 2001 and June 30, 2001, respectively.
27
Loan Composition
The Corporation's managed and reported loan portfolios for the periods
indicated are as follows:
June 30, March 31, December 31, September 30, June 30,
2002 2002 2001 2001 2001
---------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
---------------------------------------------------------------------------------------------------------------------
Retail:
Small business commercial $ 10,027 5% $ 9,992 5% $ 9,947 5% $ 9,966 4% $ 9,799 4%
Home equity 29,699 14 29,891 14 30,268 14 30,712 14 30,312 14
Vehicles:
Loans 13,584 7 13,644 7 13,481 6 13,497 6 14,057 6
Leases 4,722 2 5,431 3 6,155 3 6,855 3 7,389 3
Other personal 8,238 4 8,604 4 9,779 4 9,941 5 10,906 5
---------------------------------------------------------------------------------------------------------------------
Total Retail 66,270 32 67,562 33 69,630 32 70,971 32 72,463 32
Commercial Banking:
Corporate Banking:
Commercial and industrial 17,912 9 20,226 10 22,268 10 25,287 11 28,249 13
Commercial real estate 8,433 4 8,731 4 8,975 4 9,391 4 9,417 4
Lease financing 4,758 3 4,774 2 4,669 2 4,536 2 4,704 2
Other 670 - 975 - 731 - 1,279 - 974 -
---------------------------------------------------------------------------------------------------------------------
Total Corporate
Banking 31,773 16 34,706 16 36,643 16 40,493 17 43,344 19
Middle Market:
Commercial and industrial 29,337 14 29,515 14 31,076 14 32,325 15 32,799 15
Commercial real estate 2,421 1 3,516 2 3,472 2 3,233 1 2,905 1
Lease financing 1,092 1 1,156 1 1,053 1 1,049 1 930 -
Other 251 - 141 - 294 - 300 - 224 -
---------------------------------------------------------------------------------------------------------------------
Total Middle Market 33,101 16 34,328 17 35,895 17 36,907 17 36,858 16
---------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 64,874 32 69,034 33 72,538 33 77,400 34 80,202 35
IMG and Corporate 7,469 3 8,134 4 7,779 4 7,480 3 7,710 4
Credit Card:
Owned-held in portfolio 5,115 3 4,777 3 5,040 2 4,757 2 2,776 1
Owned-held for sale 4,000 2 2,619 1 1,746 1 3,643 2 3,425 2
Securitized:
Seller's interest retained (2) 21,897 11 22,343 10 24,019 11 18,397 9 16,981 8
Sold loans 35,797 17 35,050 16 37,350 17 39,956 18 39,833 18
---------------------------------------------------------------------------------------------------------------------
Managed credit card (3) 66,809 33 64,789 30 68,155 31 66,753 31 63,015 29
---------------------------------------------------------------------------------------------------------------------
Total managed $ 205,422 100% $ 209,519 100% $ 218,102 100% $ 222,604 100% $ 223,390 100%
=====================================================================================================================
Total reported $ 147,728 $ 152,126 $ 156,733 $ 164,251 $ 166,576
=====================================================================================================================
(1) Percentages are determined as a percentage of total managed loans.
(2) Seller's interest is reported as an investment security, therefore excluded
from reported loans. Seller's interest is included for managed loans.
(3) See page 37 for the detailed components of managed credit card loans.
Loans held for sale, which are carried at lower of cost or fair value,
totaled $5.8 billion and $4.5 billion at June 30, 2002 and March 31, 2002,
respectively. At June 30, 2002, loans held for sale included Commercial Banking
loans of $202 million, of which approximately $103 million are included in
nonperforming loans, and Credit Card and other Consumer loans of $5.6 billion.
28
Commercial and Industrial Loans
-------------------------------
Commercial and industrial loans represent commercial loans other than
commercial real estate. At June 30, 2002, commercial and industrial loans
totaled $47.2 billion, which represents 73% of the Commercial Banking portfolio.
The more significant borrower industry concentrations of the Commercial
Banking commercial and industrial portfolio for the periods indicated are as
follows:
June 30, 2002 March 31, 2002 (2) December 31, 2001
--------------------------------------------------------------------------------------------------------
(Dollars in millions) Outstanding % (1) Outstanding % (1) Outstanding % (1)
--------------------------------------------------------------------------------------------------------
Motor vehicles and parts $ 4,006 8.5% $ 4,611 9.3% $ 2,468 4.6%
Wholesale trade 3,952 8.4 4,066 8.2 4,409 8.3
Oil and gas 2,997 6.3 3,474 7.0 3,219 6.0
Industrial materials 2,863 6.1 3,140 6.3 3,355 6.3
Business finance and leasing 2,603 5.5 2,427 4.9 1,126 2.1
Telephone and wireless communication (3) 426 0.9 370 0.7 282 0.5
--------------------------------------------------------------------------------------------------------
(1) Total outstanding by industry concentration as a percentage of total
commercial and industrial loans.
(2) During the first quarter of 2002 the Dealer Commercial Services business was
transferred from Retail to Commercial Banking. All results for prior periods
conform to the current line of business organization.
(3) Presented for informational purposes. Other industry concentrations precede
this category.
29
Commercial Real Estate
----------------------
Commercial real estate loans represent credit extended for real estate
related purposes to borrowers or counterparties who are primarily in the real
estate development or investment business and for which the primary source of
repayment of the loan is from the sale, lease, rental, management, operations or
refinancing of the property. At June 30, 2002, commercial real estate loans
totaled $10.8 billion, which represents 17% of the Commercial Banking portfolio.
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 (Real Estate Operating Companies).
The commercial real estate loan portfolio by both collateral location and
property type for the periods indicated are as follows:
(Dollars in millions) June 30, 2002 March 31, 2002 December 31, 2001
-------------------------------------------------------------------------------------------------------
% of % of % of
By Collateral Location: Amount Portfolio Amount Portfolio Amount Portfolio
------- ---------- ------- ---------- ------- ----------
Illinois $ 1,245 11% $ 1,668 15% $ 1,682 14%
Michigan 1,200 11 1,361 11 1,348 11
California 1,041 10 985 8 960 8
Texas 976 9 1,048 8 1,004 8
Arizona 837 8 937 8 958 8
Ohio 793 7 835 7 839 7
Indiana 431 4 496 4 504 4
Louisiana 392 4 439 4 487 4
Kentucky 357 3 352 3 326 3
Colorado 284 3 322 3 356 3
Other areas 1,675 15 1,877 15 1,806 13
Unsecured 1,103 10 1,397 11 1,670 13
Secured by other than
real estate 520 5 530 4 507 4
------------------------------------------------------------------------------------------------------
Total $10,854 100% $12,247 100% $12,447 100%
======================================================================================================
By Property Type:
Apartment $ 1,916 18% $ 1,825 15% $ 1,770 14%
Retail 1,667 15 1,862 15 1,913 15
Office 1,552 14 1,730 14 1,804 15
Single family residential
development 1,069 10 1,299 11 1,273 10
Industrial/warehouse 857 8 1,230 10 1,230 10
REIT/REOC 788 7 1,312 11 1,297 10
Hotels 591 6 486 4 625 5
Residential lots 368 3 420 3 472 4
Miscellaneous commercial
income producing 1,881 17 1,918 16 1,864 15
Miscellaneous residential
developments 165 2 165 1 199 2
------------------------------------------------------------------------------------------------------
Total $10,854 100% $12,247 100% $12,447 100%
======================================================================================================
30
ASSET QUALITY
Nonperforming Assets
The Corporation places loans on nonaccrual status as follows:
. Retail consumer loans are placed on nonaccrual status when the collection
of contractual principal or interest becomes 90 days past due.
. Commercial Banking and Retail small business commercial loans are placed
on nonaccrual status when the collection of contractual principal or
interest is deemed doubtful, or it becomes 90 days or more past due and
is not both well-secured and in the process of collection.
. Credit card receivables are charged-off rather than placed on nonaccrual
status.
The Corporation's nonperforming assets for the periods indicated are as
follows:
June 30 March 31 December 31 September 30 June 30
(Dollars in millions) 2002 2002 2001 2001 2001
---------------------------------------------------------------------------------------------------------
Nonperforming Loans:
Retail $ 1,349 $ 1,402 $ 1,344 $ 1,155 $ 1,049
Commercial Banking:
Corporate Banking 1,161 1,170 1,154 1,051 1,050
Middle Market Banking 1,136 1,087 973 853 703
---------------------------------------------------------------------------------------------------------
Total Commercial Banking (1) 2,297 2,257 2,127 1,904 1,753
IMG and Corporate 74 78 80 53 52
---------------------------------------------------------------------------------------------------------
Total 3,720 3,737 3,551 3,112 2,854
Other, including other real estate owned 204 197 137 116 97
---------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,924 $ 3,934 $ 3,688 $ 3,228 $ 2,951
=========================================================================================================
Nonperforming assets to related assets: 2.65% 2.58% 2.35% 1.96% 1.77%
Loans 90-days or more past due and
accruing interest:
Credit Card $ 112 $ 100 $ 96 $ 114 $ 59
Other - 2 1 9 9
---------------------------------------------------------------------------------------------------------
Total $ 112 $ 102 $ 97 $ 123 $ 68
=========================================================================================================
(1) Commercial Banking nonperforming loans at June 30, 2002 include $103
million of Loans Held for Sale.
Credit quality is stabilizing across the Corporation despite the
challenging economic environment. Significant deterioration is not expected in
the near-term in either commercial or consumer nonperformers. Improvement in
credit costs is expected to follow over the longer term. The Corporation has
established processes for identifying potential problem areas of the portfolio,
which currently include exposure to telecommunications, transportation,
auto-related and travel. The Corporation will continue to monitor and manage
these potential risks.
Nonperforming loans within Retail at June 30, 2002 were $1.3 billion, a
decrease of $53 million from first quarter 2002. This decrease was primarily
driven by brokered home equity loans. Home equity loans are written down to net
realizable value once a loan reaches 120 days delinquency. However, due to the
time necessary to complete foreclosure and gain title, real estate loans remain
in nonperforming status for an extended period.
31
Charge-offs
The Corporation records charge-offs as follows:
. Commercial loans are charged-off in the reporting period in which
either an event occurs that confirms the existence of a loss or it is
determined that a loan or a portion of a loan is uncollectible.
. A credit card loan is charged-off in the month it becomes contractually
180 days past due and remains unpaid at the end of that month, or 60
days after receipt of bankruptcy notification.
. Retail loans are generally charged-off following a delinquency period
of 120 days, or within 60 days for unsecured Retail loans after receipt
of notification in case of bankruptcy. Closed-end consumer loans, such
as auto loans and leases and home mortgage loans, are typically written
down to the extent of loss after considering the net realizable value
of the collateral. Beginning in the second quarter 2002, losses on
secured bankrupt loans are recorded based on determination of actual
collateral values versus estimates.
The timing and amount of the charge-off on consumer loans will depend on
the type of loan, giving consideration to available collateral, as well as the
circumstances giving rise to the delinquency. The Corporation adheres to uniform
guidelines published by the FFIEC in charging off consumer loans.
The Corporation's net charge-offs by line of business for the periods
indicated are as follows:
June 30, 2002 March 31, 2002 December 31, 2001
-----------------------------------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
charge- Average charge-off charge- Average charge- charge- Average charge-
(Dollars in millions) offs balance rate offs balance off rate offs balance off rate
-----------------------------------------------------------------------------------------------------------------------------
Retail (1) $ 215 $ 66,826 1.29% $ 265 $ 69,228 1.53% $ 268 $70,049 1.53%
Commercial Banking:
Corporate Banking 168 33,322 2.02 163 36,040 1.81 164 38,065 1.72
Middle Market Banking 106 33,689 1.26 118 35,075 1.34 158 36,185 1.75
-----------------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 274 67,011 1.64 281 71,115 1.58 322 74,250 1.73
Credit Card 926 65,930 5.62 943 66,324 5.69 930 66,505 5.59
IMG and Corporate - 7,378 - 20 7,382 - 14 7,493 -
-----------------------------------------------------------------------------------------------------------------------------
Total-managed 1,415 207,145 2.73% 1,509 214,049 2.82% 1,534 218,297 2.81%
=============================================================================================================================
Securitized (808) (57,471) (846) (59,107) (817) (58,147)
------------------- ------------------- -------------------
Total-reported $ 607 $149,674 1.62% $ 663 $154,942 1.71% $ 717 $160,150 1.79%
=============================================================================================================================
September 30, 2001 June 30, 2001
-----------------------------------------------------------------------------------------------------------------------------
Net Net Net Net
charge- Average charge- charge- Average charge-
offs balance off rate offs balance off rate
-----------------------------------------------------------------------------------------------------------------------------
Retail (1) $ 209 $ 71,682 1.17% $ 177 $ 72,679 0.97%
Commercial Banking:
Corporate Banking 131 41,410 1.27 155 45,736 1.36
Middle Market Banking 99 36,657 1.08 84 36,995 0.91
-----------------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 230 78,067 1.18 239 82,731 1.16
Credit Card 981 66,641 5.89 962 63,179 6.09
IMG and Corporate 9 7,732 - 13 7,763 -
-----------------------------------------------------------------------------------------------------------------------------
Total-managed 1,429 224,122 2.55% 1,391 226,352 2.46%
=============================================================================================================================
Securitized (863) (58,706) (875) (57,212)
------------------- -------------------
Total-reported $ 566 $165,416 1.37% $ 516 $169,140 1.22%
=============================================================================================================================
(1) Quarter results exclude $1 million, $1 million, $14 million, $14 million
and $24 million, respectively, of charge-offs which are not so classified
in the Corporation's GAAP financials because they are part of a portfolio
that 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.
Managed net charge-offs decreased 6% during the second quarter of 2002 to
$1.4 billion from the first quarter 2002, reflecting lower charge-offs in nearly
all lines of businesses. The managed net charge-off rate decreased to 2.73% in
the second quarter 2002 compared to 2.82% in the first quarter 2002.
32
Loan Sales
A summary of the Corporation's Commercial Banking loan sales for the
periods indicated are as follows:
June 30 March 31 December 31 September 30 June 30
(In millions) 2002 2002 2001 2001 2001
----------------------------------------------------------------------------------------------------------
Loans sold and loans transferred
to loans held for sale: (1)
Nonperforming loans $208 $ 99 $ 18 $ 42 $147
Other loans with credit related losses 148 160 93 86 84
Other loans 193 343 179 438 351
----------------------------------------------------------------------------------------------------------
Total $549 $602 $290 $566 $582
----------------------------------------------------------------------------------------------------------
Losses on sale:
Charge-offs: (2)
Nonperforming loans $ 39 $ 48 $ 8 $ 11 $ 47
Other loans with credit related losses 12 19 18 22 21
----------------------------------------------------------------------------------------------------------
Total charge-offs $ 51 $ 67 $ 26 $ 33 $ 68
Losses on loans sold and held for sale 22 4 12 18 12
----------------------------------------------------------------------------------------------------------
Total $ 73 $ 71 $ 38 $ 51 $ 80
==========================================================================================================
(1) Second quarter 2002 includes loans reclassified to loans held for sale of
approximately $103 million, $26 million and $7 million in nonperforming, other
loans with credit related losses and other loans, respectively.
(2) Charge-offs on loans initially reclassified to held for sale in the second
quarter 2002 of approximately $26 million and $4 million are included in
nonperforming and other loans with credit related losses, respectively.
The Corporation sells Commercial Banking loans in the normal course of its
business activities. These loans are subject to the Corporation's overall risk
management practices. The sale of loans is one alternative the Corporation uses
to manage credit risk. When a loan is sold, the gain or loss is evaluated to
determine whether it resulted from credit deterioration or other conditions.
Based upon this evaluation, losses resulting from credit deterioration are
recorded as charge-offs. Losses deemed to be from other than credit
deterioration are recorded as losses on sale. When a loan is sold or initially
reclassified to loans held for sale, appropriate charge-offs are recorded.
Subsequent writedowns in market value on loans held for sale are reflected in
other income/loss.
Loans reclassified to held for sale are carried at the lower of cost or
market value. Subsequent to their transfer, these loans are no longer included
in the evaluation of the adequacy of the allowance for loan losses.
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, portfolio stress testing and management's judgment. The
allowance is based on ranges of probable loss estimates and is intended to be
adequate but not excessive.
33
The change in the Corporation's allowance for credit losses for the periods
indicated are as follows:
June 30 March 31 December 31 September 30 June 30
(In millions) 2002 2002 2001 2001 2001
----------------------------------------------------------------------------------------------------------
Balance, beginning of period $4,520 $4,528 $4,479 $4,229 $4,205
Charge-offs:
Retail:
Small business commercial 28 18 29 24 21
Home equity 112 138 131 91 101
Vehicles:
Loans 56 82 75 61 46
Leases 19 34 33 31 28
Other personal 38 41 39 39 26
----------------------------------------------------------------------------------------------------------
Total Retail 253 313 307 246 222
Commercial Banking:
Corporate Banking:
Commercial and industrial 152 182 158 147 169
Commercial real estate 19 2 8 1 3
Lease financing 25 2 17 - -
----------------------------------------------------------------------------------------------------------
Total Corporate Banking 196 186 183 148 172
Middle Market:
Commercial and industrial 113 126 165 96 87
Commercial real estate 2 4 4 1 2
Lease financing 19 5 19 11 5
----------------------------------------------------------------------------------------------------------
Total Middle Market 134 135 188 108 94
----------------------------------------------------------------------------------------------------------
Total Commercial Banking 330 321 371 256 266
Credit Card 129 111 120 123 94
IMG and Corporate 2 22 14 11 14
----------------------------------------------------------------------------------------------------------
Total charge-offs $ 714 $ 767 $ 812 $ 636 $ 596
----------------------------------------------------------------------------------------------------------
Recoveries:
Retail:
Small business commercial $ 5 $ 4 $ 6 $ 4 $ 4
Home equity 10 8 6 7 8
Vehicles:
Loans 15 17 15 16 18
Leases 4 4 7 6 8
Other personal 4 15 5 4 7
----------------------------------------------------------------------------------------------------------
Total Retail 38 48 39 37 45
Commercial Banking:
Corporate Banking:
Commercial and industrial 26 21 17 14 15
Commercial real estate 2 2 2 3 2
Lease financing - - - - -
----------------------------------------------------------------------------------------------------------
Total Corporate Banking 28 23 19 17 17
Middle Market:
Commercial and industrial 24 14 24 8 9
Commercial real estate 1 2 - - -
Lease financing 3 1 6 1 1
----------------------------------------------------------------------------------------------------------
Total Middle Market 28 17 30 9 10
----------------------------------------------------------------------------------------------------------
Total Commercial Banking 56 40 49 26 27
Credit Card 11 14 7 5 7
IMG and Corporate 2 2 - 2 1
----------------------------------------------------------------------------------------------------------
Total recoveries $ 107 $ 104 $ 95 $ 70 $ 80
----------------------------------------------------------------------------------------------------------
Net charge-offs:
Retail $ 215 $ 265 $ 268 $ 209 $ 177
Commercial Banking 274 281 322 230 239
Credit Card 118 97 113 118 87
IMG and Corporate - 20 14 9 13
----------------------------------------------------------------------------------------------------------
Total net charge-off $ 607 $ 663 $ 717 $ 566 $ 516
----------------------------------------------------------------------------------------------------------
Provision for credit losses 607 665 765 620 540
Transfers 1 (10) 1 196 -
----------------------------------------------------------------------------------------------------------
Balance, end of period $4,521 $4,520 $4,528 $4,479 $4,229
==========================================================================================================
34
Composition of Allowance for Credit Losses
------------------------------------------
While the allowance for credit losses is available to absorb credit losses
in the entire portfolio, allocations of the allowance for credit losses by line
of business for the periods indicated are as follows:
June 30 March 31 December 31 September 30 June 30
2002 2002 2001 2001 2001
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------------------------
Retail $1,029 23% $1,028 23% $1,027 23% $ 979 22% $ 938 22%
Commercial Banking:
Corporate Banking 1,706 38 1,706 38 1,714 38 1,714 38 1,706 40
Middle Market 1,365 30 1,365 30 1,365 30 1,364 30 1,361 32
-----------------------------------------------------------------------------------------------------------------------------------
Total Commercial 3,071 68 3,071 68 3,079 68 3,078 68 3,067 72
Banking
Credit Card 396 9 396 9 39 8 397 9 197 5
IMG and Corporate - 25 - 26 1 25 1 27 1
-----------------------------------------------------------------------------------------------------------------------------------
Total $4,521 100% $4,520 100% $4,528 100% $4,479 100% $4,229 100%
===================================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses a variety of derivative financial instruments in its
trading activity, asset and liability management, and mortgage operations, as
well as to manage certain currency translation exposures of foreign entities.
These instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, credit
derivatives and other conditional or exchange contracts, and include both
exchange-traded and over-the-counter contracts. A detailed discussion of
accounting policies for trading and hedging derivative instruments is presented
in the Corporation's 2001 Annual Report beginning on page 61.
Income Resulting from Derivative Financial Instruments
The Corporation uses interest rate derivative financial instruments in
asset and liability management activities to reduce structural interest rate
risk, and the volatility of pre-tax income (see Structural Interest Rate Risk
Manangement section on page 26). Pre-tax income reflects the effective use of
these derivatives. Without their use, pre-tax income for the six months ended
June 30, 2002 and 2001, would have been higher by $53 million in 2002 and lower
by $1 million in 2001.
For cash flow hedges, the effective portion of the change in fair value of
the hedging derivative is recorded in Accumulated Other Adjustments to
Stockholders' Equity ("AOASE"), which is reclassified into earnings in a manner
consistent with the earnings pattern of the underlying hedged instrument or
transaction. At June 30, 2002, the total amount of such reclassification into
earnings is projected to be a decrease in income of $242 million after-tax ($382
million pre-tax) over the next twelve months. These projections involve the use
of currently forecasted interest rates over the next twelve months. These rates,
and the resulting reclassifications into earnings, are subject to change.
The amount of hedge ineffectiveness recognized for cash flow and fair value
hedges for the six months ended June 30, 2002 was $7 million. No component of a
derivative instrument's gain or loss is excluded from the assessment of hedge
effectiveness.
The maximum length of time exposure to the variability of future cash flows
for forecasted transactions hedged is 33 months. There were no events in 2002
with an effect on earnings from the discontinuance of cash flow hedges due to
the determination that a forecasted transaction is no longer likely to occur.
The Corporation uses credit derivatives, primarily single name credit
default swaps, as one method of credit protection against the deterioration of
credit risk on commercial loans and loan commitments. The change in fair value
of credit derivative instruments is included in trading results in the
Corporation's financial statements while any credit assessment change in the
identified commercial credit exposure is reflected as a change in the allocated
credit reserves. At June 30, 2002, the notional amount of credit derivatives
protecting commercial credit exposure totaled $5.4 billion, and related trading
revenue was $32.7 million and $0.8 million, respectively for the three months
and six months ended June 30, 2002.
35
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 impact of these master netting agreements for the periods indicated are
as follows:
(In millions) June 30, 2002 March 31, 2002
------------------------------------------------------------------------------------------------------
Gross replacement cost $15,494 $10,736
Less: Adjustment due to master netting agreements 12,498 8,072
------------------------------------------------------------------------------------------------------
Balance sheet credit exposure $ 2,996 $ 2,664
======================================================================================================
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.
At June 30, 2002, the notional value of ALM interest rate swaps linked to
specific assets, liabilities or forecasted transactions was as follows:
Receive Fixed Pay Fixed
Pay Floating Receive Floating
----------------------------------------------------------------------------------------------------------
Fair Value Fair Value Cash Flow
(In millions) Hedge Hedge Hedge Total Swaps
----------------------------------------------------------------------------------------------------------
Interest rate swaps associated with:
Interest-bearing assets $ - $50 $ 3,000 $ 3,050
Interest-bearing liabilities 5,134 - 15,267 20,401
---------------------------------------------------------------------------------------------------------
Total $5,134 $50 $18,267 $23,451
=========================================================================================================
Interest rate swaps used to adjust the interest rate sensitivity of certain
interest-bearing assets and liabilities will not need to be replaced at
maturity, since the corresponding asset or liability will mature along with the
interest rate swap. The notional amount of such swaps totaled $16.5 billion at
June 30, 2002.
LOAN SECURITIZATIONS AND OFF-BALANCE SHEET ACTIVITIES
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 purpose entity.
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 enhancements 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 $149
million and $205 million at June 30, 2002 and 2001, respectively, 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 64-65 and 81-82 of the Corporation's 2001 Annual
Report.
36
The Corporation's managed credit card loans are comprised of the following:
(In millions) June 30, 2002 June 30, 2001
-----------------------------------------------------------------------------------------------------------
Owned credit card loans-held in portfolio $ 5,115 $ 2,776
Owned credit card loans-held for sale 4,000 3,425
Seller's interest in credit card loans (investment securities) (1) 21,897 16,981
-----------------------------------------------------------------------------------------------------------
Total credit card loans and seller's interest reflected on balance sheet 31,012 23,182
Securities sold to investors and removed from balance sheet 35,797 39,833
-----------------------------------------------------------------------------------------------------------
Managed credit card loans $66,809 $63,015
===========================================================================================================
(1) At June 30, 2002, the estimated fair values of seller's interest and
interest-only strip from credit card securitizations were $21.7 billion and
$193 million, respectively.
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:
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001
----------------------------------------------------------------------------------------------------------------------
Credit Card Credit Card
(Dollars in millions) Reported Securitizations Managed Reported Securitizations Managed
----------------------------------------------------------------------------------------------------------------------
Net interest income-FTE basis $ 2,078 $ 1,258 $ 3,336 $ 2,085 $ 1,159 $ 3,244
Provision for credit losses 607 808 1,415 540 875 1,415
Noninterest income 2,232 (450) 1,782 1,791 (283) 1,508
Noninterest expense 2,438 - 2,438 2,306 - 2,306
Net income 843 - 843 664 - 664
Total average loans $149,674 $57,471 $207,145 $169,140 $57,212 $226,352
Total average earning assets 226,005 35,555 261,560 238,971 40,590 279,561
Total average assets 255,867 35,555 291,422 268,259 40,590 308,849
Net interest margin 3.69% 14.19% 5.12% 3.50% 11.45% 4.65%
Credit Card delinquency ratios:
30+ days 2.72% 4.00% 3.83% 2.23% 4.30% 4.10%
90+ days 1.23 1.79 1.72 0.94 1.87 1.78
Net credit card charge-off ratio 5.58 5.63 5.62 5.83 6.12 6.09
----------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
----------------------------------------------------------------------------------------------------------------------
Credit Card Credit Card
(Dollars in millions) Reported Securitizations Managed Reported Securitizations Managed
----------------------------------------------------------------------------------------------------------------------
Net interest income-FTE basis $ 4,313 $ 2,562 $ 6,875 $ 4,304 $ 2,247 $ 6,551
Provision for credit losses 1,272 1,654 2,926 1,125 1,751 2,876
Noninterest income 4,184 (908) 3,276 3,398 (497) 2,901
Noninterest expense 4,783 - 4,783 4,542 - 4,542
Net income 1,630 - 1,630 1,343 - 1,343
Total average loans $152,293 $58,285 $210,578 $171,395 $58,701 $230,096
Total average earning assets 228,894 36,070 264,964 240,645 40,090 280,735
Total average assets 259,590 36,070 295,660 268,883 40,090 308,973
Net interest margin 3.80% 14.32% 5.23% 3.61% 11.30% 4.71%
Credit Card delinquency ratios:
30+ days 2.72% 4.00% 3.83% 2.23% 4.30% 4.10%
90+ days 1.23 1.79 1.72 0.94 1.87 1.78
Net credit card charge-off ratio 5.49 5.68 5.66 5.71 5.97 5.91
----------------------------------------------------------------------------------------------------------------------
37
Other Off-Balance Sheet Activities
In the normal course of business, the Corporation is a party to a number of
activities that contain credit, market and operational risk that are not
reflected in whole or in part in the Corporation's consolidated financial
statements. Such activities include: traditional off-balance sheet
credit-related financial instruments; commitments under capital and operating
leases and long-term debt; credit enhancement associated with asset-backed
securities business; and joint venture activities.
The Corporation provides customers with off-balance sheet credit support
through loan commitments, standby letters of credit and guarantees, as well as
commercial letters of credit. Summarized credit-related financial instruments at
June 30, 2002 are as follows:
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------------------------------
Less Than 1 1 - 3 3 - 5 Over 5
(In billions) Total Year Years Years Years
----------------------------------------------------------------------------------------------------
Unused credit card lines $318.3 $318.3 $ - $ - $ -
Unused loan commitments 129.0 95.6 21.1 11.6 0.7
Standby letters of credit and foreign office guarantees 20.6 12.5 5.7 1.9 0.5
Commercial letters of credit 0.7 0.7 - - -
----------------------------------------------------------------------------------------------------
Since many of the unused commitments are expected to expire unused or be
only partially used, the total amount of unused commitments in the preceding
table does not necessarily represent future cash requirements.
In addition to owned banking facilities, the Corporation has entered into a
number of long-term leasing arrangements to support the ongoing activities of
the Corporation. The required payments under such commitments and long-term debt
at June 30, 2002 are as follows:
2007
(In millions) 2002 2003 2004 2005 2006 and After Total
--------------------------------------------------------------------------------------------------------
Operating leases $ 90 $ 217 $ 192 $ 169 $ 152 $ 888 $ 1,708
Trust preferred capital securities - - - - - 3,315 3,315
Long-term debt, including capital leases 4,606 7,779 6,250 5,296 6,918 9,599 40,448
--------------------------------------------------------------------------------------------------------
Total $4,696 $7,996 $6,442 $5,465 $7,070 $13,802 $45,471
========================================================================================================
The Corporation assists its customers in obtaining sources of liquidity, by
structuring financing transactions to sell customer's trade receivables or other
financial assets to specialized financing entities that issue commercial paper.
The Corporation provides liquidity facilities and subordinated loans to the
specialized financing entity, which totaled $36.6 billion and $1.1 billion,
respectively, at June 30, 2002.
In addition to customer financing transactions, these specialized financing
entities fund, through the issuance of asset-backed commercial paper, other
selected portfolios of marketable investments that are not reflected on the
Corporation's balance sheet. Off-balance sheet liquidity lines provided by the
Corporation associated with these transactions were $421 million at June 30,
2002.
The Corporation also provides liquidity lines to commercial paper issuing
specialized financing entities not sponsored by Bank One, which approximated
$2.3 billion at June 30, 2002.
In the normal course of business, the Corporation invests in venture
capital and other investments. Commitments to fund such investments at June 30,
2002 totaled $1.4 billion.
The Corporation is a participant in several operating joint venture
initiatives where the Corporation has a majority equity interest in the entity;
however, based on the terms of the joint venture arrangement, the ventures are
jointly controlled and managed. The Corporation consolidated two joint ventures
beginning the first quarter of 2002 as management has exerted additional
influence over these joint ventures. These consolidations did not have a net
impact to the Corporation's consolidated net income. The Corporation's
investment in the remaining joint venture totaled $30 million at June 30, 2002.
38
CAPITAL MANAGEMENT
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 67 of the Corporation's 2001 Annual
Report.
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 maintains a
well-capitalized regulatory position. 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 Corporation's capital ratios follow:
Well-Capitalized
June 30 March 31 December 31 September 30 June 30 Regulatory
2002 2002 2001 2001 2001 Guidelines
------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 9.4% 9.0% 8.6% 8.4% 8.2% 6.0%
Total 13.0 12.7 12.2 11.7 11.6 10.0
Common equity/managed assets 7.0 7.0 6.6 6.5 6.2 -
Tangible common equity/tangible managed assets 6.3 6.2 5.9 5.8 5.8 -
Double leverage ratio 103 103 103 102 105 -
Dividend payout ratio 30 31 38 35 37 -
------------------------------------------------------------------------------------------------------------------------
The components of the Corporation's regulatory risk-based capital and
risk-weighted assets are as follows:
June 30 March 31 December 31 September 30 June 30
(In millions) 2002 2002 2001 2001 2001
-----------------------------------------------------------------------------------------------------------
Regulatory risk-based capital:
Tier 1 capital $ 23,039 $ 22,513 $ 21,749 $ 21,330 $ 21,243
Tier 2 capital 8,924 9,115 9,091 8,547 8,930
-----------------------------------------------------------------------------------------------------------
Total capital 31,963 31,628 30,840 29,877 30,173
===========================================================================================================
Total risk weighted assets $ 246,032 $ 249,128 $ 253,330 $ 254,943 $ 259,372
===========================================================================================================
In deriving Tier 1 and Total Capital, goodwill and other nonqualifying
intangible assets are deducted for the periods indicated:
June 30 March 31 December 31 September 30 June 30
(In millions) 2002 2002 2001 2001 2001
-----------------------------------------------------------------------------------------------------------
Goodwill $ 1,829 $ 1,840 $ 1,560 $ 1,577 $ 824
Other nonqualifying intangibles 237 251 207 289 273
-----------------------------------------------------------------------------------------------------------
Subtotal 2,066 2,091 1,767 1,866 1,097
Qualifying intangibles 405 422 414 442 205
-----------------------------------------------------------------------------------------------------------
Total intangibles $ 2,471 $ 2,513 $ 2,181 $ 2,308 $ 1,302
===========================================================================================================
Goodwill and other intangibles increased in the first quarter 2002
primarily due to the consolidation of Paymentech.
In November 2001, the U.S. banking regulators revised the risk based
capital rules for the treatment of recourse arrangements, direct credit
substitutes, asset and mortgage backed securities, and residual interests in
securitization structures. Certain provisions of these rules became effective in
the first quarter 2002, and the March 31, 2002 ratio included the affect of
these changes. The Corporation implemented the remaining provisions of these
rules in the
39
second quarter 2002. Under these rules, which were required to be adopted by the
end of the year, accrued interest on securitized credit card receivables is
treated as a form of retained recourse. The additional recourse amount had an
adverse impact on the June 30, 2002, Tier 1 and Total Capital ratios of 0.27%
and 0.31%, respectively. This change increased risk weighted assets and Total
Capital by $6.7 billion and $139 million, respectively. In the second quarter,
the Corporation's ratios also reflect the early implementation of rules related
to the treatment of certain equity investments made in nonfinancial companies,
and the reduction of the risk-weight applied to certain claims on, or guarantees
by, qualifying securities firms from 100% to 20%. The change in treatment of
certain equity investments had no significant impact on Tier 1 nor Total
Capital, while the change in risk-weight applied to certain qualifying
securities firms positively impacted these ratios by 0.16% and 0.21%,
respectively, and decreased risk weighted assets and Total Capital by $4.4
billion and $51 million, respectively.
Dividend Policy
The Corporation's common stock dividend policy reflects its earnings
outlook, desired payout ratios, the need to maintain an adequate capital level
and alternative investment opportunities. The common stock dividend payout ratio
is targeted in the range of 25% - 30% of earnings over time. On July 16, 2002,
the Corporation declared its quarterly common cash dividend of 21 cents per
share, payable on October 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 103% at June 30,
2002 and March 31, 2002. Trust Preferred Capital Securities of $3.3 billion at
June 30, 2002 and March 31, 2002 were included in capital for purposes of this
calculation.
Stock Repurchase Program
On July 16, 2002, the Corporation's Board of Directors approved the
repurchase of up to $2 billion of the Corporation's common stock replacing the
two previous buyback programs announced in September, 2001 and 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
second quarter 2002, the Corporation purchased 4.6 million shares of common
stock at an average price of $39.56 per share pursuant to the previous buyback
programs.
40
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, Bank One 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 Bank One's
approval that are not statements of historical fact and may constitute
forward-looking statements. Forward-looking statements may relate to, without
limitation, Bank One's financial condition, results of operations, plans,
objectives, future performance or business.
Words such as "believes", "anticipates", "expects", "intends", "plans",
"estimates", "targeted" and similar expressions are intended to identify
forward-looking statements but are not the only means to identify these
statements.
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 Bank One'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 Bank One's business.
.. The timely development and acceptance of new products and services may be
different than anticipated.
.. Technological changes instituted by Bank One and by persons who may affect
Bank One'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.
.. 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 Bank One 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 Bank One
or its business.
.. Bank One 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. Bank
One undertakes no obligation to update any forward-looking statement to reflect
subsequent circumstances or events.
41
CONSOLIDATED BALANCE SHEETS
BANK ONE CORPORATION and Subsidiaries
June 30 December 31 June 30
(Dollars in millions) 2002 2001 2001
---------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 17,120 $ 17,383 $ 18,453
Interest-bearing due from banks 3,041 1,030 2,106
Federal funds sold and securities under resale 9,538 9,347 11,600
agreements
Trading assets 6,269 6,167 7,177
Derivative product assets 2,996 3,225 3,145
Investment securities 65,685 60,883 49,732
Loans 147,728 156,733 166,576
Allowance for credit losses (4,521) (4,528) (4,229)
---------------------------------------------------------------------------------------------------
Loans, net 143,207 152,205 162,347
Other assets 22,487 18,714 17,852
---------------------------------------------------------------------------------------------------
Total assets $270,343 $268,954 $272,412
===================================================================================================
Liabilities
Deposits:
Demand $ 26,841 $ 32,179 $ 30,662
Savings 81,477 80,599 66,974
Time:
Under $100,000 19,403 20,106 23,289
$100,000 and over 15,255 18,071 20,973
Foreign offices 14,542 16,575 22,401
---------------------------------------------------------------------------------------------------
Total deposits 157,518 167,530 164,299
Federal funds purchased and securities sold under
repurchase agreements 16,728 13,728 17,779
Other short-term borrowings 9,809 10,255 13,310
Long-term debt 40,441 40,103 38,903
Guaranteed preferred beneficial interest in the
Corporation's junior subordinated debt 3,315 3,315 2,790
Derivative product liabilities 2,632 2,574 3,051
Other liabilities 18,337 11,223 12,829
---------------------------------------------------------------------------------------------------
Total liabilities 248,780 248,728 252,961
Stockholders' Equity
Preferred stock - - 190
Common stock ($0.01 par value; authorized 4,000,000,000;
issued 1,181,382,304) 12 12 12
Surplus 10,177 10,311 10,329
Retained earnings 11,845 10,707 9,907
Accumulated other adjustments to stockholders' equity 46 (65) (207)
Deferred compensation (195) (121) (156)
Treasury stock, at cost (7,843,692, 14,415,873, and
13,586,977 shares, respectively) (322) (618) (624)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 21,563 20,226 19,451
---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $270,343 $268,954 $272,412
===================================================================================================
The accompanying notes are an integral part of this statement.
42
CONSOLIDATED INCOME STATEMENTS
BANK ONE CORPORATION and Subsidiaries
Three Six
Months Ended Months Ended
June 30 June 30
----------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------
(In millions, except per share data)
Net Interest Income:
Interest income $ 3,389 $ 4,385 $ 6,929 $ 9,306
Interest expense 1,347 2,330 2,687 5,066
-----------------------------------------------------------------------------------------------------------
Total net interest income 2,042 2,055 4,242 4,240
Noninterest Income:
Banking fees and commissions 492 431 937 842
Credit card revenue 956 621 1,862 1,142
Service charges on deposits 376 360 769 691
Fiduciary and investment management fees 188 184 377 371
Investment securities gains (losses) 96 69 78 (27)
Trading 70 61 86 126
Other income 54 65 75 253
-----------------------------------------------------------------------------------------------------------
Total noninterest income 2,232 1,791 4,184 3,398
-----------------------------------------------------------------------------------------------------------
Total revenue, net of interest expense 4,274 3,846 8,426 7,638
Provision for credit losses 607 540 1,272 1,125
Noninterest Expense:
Salaries and employee benefits 1,101 1,072 2,197 2,092
Occupancy 170 164 328 331
Equipment 99 119 202 240
Outside service fees and processing 372 313 672 569
Marketing and development 264 210 522 422
Telecommunication 134 95 235 204
Other intangible amortization 29 19 62 39
Goodwill amortization - 18 - 35
Other expense 332 299 628 613
-----------------------------------------------------------------------------------------------------------
Total noninterest expense before merger
and restructuring-related charges 2,501 2,309 4,846 4,545
-----------------------------------------------------------------------------------------------------------
Merger and restructuring-related charges (reversals) (63) (3) (63) (3)
-----------------------------------------------------------------------------------------------------------
Total noninterest expense 2,438 2,306 4,783 4,542
Income before income taxes and cumulative effect of change in
accounting principle 1,229 1,000 2,371 1,971
Applicable income taxes 386 292 741 584
-----------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 843 708 1,630 1,387
Cumulative effect of change in accounting principle, net of taxes of $25 - (44) - (44)
-----------------------------------------------------------------------------------------------------------
Net income $ 843 $ 664 $ 1,630 $ 1,343
===========================================================================================================
Net income attributable to common stockholders' equity 843 661 1,630 1,337
===========================================================================================================
Earnings per share before cumulative effect of change in
accounting principle:
Basic $ 0.72 $ 0.60 $ 1.39 $ 1.18
Diluted $ 0.71 $ 0.60 $ 1.38 $ 1.18
===========================================================================================================
Earnings per share:
Basic $ 0.72 $ 0.57 $ 1.39 $ 1.15
Diluted $ 0.71 $ 0.56 $ 1.38 $ 1.14
===========================================================================================================
The accompanying notes are an integral part of this statement.
43
CONSOLIDATED STATEMENTS 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, 2000 $ 190 $ 12 $ 10,487 $ 9,060 $ (5) $ (121) $ (988) $ 18,635
-----------------------------------------------------------------------------------------------------------------------------
Net income 1,343 1,343
Change in fair value, investment
securities-available for sale,
net of taxes (62) (62)
Change in fair value of cash-flow
hedge derivative securities,
net of taxes (137) (137)
Translation loss, net of hedge
results and taxes (3) (3)
-------------------- --------
Net income and changes in
accumulated other adjustments
to stockholders' equity 1,343 (202) 1,141
Cash dividends declared:
Common stock (490) (490)
Preferred stock (6) (6)
Net issuance of common stock (159) 364 205
Awards granted, net of
forfeitures and amortization (35) (35)
Other 1 1
-----------------------------------------------------------------------------------------------------------------------------
Balance-June 30, 2001 $ 190 $ 12 $ 10,329 $ 9,907 $ (207) $ (156) $ (624) $ 19,451
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 2001 $ - $ 12 $ 10,311 $ 10,707 $ (65) $ (121) $ (618) $ 20,226
-----------------------------------------------------------------------------------------------------------------------------
Net income 1,630 1,630
Change in fair value, investment
securities-available for
sale, net of taxes 204 204
Change in fair value of cash-flow
hedge derivative securities,
net of taxes (92) (92)
Translation loss, net of hedge
results and taxes (1) (1)
-------------------- --------
Net income and changes in
accumulated other adjustments
to stockholders' equity 1,630 111 1,741
Common stock cash dividends
declared (492) (492)
Net issuance of common stock (151) 296 145
Awards granted, net of
forfeitures and amortization (74) (74)
Other 17 17
-----------------------------------------------------------------------------------------------------------------------------
Balance-June 30, 2002 $ - $ 12 $ 10,177 $ 11,845 $ 46 $ (195) $ (322) $ 21,563
=============================================================================================================================
The accompanying notes are an integral part of this statement.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
BANK ONE CORPORATION and Subsidiaries
Six Months Ended
June 30
-------------------
2002 2001
--------------------------------------------------------------------------------------------------------
(In millions)
Cash Flows from Operating Activities:
Net income $ 1,630 $ 1,343
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 251 276
Cumulative effect of accounting change -- 69
Provision for credit losses 1,272 1,125
Investment securities (gains) losses, net (78) 27
Net decrease in net derivative product assets 47 153
Net increase in trading assets (100) (4,389)
Net increase in other assets (2,957) (1,634)
Net increase in other liabilities 6,376 2,583
Merger-related and restructuring charges (reversals) (63) 3
Other operating adjustments 171 (638)
--------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 6,549 (1,082)
Cash Flows from Investing Activities:
Net increase in federal funds sold and securities under resale agreements (191) (6,863)
Securities available for sale:
Purchases (29,611) (31,102)
Maturities 2,797 14,770
Sales 20,448 11,046
Credit card receivables securitized 2,750 3,845
Net decrease in loans 6,824 8,496
Loan recoveries 211 177
Additions to premises and equipment (135) (87)
Proceeds from sales of premises and equipment 34 47
All other investing activities, net (322) 442
--------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 2,805 771
Cash Flows from Financing Activities:
Net decrease in deposits (9,976) (2,805)
Net increase in federal funds purchased and securities under repurchase agreements 3,000 5,659
Net decrease in other short-term borrowings (437) (4,693)
Proceeds from issuance of long-term debt 4,433 7,072
Repayment of long-term debt (4,198) (6,858)
Repurchase of treasury stock (181) --
Cash dividends paid (491) (495)
Proceeds from issuance of trust preferred capital securities -- 300
Proceeds from issuance of common and treasury stock 227 139
All other financing activities, net 18 12
--------------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,605) (1,669)
Effect of exchange rate changes on cash and cash equivalents (1) 38
--------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,748 (1,942)
Cash and Cash Equivalents at Beginning of Period 18,413 22,501
--------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 20,161 $ 20,559
========================================================================================================
The accompanying notes are an integral part of this statement.
45
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, and certain
prior-quarter financial statement information has been reclassified to conform
to the current quarter presentation. The preparation of the consolidated
financial statements requires management to make estimates and assumptions that
affect the amounts reported and disclosures of contingent assets and
liabilities. Actual results could differ from those estimates.
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 2001 Annual Report.
Note 2-New Accounting Pronouncements
Effective January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142") resulting in no goodwill
impairment. In accordance with the new standard, goodwill and intangible assets
with indefinite lives are no longer amortized, but are subject to impairment
tests at least annually. Intangible assets with finite lives continue to be
amortized over the period the Corporation expects to benefit from such assets
and are periodically reviewed for other than temporary impairment.
Note 3-Earnings per Share
Basic EPS is computed by dividing income available to common stockholders
by the average number of common shares outstanding for the period. Except when
the effect would be antidilutive, the diluted EPS calculation includes shares
that could be issued under outstanding stock options and the employee stock
purchase plan, and common shares that would result from the conversion of
convertible preferred stock.
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
(In millions, except per share data)
Income before cumulative effect of accounting change $ 843 $ 708 $1,630 $1,387
Cumulative effect of accounting change - (44) - (44)
-----------------------------------------------------------------------------------------------------------------
Net income 843 664 1,630 1,343
Preferred stock dividends - (3) - (6)
-----------------------------------------------------------------------------------------------------------------
Net income available to common stockholders for basic and diluted EPS $ 843 $ 661 $1,630 $1,337
======================================================================================================-----------
Average shares outstanding 1,174 1,166 1,172 1,165
Stock options 10 10 9 9
-----------------------------------------------------------------------------------------------------------------
Average shares outstanding assuming full dilution 1,184 1,176 1,181 1,174
=================================================================================================================
Earnings per share before cumulative effect of change in
accounting principle:
Basic $ 0.72 $ 0.60 $ 1.39 $ 1.18
Diluted $ 0.71 $ 0.60 $ 1.38 $ 1.18
Earnings per share:
Basic $ 0.72 $ 0.57 $ 1.39 $ 1.15
Diluted $ 0.71 $ 0.56 $ 1.38 $ 1.14
=================================================================================================================
46
Note 4-Restructuring-Related Activity
a) Fourth Quarter 2001 Restructuring-Related Activity
The Corporation recorded restructuring-related activity in the fourth
quarter of 2001 for additional real estate and severance costs to accomplish
more rapid expense reductions, accelerated systems conversions and other
consolidations. Summarized below are the details of these restructuring-related
activities:
Contractual
Obligations
Personnel- and Asset
(In millions) Related Costs Writedowns Total
----------------------------------------------------------------------------
December 31, 2001 Reserve balance $ 76 $ 278 $ 354
Amounts utilized (2) (134) (136)
----------------------------------------------------------------------------
March 31, 2002 Reserve balance 74 144 218
Reserve adjustments (21) (21) (42)
Amounts utilized (10) (9) (19)
----------------------------------------------------------------------------
June 30, 2002 Reserve balance $ 43 $ 114 $ 157
============================================================================
Personnel-related costs initially recorded consisted primarily of severance
costs related to identified staff reductions in the lines of business totaling
approximately 6,900 positions. Contractual obligations included the estimated
costs associated with the lease and other contract termination costs
incorporated in the business restructuring plans. Asset writedowns included
leasehold write-offs related to leased properties following the decision to
abandon such facilities, as well as in the case of fixed assets and capitalized
software for which similar decisions were made. Actions under this overall
restructuring plan are expected to be completed within a 12-month period.
Certain contractual payments associated with these actions, as required, will
extend beyond this 12-month time frame.
b) Second Quarter 2000 Restructuring-Related Activity
Actions under this restructuring plan have been completed, with only
payments of identified obligations remaining, which consist primarily of lease
obligations. Unpaid amounts totaled $45 million as of June 30, 2002 and will be
paid as required over the remaining contractual periods.
Note 5-Business Segments
The information presented on page 4 is consistent with the content of
business segment data provided to the Corporation's management, which does not
use product group revenues to assess consolidated results. Aside from investment
management and insurance products, product offerings are tailored to specific
customer segments. As a result, the aggregation of product revenues and related
profit measures across lines of business is not available.
Aside from the United States of America, 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.
For additional disclosures regarding the Corporation's operating segments
see the "Business Segment Results and Other Data" section beginning on page 4.
The data presented in tables beginning with the section entitled "Financial
Performance" in the "Retail" through "Corporate" segments on page 5-22 are
included for analytical purposes only.
47
Note 6-Interest Income and Interest Expense
Details of interest income and interest expense are as follows:
Three Six
Months Months
Ended Ended
June 30 June 30
------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------
(In millions)
Interest Income
Loans, including fees $2,428 $3,395 $4,997 $7,197
Bank balances 12 36 27 106
Federal funds sold and securities
under resale agreements 38 136 81 251
Trading assets 64 85 124 168
Investment securities 847 733 1,700 1,584
----------------------------------------------------------------------------
Total 3,389 4,385 6,929 9,306
Interest Expense
Deposits 696 1,312 1,420 2,832
Federal funds purchased and securities sold
under repurchase agreements 73 177 135 408
Other short-term borrowings 33 198 73 481
Long-term debt 545 643 1,059 1,345
----------------------------------------------------------------------------
Total 1,347 2,330 2,687 5,066
----------------------------------------------------------------------------
Net Interest Income 2,042 2,055 4,242 4,240
Provision for credit losses 607 540 1,272 1,125
----------------------------------------------------------------------------
Net Interest Income After
Provision for Credit Losses $1,435 $1,515 $2,970 $3,115
============================================================================
Note 7-Investment Securities
The summary of the Corporation's investment portfolio follows:
Gross Unrealized Gross Unrealized Fair Value
June 30, 2002 Amortized Cost Gains Losses (Book Value)
-------------------------------------------------------------------------------------------------------
(In millions)
U.S. Treasury $ 1,577 $ 29 $ (2) $ 1,604
U.S. government agencies 29,082 356 (104) 29,334
States and political subdivisions 1,145 40 (1) 1,184
Interests in credit card securitized
receivables 21,853 90 - 21,943
Other debt securities 6,521 39 (10) 6,550
Equity securities (1) 3,404 16 - 3,420
-------------------------------------------------------------------------------------------------------
Total available for sale securities $63,582 $570 $(117) 64,035
-------------------------------------------------------------------------------------------------------
Principal and other investments (2) 1,650
-------
Total investment securities $65,685
=======================================================================================================
(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.
For the six months ended June 30, 2002, gross recognized gains and losses
on the sale of investment securities were $545 million and $466 million,
respectively. For the six months ended June 30, 2001, gross recognized gains and
losses on the sale of investment securities were $421 million and $448 million,
respectively.
Included in other liabilities at June 30, 2002 is $6.9 billion related to
unsettled investment security purchases recorded on a trade date basis.
48
Note 8-Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
At June 30, 2002 the Corporation sponsored ten trusts with a total
aggregate issuance of $3.3 billion in trust preferred securities as follows:
Trust Preferred Junior Subordinated Debt Owned by Trust
------------------------------------------------------------------------------------------------------------------------------------
Initial Initial
Liquidation Principal
(Dollars in millions) Issuance Date Value Distribution Rate Amount Maturity Redeemable Beginning
------------------------------------------------------------------------------------------------------------------------------------
Capital VI September 28, 2001 $ 525 7.20% $ 541.2 October 12, 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 September 1, 2005
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% 593.0 September 12, 2029 September 20, 2004
First Chicago
NBD Capital 1 January 31, 1997 250 3-mo LIBOR 258.0 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% 515.0 December 1, 2026 December 1, 2006
First Chicago
NBD Institutional
Capital B December 5, 1996 250 7.75% 258.0 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.
49
Note 9-Supplemental Disclosures for Accumulated Other Adjustments to
Stockholders' Equity
Accumulated other adjustments to stockholders' equity are as follows:
Six Months Ended June 30 2002 2001
-----------------------------------------------------------------------------------------------------------
(In millions)
Fair value adjustment on investment securities-available for sale:
Balance, beginning of period $ 78 $ (15)
Change in fair value, net of taxes of $202 and $34 for the six months ended
June 30, 2002 and 2001, respectively 353 (49)
Reclassification adjustment, net of taxes of $(86) and $(8), for the six months
ended June 30, 2002 and 2001, respectively (149) (13)
-----------------------------------------------------------------------------------------------------------
Balance, end-of-period 282 (77)
Fair value adjustment on derivative instruments-cash flow type hedges:
Balance, beginning of period (146) -
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 $148 and $39 for the six months ended June 30, 2002 and 2001, respectively (222) (71)
Net reclassification into earnings, net of taxes of $87 and $17 for the six months ended
June 30, 2002 and 2001, respectively 130 32
-----------------------------------------------------------------------------------------------------------
Balance, end-of-period (238) (137)
Accumulated translation adjustment:
Balance, beginning of period 3 10
Translation loss, net of hedge results and taxes (1) (3)
-----------------------------------------------------------------------------------------------------------
Balance, end-of-period 2 7
-----------------------------------------------------------------------------------------------------------
Total accumulated other adjustments to stockholders' equity $ 46 $ (207)
===========================================================================================================
Note 10-Stock-Based Compensation
In the second quarter 2002, Bank One adopted the fair value method of
accounting for its stock option and stock purchase plans for 2002 grants under
the guidance of SFAS No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation." Under SFAS No. 123, compensation expense is recognized over the
vesting period equal to the fair value of stock based compensation as of the
date of grant. The impact on the first quarter 2002 is immaterial as annual
stock option awards were granted in April. Pursuant to the requirements of SFAS
No. 123, options granted prior to January 1, 2002 continue to be accounted for
under APB 25.
The grant date fair values of stock options granted under the Corporation's
various stock option plans and the Employee Stock Purchase Plan were determined
using the Black-Scholes option pricing model. The fair value estimate for the
April 2002 grant was $13.23 per option. Fair values were estimated using the
following assumptions for 2002: expected dividend yield of 2.04%, expected
volatility of 35.25%, risk-free interest rates of 2.91-4.53% depending on
varying lives, and expected lives of 1.5-5 years.
For the six months ended June 30, 2002, the net income and fully-diluted
earnings per share impacts were $8 million and $0.01, respectively. Other
disclosures related to stock options have not materially changed from the
disclosure provided in Note 19 of the Corporation's 2001 Annual Report.
50
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.
51
Management's Certification of Periodic Report
---------------------------------------------
We hereby certify that this Form 10-Q, containing BANK ONE CORPORATION's
consolidated financial statements for the three months and six months ended June
30, 2002, fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, and the information contained in this Form 10-Q
fairly presents, in all material respects, the financial condition and results
of operations of the Corporation.
/s/ James Dimon
---------------------------------
James Dimon
Principal Executive Officer
/s/ Heidi Miller
---------------------------------
Heidi Miller
Principal Financial Officer
August 12, 2002
52
SELECTED STATISTICAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
June 30, 2002 March 31, 2002
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 10,300 $ 49 1.91% $ 12,560 $ 58 1.87%
Trading assets (1) 6,941 65 3.76 6,239 60 3.90
Investment securities: (1)
U.S. government and federal agency 26,655 364 5.48 25,883 352 5.52
States and political subdivisions 1,178 22 7.49 1,287 23 7.25
Other 31,257 484 6.21 30,904 501 6.57
--------------------------------------------------------------------------------------------------------------------
Total investment securities 59,090 870 5.91 58,074 876 6.12
Loans (1) (2) 149,674 2,441 6.54 154,942 2,581 6.76
--------------------------------------------------------------------------------------------------------------------
Total earning assets 226,005 3,425 6.08 231,815 3,575 6.25
Allowance for credit losses (4,521) (4,563)
Other assets - nonearning 34,383 36,102
--------------------------------------------------------------------------------------------------------------------
Total assets $255,867 $ 263,354
Liabilities and Stockholders' Equity
Deposits - interest-bearing:
Savings $ 10,997 $ 48 1.75% $ 12,731 $ 43 1.37%
Money market 67,546 163 0.97 70,387 168 0.97
Time 35,529 414 4.67 37,387 445 4.83
Foreign offices (3) 14,293 71 1.99 14,064 68 1.96
--------------------------------------------------------------------------------------------------------------------
Total deposits - interest-bearing 128,365 696 2.17 134,569 724 2.18
Federal funds purchased and securities
under repurchase agreements 15,188 73 1.93 14,531 62 1.73
Other short-term borrowings 6,031 33 2.19 7,376 40 2.20
Long-term debt (4) 43,870 545 4.98 43,022 514 4.85
--------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 193,454 1,347 2.79 199,498 1,340 2.72
--------------------------------------------------------------------------------------------------------------------
Demand deposits 27,266 29,165
Other liabilities 13,557 13,828
Preferred stock - -
Common stockholders' equity 21,590 20,863
--------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $255,867 $ 263,354
Interest income/earning assets $3,425 6.08% $3,575 6.25%
Interest expense/interest bearing liabilities 1,347 2.39 1,340 2.34
--------------------------------------------------------------------------------------------------------------------
Net interest income/margin $2,078 3.69% $2,235 3.91%
====================================================================================================================
(1) Includes tax-equivalent adjustments based on federal income tax rate of
35%.
(2) Nonperforming loans are included in average balances used to determine
average rate.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and oversees offices.
(4) Includes trust preferred capital securities.
53
December 31, 2001 September 30, 2001 June 30, 2001
----------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Average Rate Balance Interest Average Rate Balance Interest Average Rate
----------------------------------------------------------------------------------------------------
$ 14,442 $ 89 2.44% $ 12,704 $ 117 3.65% $ 15,050 $ 172 4.58%
6,487 63 3.85 6,982 78 4.43 7,276 85 4.69
23,317 332 5.65 21,655 312 5.72 20,013 282 5.65
1,327 25 7.47 1,303 25 7.61 1,265 23 7.29
29,201 507 6.89 27,292 473 6.88 26,227 445 6.81
----------------------------------------------------------------------------------------------------
53,845 864 6.37 50,250 810 6.40 47,505 750 6.33
160,150 2,841 7.04 165,416 3,204 7.68 169,140 3,408 8.08
----------------------------------------------------------------------------------------------------
234,924 3,857 6.51 235,352 4,209 7.10 238,971 4,415 7.41
(4,516) (4,499) (4,255)
36,348 34,993 33,543
----------------------------------------------------------------------------------------------------
$266,756 $265,846 $268,259
$ 15,509 $ 30 0.77% $ 14,969 $ 42 1.11% $ 15,888 $ 45 1.14%
60,333 235 1.55 53,189 305 2.28 48,914 330 2.71
39,456 521 5.24 42,891 621 5.74 45,649 688 6.05
17,979 114 2.52 21,817 195 3.55 22,782 249 4.38
----------------------------------------------------------------------------------------------------
133,277 900 2.68 132,866 1,163 3.47 133,233 1,312 3.95
15,611 80 2.03 17,038 145 3.38 16,890 177 4.20
9,657 65 2.67 11,217 113 4.00 15,024 198 5.29
44,282 539 4.83 42,862 595 5.51 42,191 643 6.11
----------------------------------------------------------------------------------------------------
202,827 1,584 3.10 203,983 2,016 3.92 207,338 2,330 4.51
----------------------------------------------------------------------------------------------------
29,983 28,576 28,575
13,443 13,203 13,039
64 190 190
20,439 19,894 19,117
----------------------------------------------------------------------------------------------------
$266,756 $265,846 $268,259
$3,857 6.51% $4,209 7.10% $4,415 7.41%
1,584 2.67 2,016 3.40 2,330 3.91
----------------------------------------------------------------------------------------------------
$2,273 3.84% $2,193 3.70% $2,085 3.50%
====================================================================================================
54
SELECTED STATISTICAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
Six Months Ended June 30
2002 2001
--------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------
Assets
------
Short-term investments $ 11,424 $ 107 1.89% $ 13,644 $ 358 5.29%
Trading assets (1) 6,592 125 3.82 6,494 167 5.19
Investment securities: (1)
U.S. government and federal agency 26,271 716 5.50 19,672 616 6.31
States and political subdivisions 1,232 45 7.37 1,267 47 7.48
Other 31,082 985 6.39 28,173 957 6.85
--------------------------------------------------------------------------------------------------------------
Total investment securities 58,585 1,746 6.01 49,112 1,620 6.65
Loans (1) (2) 152,293 5,022 6.65 171,395 7,225 8.50
--------------------------------------------------------------------------------------------------------------
Total earning assets 228,894 7,000 6.17 $ 240,645 $ 9,370 7.85
Allowance for credit losses (4,542) (4,235)
Other assets - nonearning 35,238 32,473
--------------------------------------------------------------------------------------------------------------
Total assets $ 259,590 $ 268,883
Liabilities and Stockholders' Equity
------------------------------------
Deposits - interest-bearing:
Savings $ 11,859 $ 91 1.55 $ 15,691 $ 96 1.23
Money market 68,959 331 0.97 47,965 714 3.00
Time 36,453 859 4.75 46,454 1,431 6.21
Foreign offices (3) 14,179 139 1.98 23,427 591 5.09
--------------------------------------------------------------------------------------------------------------
Total deposits - interest-bearing 131,450 1,420 2.18 133,537 2,832 4.28
Federal funds purchased and securities
under repurchase agreements 14,861 135 1.83 17,009 408 4.84
Other short-term borrowings 6,699 73 2.20 16,629 481 5.83
Long-term debt (4) 43,449 1,059 4.92 41,987 1,345 6.46
--------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 196,459 $ 2,687 2.76 209,162 $ 5,066 4.88
--------------------------------------------------------------------------------------------------------------
Demand deposits 28,210 27,706
Other liabilities 13,693 12,858
Preferred stock - 190
Common stockholders' equity 21,228 18,967
--------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 259,590 $ 268,883
Interest income/earning assets $ 7,000 6.17% $ 9,370 7.85%
Interest expense/interest bearing liabilities 2,687 2.37 5,066 4.24
--------------------------------------------------------------------------------------------------------------
Net interest margin $ 4,313 3.80% $ 4,304 3.61%
===============================================================================================================
(1) Includes tax-equivalent adjustments based on federal income tax rate of
35%.
(2) Nonperforming loans are included in average balances used to
determine average rate.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and oversees offices.
(4) Includes trust preferred capital securities.
55
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 001-15323
BANK ONE CORPORATION
----------------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 31-0738296
----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 BANK ONE PLAZA CHICAGO, ILLINOIS 60670
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
312-732-4000
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of July 31, 2002.
Class Number of Shares Outstanding
---------------------------- ----------------------------
Common Stock $0.01 par value 1,170,953,429
56
Form 10-Q Cross-Reference Index
PART I-FINANCIAL INFORMATION
----------------------------
ITEM 1. Financial Statements
Page
----
Consolidated Balance Sheets-
June 30, 2002 and 2001, and December 31, 2001 42
Consolidated Income Statements-
Three Months and Six months ended June 30, 2002 and 2001 43
Consolidated Statements of Stockholders' Equity-
Six months ended June 30, 2002 and 2001 44
Consolidated Statements of Cash Flows-
Six months ended June 30, 2002 and 2001 45
Notes to Consolidated Financial Statements 46
Selected Statistical Information 53
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-41
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 25-27
PART II-OTHER INFORMATION
-------------------------
ITEM 1. Legal Proceedings 58
ITEM 2. Changes in Securities and Use of Proceeds 58
ITEM 3. Defaults Upon Senior Securities 58
ITEM 4. Submission of Matters to a Vote of Security Holders 58
ITEM 5. Other Information 58
ITEM 6. Exhibits and Reports on Form 8-K 58
Signatures 59
57
PART II-OTHER INFORMATION
ITEM 1. Legal Proceedings
-------------------------
None
ITEM 2. Changes in Securities and Use of Proceeds
-------------------------------------------------
None
ITEM 3. Defaults Upon Senior Securities
---------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
BANK ONE CORPORATION held its Annual Meeting of Stockholders on Tuesday, April
16, 2002. A total of 997,192,741 shares were represented in person or by proxy,
or more than 85% of the total shares outstanding.
1. Proposal 1--Stockholders elected the twelve Director nominees named in the
Proxy Statement.
Name For Withheld
---- ---- --------
John H. Bryan 981,355,705 15,837,036
James S. Crown 987,679,765 9,512,976
James Dimon 987,813,857 9,378,884
Maureen A. Fay, O.P. 986,404,443 10,788,298
John R. Hall 986,823,270 10,369,471
Laban P. Jackson, Jr. 981,444,653 15,748,088
John W. Kessler 986,931,755 10,260,986
Richard A. Manoogian 978,164,241 19,028,500
William T. McCormick, Jr. 981,745,486 15,447,255
David C. Novak 924,000,457 73,192,284
John W. Rogers, Jr. 981,711,715 15,481,026
Frederick P. Stratton, Jr. 972,883,291 24,309,450
2. Proposal 2--the ratification of the appointment of KPMG LLP as Bank One's
independent auditor for 2002--received votes as follows:
FOR: 974,115,705 (97.695% of the shares present and entitled to vote
on the proposal)
AGAINST: 16,240,110 (1.629% of the shares present and entitled to vote on
the proposal)
ABSTAIN: 6,738,676 (0.676% of the shares present and entitled to vote on
the proposal)
ITEM 5. Other Information
-------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibit 12-Statement regarding computation of ratios.
(b) The Registrant filed the following Current Reports on Form 8-K during
the quarter ended June 30, 2002.
Date Item Reported
---- -------------
April 16, 2002 Registrant's April 16, 2002 news release announcing
its 2002 first quarter earnings.
58
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK ONE CORPORATION
--------------------
Date August 12, 2002 /s/ James Dimon
--------------- -------------------------------
James Dimon
Principal Executive Officer
Date August 12, 2002 /s/ Heidi Miller
--------------- -------------------------------
Heidi Miller
Principal Financial Officer
Date August 12, 2002 /s/ Melissa J. Moore
--------------- -------------------------------
Melissa J. Moore
Principal Accounting Officer
59
BANK ONE CORPORATION
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
12 -Statement regarding computation of ratios.
60