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BANK ONE CORPORATION
INDEX TO FINANCIAL REVIEW
1 Five Quarter Summary of Selected Financial Information
2 Summary of Results
2 Balance Sheet Analysis
3 Business Segment Results
23 Consolidated Results
25 Risk Management
26 Market Risk Management
28 Credit Portfolio Composition
32 Asset Quality
36 Derivative Financial Instruments
38 Loan Securitizations and Off-Balance Sheet Activities
39 Capital Management
41 Forward-Looking Statements
42 Consolidated Financial Statements
46 Notes to Consolidated Financial Statements
54 Selected Statistical Information
57 Report of Management
58 Review Report of Independent Public Accountants
59 Form 10-Q
63 Management's Certification of Periodic Report
FIVE QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION
BANK ONE CORPORATION AND SUBSIDIARIES
Three Months Ended
--------------------------------------------------------------------
(In millions, except per share data, SEPTEMBER 30 June 30 March 31 December 31 September 30
ratios, and headcount) 2002 (5) 2002 (5) 2002 (5) 2001 2001
- ---------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Total revenue, net of interest expense $ 4,180 $ 4,274 $ 4,152 $ 4,207 $ 4,016
Net interest income-
fully taxable-equivalent ("FTE") basis(1) 2,235 2,078 2,235 2,273 2,193
Noninterest income 1,983 2,232 1,952 1,972 1,853
Provision for credit losses 587 607 665 765 620
Noninterest expense 2,415 2,438 2,345 2,706 2,303
Net income 823 843 787 541 754
PER COMMON SHARE DATA:
Net income:
Basic $ 0.71 $ 0.72 $ 0.67 $ 0.46 $ 0.64
Diluted 0.70 0.71 0.67 0.46 0.64
Cash dividends declared 0.21 0.21 0.21 0.21 0.21
Book value 18.79 18.37 17.81 17.33 17.30
BALANCE SHEET DATA - ENDING BALANCES:
Loans $ 150,389 $ 147,728 $ 152,126 $ 156,733 $ 164,251
Total assets 274,187 270,343 262,947 268,954 270,252
Deposits 164,036 157,518 158,803 167,530 162,385
Long-term debt(2) 42,481 43,756 44,194 43,418 44,361
Common stockholders' equity 21,925 21,563 20,913 20,226 20,192
Total stockholders' equity 21,925 21,563 20,913 20,226 20,382
CREDIT QUALITY RATIOS:
Net charge-offs to average loans 1.55% 1.62% 1.71% 1.79% 1.37%
Allowance to period end loans 3.17 3.19 3.06 2.97 2.81
Nonperforming assets to related assets(3) 2.48 2.65 2.58 2.35 1.96
FINANCIAL PERFORMANCE:
Return on average assets 1.24% 1.32% 1.21% 0.80% 1.13%
Return on average common equity 14.8 15.7 15.3 10.5 15.0
Net interest margin 3.84 3.69 3.91 3.84 3.70
Efficiency ratio 57.3 56.6 56.0 63.7 56.9
Employees 73,535(4) 73,579(4) 73,864(4) 73,519 75,801
CAPITAL RATIOS:
Risk-based capital:
Tier 1 9.5% 9.4% 9.0% 8.6% 8.4%
Total 13.0 13.0 12.7 12.2 11.7
Leverage 9.0 9.1 8.6 8.2 8.1
COMMON STOCK DATA:
Average shares outstanding:
Basic 1,162 1,174 1,170 1,166 1,168
Diluted 1,171 1,184 1,179 1,174 1,176
Stock price, quarter-end $ 37.40 $ 38.48 $ 41.78 $ 39.05 $ 31.47
- ---------------------------------------------------------------------------------------------------------------------
(1) Net interest income-FTE includes tax equivalent adjustments of $38 million,
$36 million, $35 million, $38 million and $30 million for the quarters
ended September 30, 2002, June 30, 2002, March 31, 2002, December 31, 2001
and September 30, 2001, respectively.
(2) Includes trust preferred capital securities.
(3) Related assets consist of loans outstanding, including loans held for sale,
and other real estate owned.
(4) Includes the addition of employees due to the consolidation of Paymentech,
Inc. and Anexsys, LLC.
(5) Results include the effects of the consolidation of Paymentech, Inc. and
Anexsys, LLC.
1
SUMMARY OF RESULTS
Net income for BANK ONE CORPORATION and its subsidiaries ("Bank One" or the
"Corporation") for the third quarter of 2002 was $823 million, or $0.70 per
diluted share. This is compared to net income of $754 million, or $0.64 per
diluted share. (All comparisons are to the applicable period in the prior year
unless otherwise specified.)
For the first nine months of 2002, net income was $2.5 billion, or $2.08
per diluted share, including a $40 million after tax benefit from reversals of
prior restructuring charges. This is compared to $2.1 billion, or $1.78 per
diluted share, including a $2 million after tax benefit from reversals of prior
restructuring charges.
Net interest income of $2.2 billion in the third quarter 2002 and $6.4
billion for the nine months ended September 30, 2002 remained relatively
unchanged. Decreases resulting from intentional reduction of certain segments of
the loan portfolio were offset by increases in Retail core deposits and the
benefit of lower interest rates that reduced the Corporation's funding costs.
Noninterest income increased $130 million in the third quarter primarily
due to increases in credit card revenue and gains in the fair value of credit
derivatives used to hedge exposure to specific credits in the loan portfolio
offset by writedowns in investments. Noninterest income increased $916 million
in the first nine months of 2002 primarily due to the acquisition of the
Wachovia credit card business in the third quarter of 2001, the consolidation of
Paymentech, Inc. and Anexsys, LLC beginning January 1, 2002, increased annuity
and mutual fund sales, increased service charges on deposits, asset-backed
finance underwriting fees and multiple other capital markets businesses, and
gains recognized on credit derivatives. Noninterest income as a percentage of
total revenue increased to 47.4% for the three months ended September 30, 2002
from 46.1% and increased to 48.9% for the nine months ended September 30, 2002
from 45.1%. These increases resulted from lower interest revenue driven by the
intentional reduction of certain segments of the loan portfolio and the impact
of lower interest rates, an increase in fee based revenue, particularly credit
card revenue from the Wachovia credit card business, and offsetting increases
and decreases driven by credit derivatives trading gains and other investment
writedowns, respectively.
Net investment securities losses were $29 million for the third quarter of
2002 compared to losses of $42 million. Net investment gains for the first nine
months of 2002 were $49 million compared with losses of $69 million. The gain
for the first nine months of 2002 included a $261 million gain on sale of the
interest in the GE Monogram joint venture, partially offset by net writedowns in
tax-advantaged investments and principal investment portfolios.
Total noninterest expense increased for the quarter and nine months by $112
million and $353 million, respectively. These increases were primarily the
result of the consolidations of Paymentech and Anexsys, increased marketing
expenditures and general costs associated with the Corporation's conversion
efforts. For the nine months ended September 30, 2002, total noninterest expense
also included expenses for terminating and renegotiating certain vendor
contracts and the benefit of restructuring-related reversals of $40 million
after-tax ($63 million pre-tax) related principally to reduced severance costs
associated with staff reductions, primarily in the Retail and Card Services
lines of business, changes in real estate closure and consolidation strategies,
and adjustments in estimates previously made for all lines of business.
Provision for credit losses was $587 million for the third quarter of 2002
compared to $620 million, a decrease of $33 million. Since the fourth quarter of
2001, the Corporation as a whole has experienced lower net charge-offs and
reductions in nonperforming loans, resulting in a reduction of provision for
credit losses in the current quarter. For the first nine months of 2002,
provision for credit losses was $1.9 billion compared to $1.7 billion in the
prior year, a 7% increase. This increase was due primarily to higher net
charge-offs in the vehicle and home equity portfolios.
BALANCE SHEET ANALYSIS
The Corporation's loan portfolio was $150.4 billion at September 30, 2002
compared with $156.7 billion at December 31, 2001, a decrease of $6.3 billion,
or 4%. Retail loans totaled $67.7 billion at September 30, 2002 compared with
$69.6 billion at December 31, 2001, a decrease of $1.9 billion, due to the
intentional reduction of the auto lease and discontinued brokered home equity
portfolios. Commercial Banking loans totaled $63.0 billion at September 30, 2002
compared to $72.5 billion at December 31, 2001, a decrease of $9.5 billion, or
13%. Reductions of $7.9 billion and $1.5 billion in commercial and industrial
and commercial real estate loans, respectively, reflected the conscious
management of credit risk in the current economic environment. Card Services
loans totaled $11.9 billion at September 30, 2002 compared to $6.8 billion at
December 31, 2001, an increase of $5.1 billion, or 75%, reflecting
2
renewed organic growth in the portfolio. During the quarter, 1.4 million credit
card accounts were opened, an increase of 11% compared to second quarter 2002.
At September 30, 2002, investment securities totaled $66.1 billion compared
with $60.9 billion at December 31, 2001. This increase of $5.2 billion, or 9%,
was driven by a $3.6 billion, or 14%, increase in U.S. government agencies, an
increase of $1.1 billion, or 26%, in other debt securities, primarily
asset-backed securities, and an increase of $172 million, or 6%, in equity
securities. Partially offsetting these increases were the previously mentioned
writedowns of tax-advantaged investment securities and principal investment
portfolios.
Total deposits at September 30, 2002 were $164.0 billion compared to $167.5
billion at December 31, 2001, a decrease of $3.5 billion, or 2%. Demand deposits
totaled $30.9 billion at September 30, 2002 compared to $32.2 billion at
December 31, 2001, a decrease of $1.3 billion, or 4%. Time deposits totaled
$32.3 billion at September 30, 2002 compared to $38.2 billion at December 31,
2001, a decrease of $5.9 billion, or 15%, primarily due to a decrease in
certificates of deposit, as rates on them have declined. These decreases were
partially offset by an increase of $4.6 billion, or 6%, in savings deposits.
BUSINESS SEGMENT RESULTS
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 net income (loss) by line of business for
the periods indicated:
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------------------------------------
(In millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Retail $ 354 $ 304 $ 1,056 $ 960
Commercial Banking 179 205 469 598
Card Services 298 279 845 620
Investment Management 100 101 330 266
Corporate (108) (135) (247) (303)
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle 823 754 2,453 2,141
Cumulative effect of change in accounting
principle, net of taxes of ($25) - - - (44)
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 823 $ 754 $ 2,453 $ 2,097
- ------------------------------------------------------------------------------------------------------------------------
The information provided in the line of business tables beginning with the
caption entitled "Financial Performance" is included herein for analytical
purposes only and is based on management information systems, assumptions and
methodologies that are under continual review.
3
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 September 30 Nine Months Ended September 30
-------------------------------------------------------------------------------------
Change Change
----------------- ------------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(1)(2) $ 1,209 $ 1,222 $ (13) (1)% $ 3,667 $ 3,740 $ (73) (2)%
Banking fees and commissions(3) 102 112 (10) (9) 333 345 (12) (3)
Credit card revenue(4) 45 43 2 5 129 120 9 8
Service charges on deposits(5) 213 202 11 5 610 584 26 4
Trading(6) 6 - 6 - 1 - 1 -
Other income (loss) (30) 1 (31) N/M (19) 25 (44) N/M
- -------------------------------------------------------------------- --------------------------------
Total noninterest income 336 358 (22) (6) 1,054 1,074 (20) (2)
- -------------------------------------------------------------------- --------------------------------
Total revenue, net of interest
expense 1,545 1,580 (35) (2) 4,721 4,814 (93) (2)
Provision for credit losses 199 247 (48) (19) 681 691 (10) (1)
Salaries and employee benefits 358 372 (14) (4) 1,080 1,116 (36) (3)
Other expense 445 494 (49) (10) 1,352 1,516 (164) (11)
- -------------------------------------------------------------------- --------------------------------
Total noninterest expense before
merger and restructuring-related
reversals 803 866 (63) (7) 2,432 2,632 (200) (8)
Restructuring-related reversals(7) - - - - (18) (3) (15) N/M
- -------------------------------------------------------------------- --------------------------------
Total noninterest expense 803 866 (63) (7) 2,414 2,629 (215) (8)
- -------------------------------------------------------------------- --------------------------------
Income before income taxes 543 467 76 16 1,626 1,494 132 9
Applicable income taxes 189 163 26 16 570 534 36 7
- -------------------------------------------------------------------- --------------------------------
Net income $ 354 $ 304 $ 50 16 $ 1,056 $ 960 $ 96 10
- --------------------------------------------------------------------------------------------------------------------------
Memo-Revenue by source:
Core businesses $ 1,460 $ 1,448 $ 12 1% $ 4,436 $ 4,393 $ 43 1%
Home equity
discontinued/vehicle leases 85 132 (47) (36) 285 421 (136) (32)
FINANCIAL PERFORMANCE:
Return on equity 23% 19% 4% 23% 21% 2%
Efficiency ratio 52 55 (3) 51 55 (4)
Headcount-full-time 32,098 34,001 (1,903) (6)
- --------------------------------------------------------------------------------------------------------------------------
4
RETAIL - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------------------------------------
Change Change
----------------- ------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Small business commercial $ 9.9 $ 10.0 $ (0.1) (1)%
Home equity 26.8 24.7 2.1 9
Vehicle 14.3 13.5 0.8 6
Other personal 8.9 9.9 (1.0) (10)
- -------------------------------------------------------------------------
Core businesses 59.9 58.1 1.8 3
Brokered home equity discontinued 3.6 6.0 (2.4) (40)
Vehicle leases 4.2 6.9 (2.7) (39)
- -------------------------------------------------------------------------
Home equity discontinued/vehicle
leases 7.8 12.9 (5.1) (40)
- -------------------------------------------------------------------------
Total loans (8) 67.7 71.0 (3.3) (5)
Assets 71.0 75.0 (4.0) (5)
Demand deposits 26.6 24.4 2.2 9
Savings 38.1 34.7 3.4 10
Time 23.0 28.1 (5.1) (18)
- -------------------------------------------------------------------------
Total deposits 87.7 87.2 0.5 1
Equity 6.2 6.2 - -
AVERAGE BALANCES (in billions):
Small business commercial $ 10.0 $ 9.9 $ 0.1 1 $ 10.0 $ 9.6 $ 0.4 4%
Home equity 26.1 24.5 1.6 7 25.6 23.8 1.8 8
Vehicle 13.8 14.0 (0.2) (1) 13.6 14.1 (0.5) (4)
Other personal 8.6 10.0 (1.4) (14) 9.0 10.7 (1.7) (16)
- ------------------------------------------------------------------------- ---------------------------
Core businesses 58.5 58.4 0.1 - 58.2 58.2 - -
Brokered home equity discontinued 3.9 6.3 (2.4) (38) 4.4 7.0 (2.6) (37)
Vehicle leases 4.4 7.0 (2.6) (37) 5.0 7.6 (2.6) (34)
- ------------------------------------------------------------------------- ---------------------------
Home equity discontinued/vehicle
leases 8.3 13.3 (5.0) (38) 9.4 14.6 (5.2) (36)
- ------------------------------------------------------------------------- ---------------------------
Total loans 66.8 71.7 (4.9) (7) 67.6 72.8 (5.2) (7)
Assets 70.2 75.7 (5.5) (7) 71.1 76.8 (5.7) (7)
Demand deposits 26.1 23.8 2.3 10 25.7 23.8 1.9 8
Savings 38.1 34.4 3.7 11 37.7 33.5 4.2 13
Time 23.7 28.8 (5.1) (18) 24.6 30.4 (5.8) (19)
- ------------------------------------------------------------------------- ---------------------------
Total deposits 87.9 87.0 0.9 1 88.0 87.7 0.3 -
Equity 6.2 6.2 - - 6.2 6.1 0.1 2
- --------------------------------------------------------------------------------------------------------------------------
5
RETAIL - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------------------------------------------------------
Change Change
------------------- ----------------
2002 2001 Amount Percent 2002 2001 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY (in millions):
Net charge-offs:
Small business commercial $ 15 $ 20 $ (5) (25)% $ 52 $ 47 $ 5 11%
Home equity 58 45 13 29 198 132 66 50
Vehicle 53 45 8 18 159 94 65 69
Other personal 26 35 (9) (26) 86 88 (2) (2)
- ------------------------------------------------------------------------- ---------------------------
Core businesses 152 145 7 5 495 361 134 37
Brokered home equity discontinued 34 39 (5) (13) 126 118 8 7
Vehicle leases 16 25 (9) (36) 61 73 (12) (16)
- ------------------------------------------------------------------------- ---------------------------
Home equity discontinued/vehicle
leases 50 64 (14) (22) 187 191 (4) (2)
- ------------------------------------------------------------------------- ---------------------------
Total consumer 187 189 (2) (1) 630 505 125 25
- ------------------------------------------------------------------------- ---------------------------
Total net charge-offs 202 209 (7) (3) 682 552 130 24
- ------------------------------------------------------------------------- ---------------------------
Net charge-off ratios:
Small business commercial 0.60% 0.81% (0.21)% 0.69% 0.65% 0.04%
Home equity 0.89 0.73 0.16 1.03 0.74 0.29
Vehicle 1.54 1.29 0.25 1.56 0.89 0.67
Other personal 1.21 1.40 (0.19) 1.27 1.10 0.17
- ------------------------------------------------------------------------- ---------------------------
Core businesses 1.04 0.99 0.05 1.13 0.83 0.30
Brokered home equity discontinued 3.49 2.48 1.01 3.82 2.25 1.57
Vehicle leases 1.45 1.41 0.04 1.63 1.28 0.35
- ------------------------------------------------------------------------- ---------------------------
Home equity discontinued/vehicle
leases 2.41 1.91 0.50 2.65 1.74 0.91
- ------------------------------------------------------------------------- ---------------------------
Total consumer 1.32 1.22 0.10 1.46 1.07 0.39
- ------------------------------------------------------------------------- ---------------------------
Total net charge-offs 1.21 1.17 0.04 1.35 1.01 0.34
- ------------------------------------------------------------------------- ---------------------------
Nonperforming assets:
Commercial $ 324 $ 241 $ 83 34
Consumer(9) 1,110 914 196 21
- -------------------------------------------------------------------------
Total nonperforming loans(10) 1,434 1,155 279 24
Other, including
Other Real Estate Owned ("OREO") 180 76 104 N/M
- -------------------------------------------------------------------------
Total nonperforming assets 1,614 1,231 383 31
Allowance for credit losses 1,026 979 47 5
Allowance to period end loans 1.57% 1.40% 0.17%
Allowance to nonperforming loans 72 85 (13)
Nonperforming assets to related assets 2.38 1.73 0.65
- ------------------------------------------------------------------------------------------------------------------------
6
RETAIL - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------------------
Change Change
------------------- ------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTION:
Number of:
Banking centers 1,779 1,805 (26) (1)%
ATMs 4,122 5,652 (1,530) (27)
On-line customers (in thousands) 1,326 1,040 286 28
Households (in thousands) 6,980 7,361 (381) (5)
Business customers (in thousands) 486 512 (26) (5)
Debit cards issued (in thousands) 4,609 4,491 118 3
INVESTMENTS:
Investment sales volume (in millions) $ 1,327 $ 1,231 $ 96 8 $ 4,155 $ 3,510 $ 645 18%
- --------------------------------------------------------------------------------------------------------------------------
N/M-Not meaningful.
(1) Net interest income-FTE includes tax equivalent adjustments of $6
million for the three months ended September 30, 2002 and 2001. For the
nine months ended September 30, 2002 and 2001, tax equivalent
adjustments were $16 million.
(2) Net interest income is presented rather than gross interest income and
gross interest expenses because the Corporation relies primarily on net
interest revenue to assess the performance of the segment and make
resource allocations.
(3) Banking fees and commissions include insurance fees, documentary fees,
commitment fees, mutual fund commissions, syndicated management fees,
leasing fees, safe deposit fees, official checks fees, ATM interchange
and miscellaneous other fee revenue.
(4) Credit card revenue includes credit card fees, debit card fees, merchant
fees and interchange fees.
(5) Service charges on deposits include service charges on deposits,
deficient balance fees and non-sufficient funds/overdraft fees.
(6) Trading includes trading and foreign exchange.
(7) Restructuring-related charges (reversals) are allocated to each line of
business for management reporting purposes. Restructuring-related
charges (reversals) are discussed on page 47. Income before
restructuring-related reversals, net of $7 million and $1 million of
taxes, was $1.0 billion and $958 million, for nine months ended
September 30, 2002 and 2001, respectively.
(8) Includes loans held for sale of $2.5 billion and $1.1 billion at
September 30, 2002 and 2001, respectively. These amounts are not
included in allowance coverage statistics. Prior periods have been
recalculated to conform to current period presentation.
(9) Includes consumer balances that are placed on nonaccrual status when the
collection of contractual principal or interest becomes 90 days past
due.
(10) Includes loans held for sale of $3 million at September 30, 2002. There
were no nonperforming loans held for sale at September 30, 2001. These
amounts are not included in allowance coverage statistics. Prior periods
have been recalculated to conform to current period presentation.
Quarterly Results
- -----------------
Retail net income totaled $354 million, up $50 million, or 16%, primarily
due to lower noninterest and provision expense.
Net interest income declined $13 million, or 1%, driven by the intentional
reduction of the auto lease and discontinued brokered home equity portfolios.
This decline was partially offset by a 10% increase in core deposits, which
include demand and savings products. The run-off portfolios were down $5.1
billion, while average balances for the remaining home equity loan portfolio
were up $1.6 billion, reflecting strong production trends.
Noninterest income was $336 million, down $22 million, or 6%, primarily as
a result of lower mortgage-related revenue and lower revenue from the
intentional reduction of non-branded ATMs, partially offset by higher deposit
service charges. Compared to the prior quarter, noninterest income was down $20
million, or 6%, primarily as a result of higher losses on tax-advantaged
investments.
Noninterest expense was $803 million, down $63 million, or 7%. The absence
of goodwill amortization, lower fraud losses, and lower staffing levels were
partially offset by additional investments in marketing and higher benefits
costs. Noninterest expense was up $14 million from the prior quarter due to the
absence of an $18 million benefit from the reversal of a restructuring-related
charge.
The provision for credit losses was $199 million, down $48 million, or 19%,
due to the absence of reserve increases and lower net charge-offs on
discontinued portfolios and small business loans. Compared to the prior quarter,
provision declined $16 million, or 7%.
7
RETAIL-CONTINUED
The allowance for credit losses of $1.0 billion represented 1.57% of
period-end loans, an increase from 1.40%. Nonperforming assets were $1.6
billion, up $383 million, or 31%, due to increases in home equity and small
business loans.
Year-to-Date Results
- --------------------
Retail year-to-date net income totaled $1.1 billion, up $96 million, or
10%, primarily due to lower noninterest expense partially offset by lower
revenue.
Net interest income declined $73 million, or 2%, driven by the intentional
reduction of the auto lease and discontinued brokered home equity portfolios.
This decline was partially offset by an 11% increase in core deposits, which
include demand and savings products. The run-off portfolios decreased $5.1
billion, while average balances for the remaining home equity loan portfolio
increased $1.8 billion, reflecting strong production trends.
Noninterest income was $1.1 billion, down $20 million, or 2%, primarily as
a result of higher losses on tax-advantaged investments, lower mortgage-related
revenue and lower revenue from the intentional reduction of non-branded ATMs,
partially offset by higher deposit service charges.
Noninterest expense declined $215 million, or 8%, driven by lower staffing,
the absence of goodwill amortization, and lower fraud and operating losses. The
decline was partially offset by additional investments in marketing and benefits
costs.
The provision for credit losses was $681 million, down $10 million, or 1%,
due to the absence of reserve increases, offset by higher net charge-offs on
home equity and vehicle loans.
8
COMMERCIAL BANKING
Commercial Banking offers a broad array of products, including global cash
management, capital markets, commercial credit cards, investment management, and
lending to Corporate Banking and Middle Market Banking customers.
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------------------------------------------------------
Change Change
------------------ -------------------
(Dollars in millions) 2002(12) 2001 Amount Percent 2002(12) 2001 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(2)(11) $ 605 $ 657 $ (52) (8)% $ 1,858 $ 2,071 $ (213) (10)%
Banking fees and commissions 175 182 (7) (4) 574 528 46 9
Credit card revenue 21 21 - - 55 65 (10) (15)
Service charges on deposits 188 175 13 7 545 456 89 20
Fiduciary and investment
management fees(13) - 3 (3) N/M (1) 1 (2) N/M
Investment securities losses (12) (12) - - (13) (12) (1) 8
Trading 143 81 62 77 250 225 25 11
Other income (loss) (78) (23) (55) N/M (148) (71) (77) N/M
- --------------------------------------------------------------------- ---------------------------------
Total noninterest income 437 427 10 2 1,262 1,192 70 6
- --------------------------------------------------------------------- --------------------------------
Total revenue, net of interest
expense 1,042 1,084 (42) (4) 3,120 3,263 (143) (4)
Provision for credit losses 237 246 (9) (4) 792 750 42 6
Salaries and employee
benefits(14) 269 249 20 8 789 760 29 4
Other expense(14) 315 298 17 6 947 912 35 4
- --------------------------------------------------------------------- ---------------------------------
Total noninterest expense before
merger and restructuring-related
reversals 584 547 37 7 1,736 1,672 64 4
Restructuring-related
reversals(15) - - - - (4) - (4) -
- --------------------------------------------------------------------- ---------------------------------
Total noninterest expense 584 547 37 7 1,732 1,672 60 4
- --------------------------------------------------------------------- ---------------------------------
Income before income taxes 221 291 (70) (24) 596 841 (245) (29)
Applicable income taxes 42 86 (44) (51) 127 243 (116) (48)
- --------------------------------------------------------------------- ---------------------------------
Net income $ 179 $ 205 $ (26) (13) $ 469 $ 598 $ (129) (22)
- ----------------------------------------------------------------------------------------------------------------------------
Memo-Revenue by activity(16):
Lending-related revenue $ 491 $ 493 $ (2) -% $ 1,340 $ 1,542 $ (202) (13)%
Global Treasury Services 426 416 10 2 1,254 1,192 62 5
Capital Markets(17) 154 163 (9) (6) 518 493 25 5
Other (29) 12 (41) N/M 8 36 (28) (78)
FINANCIAL PERFORMANCE:
Return on equity 10% 11% (1)% 8% 11% (3)%
Efficiency ratio 56 50 6 56 51 5
Headcount-full-time(14):
Corporate Banking
(including Capital Markets) 2,306 2,768 (462) (17)
Middle Market 2,942 3,351 (409) (12)
Global Treasury Services 3,403 3,035 368 12
Operations, Technology, and
other Administration 1,967 2,210 (243) (11)
- ---------------------------------------------------------------------
Total headcount-full-time 10,618 11,364 (746) (7)
- ----------------------------------------------------------------------------------------------------------------------------
9
COMMERCIAL BANKING - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
-----------------------------------------------------------------------------------
Change Change
------------------ -------------------
2002(12) 2001 Amount Percent 2002(12) 2001 Amount Percent
- -------------------------------------------------------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Loans(18) $ 63.0 $ 77.4 $ (14.4) (19)%
Assets 95.7 106.5 (10.8) (10)
Demand deposits 24.5 23.3 1.2 5
Savings 2.9 2.8 0.1 4
Time 14.8 9.4 5.4 57
Foreign offices 9.4 9.3 0.1 1
- ----------------------------------------------------------------------------
Total deposits 51.6 44.8 6.8 15
Equity 7.4 7.3 0.1 1
AVERAGE BALANCES (in billions):
Loans $ 63.7 $ 78.1 $ (14.4) (18) $ 67.3 $ 82.6 $ (15.3) (19)%
Assets 92.7 106.3 (13.6) (13) 95.5 108.7 (13.2) (12)
Demand deposits 21.7 20.9 0.8 4 22.3 20.8 1.5 7
Savings 2.8 2.8 - - 2.8 2.7 0.1 4
Time 13.6 9.2 4.4 48 13.5 7.2 6.3 88
Foreign offices 8.9 10.0 (1.1) (11) 8.5 8.9 (0.4) (4)
- ---------------------------------------------------------------------------- -----------------------------
Total deposits 47.0 42.9 4.1 10 47.1 39.6 7.5 19
Equity 7.4 7.3 0.1 1 7.4 7.3 0.1 1
CREDIT QUALITY (in millions):
Net charge-offs $ 237 $ 230 $ 7 3 $ 792 $ 718 $ 74 10
Net charge-off ratio 1.49% 1.18% 0.31% 1.57% 1.16% 0.41%
Nonperforming assets:
Nonperforming loans(19) $ 2,040 $ 1,904 $ 136 7
Other, including OREO 27 30 (3) (10)
- ----------------------------------------------------------------------------
Total nonperforming assets 2,067 1,934 133 7
Allowance for credit losses 3,071 3,078 (7) -
Allowance to period end loans(18) 4.89% 3.98% 0.91%
Allowance to nonperforming loans(19) 157 162 (5)
Nonperforming assets to related assets 3.28 2.50 0.78
CORPORATE BANKING (in billions):
Loans-ending balance $ 31.2 $ 40.5 $ (9.3) (23)
-average balance 31.6 41.4 (9.8) (24) $ 33.6 $ 45.7 $ (12.1) (26)
Deposits-ending balance 28.8 24.1 4.7 20
-average balance 25.9 23.9 2.0 8 25.5 20.9 4.6 22
Credit quality (in millions):
Net charge-offs 160 131 29 22 491 472 19 4
Net charge-off ratio 2.03% 1.27% 0.76% 1.95% 1.38% 0.57%
Nonperforming loans $ 1,010 $ 1,051 $ (41) (4)
Nonperforming loans to total loans 3.24% 2.60% 0.64%
SYNDICATIONS:
Lead arranger deals:
Volume (in billions) $ 11.3 $ 9.7 $ 1.6 16 $ 44.6 $ 37.0 $ 7.6 21
Number of transactions 63 56 7 13 184 161 23 14
- -------------------------------------------------------------------------------------------------------------------------------
10
COMMERCIAL BANKING - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------------------------------------------------
Change Change
------------------- ------------------
2002(12) 2001 Amount Percent 2002(12) 2001 Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
SYNDICATIONS - CONTINUED
League table standing-rank 4 4 - - 4 4 - -
League table standing-market share 6% 4% 2% 6% 4% 2%
- --------------------------------------------------------------------------- ----------------------------
MIDDLE MARKET BANKING (in billions):
Loans-ending balance $ 31.8 $ 36.9 $ (5.1) (14)%
-average balance 32.1 36.7 (4.6) (13) $ 33.6 $ 36.9 $ (3.3) (9)%
Deposits-ending balance 22.8 20.6 2.2 11
-average balance 21.2 19.0 2.2 12 21.6 18.7 2.9 16
Credit quality (in millions):
Net charge-offs 77 99 (22) (22) 301 246 55 22
Net charge-off ratio 0.96% 1.08% (0.12)% 1.19% 0.89% 0.30%
Nonperforming loans $ 1,030 $ 853 $ 177 21
Nonperforming loans to total loans 3.24% 2.31% 0.93%
- ------------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see page 7.
(11) Net interest income-FTE includes tax equivalent adjustments of $24 million
and $17 million for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002 and 2001 tax
equivalent adjustments were $68 million and $56 million, respectively.
(12) Results include the effect of consolidating Anexsys, LLC, which had an
impact on the classification of revenue and expense but had no impact on
net income for the three months ended September 30, 2002 or the year to
date.
(13) Fiduciary and investment management fees include asset management fees,
personal trust fees, other trust fees and advisory fees.
(14) Prior period data has been adjusted for the transfer of the National
Retail Lockbox Operations and Cash Vault Services business from Commercial
to Corporate.
(15) Restructuring-related charges (reversals) are discussed on page 47. Income
before restructuring-related reversals, net of $1 million tax, was $466
million for the nine months ended September 30, 2002.
(16) Prior periods have been adjusted to conform to the current organization.
(17) Capital markets include trading revenues and underwriting, syndicated
lending and advisory fees.
(18) Includes loans held for sale of $230 million and $58 million at September
30, 2002 and 2001, respectively. These amounts are not included in
allowance coverage statistics. Prior periods have been recalculated to
conform to current period presentation.
(19) Includes loans held for sale of $90 million at September 30, 2002. There
were no nonperforming loans held for sale at September 30, 2001. These
amounts are not included in allowance coverage statistics. Prior periods
have been recalculated to conform to current period presentation.
Quarterly Results
- -----------------
Commercial Banking net income totaled $179 million, down $26 million, or
13% from the prior year, and up $32 million, or 22%, from the prior quarter.
Results reflected lower net interest income and higher noninterest expense,
partially offset by higher noninterest income and a lower provision for credit
losses.
Net interest income totaled $605 million, a decline of $52 million, or 8%,
as a result of a reduction in average loans of $14.4 billion, or 18%. Compared
to the prior quarter, net interest income increased by $7 million, or 1%.
Noninterest income was $437 million, up $10 million, or 2%. Banking fees
and commissions decreased $7 million, or 4%, as a result of lower loan
syndication fees and investment grade underwriting. Service charges on deposits
increased $13 million, or 7%, as Global Treasury Services clients incurred
higher fees because of the lower value of their compensating deposit balances.
Trading income was $143 million, reflecting an increase of $62 million, or 77%,
driven by the $101 million pre-tax gain in the credit derivatives portfolio used
to hedge the commercial loan portfolio. In general, credit derivatives are used
to limit exposures for specific credits that are larger than the Corporation is
willing to bear. The notional amount of credit derivatives totaled $6.1 billion,
while Corporate Banking loans and loan commitments totaled approximately $100
billion. While credit derivatives are marked to market through trading income,
loans are not marked to market. The Corporation, however, makes risk management
decisions for economic, rather than accounting, purposes to allow for better
management of credit risk. The Corporation acknowledges that gains recognized
during the third quarter of 2002 could decline or reverse in future quarters,
and therefore does not consider them sustainable earnings. Capital markets
trading income declined $14 million, or 23%, reflecting lower results across
multiple trading products. Other income was a $78 million loss, a decline of $55
million, predominantly driven by a higher than expected loss in tax-oriented
investments.
Noninterest expense was $584 million, up $37 million, or 7%, as a result of
an $18 million impact from the consolidation of Anexsys, LLC as well as higher
incentive compensation and conversion related expenses.
11
COMMERCIAL BANKING - CONTINUED
Commercial Banking provision for credit losses was $237 million, a decline
of $9 million, or 4%, from the prior year and $37 million, or 14%, from the
prior quarter. Corporate Banking net charge-offs were $160 million, or 2.03% of
average loans, an increase from 1.27% in the prior year and relatively unchanged
from the second quarter. Net charge-offs included $11 million related to loans
sold or initially reclassified to held for sale, compared to $33 million in the
prior year. Middle Market net charge-offs were $77 million, or 0.96% of average
loans, down from 1.08% in the prior year and down from 1.26% in the prior
quarter.
The allowance for credit losses of $3.1 billion represented 4.89% of
period-end loans, an increase from 3.98% in the prior year and 4.74% in the
prior quarter. Nonperforming loans declined by $257 million, or 11%, to $2.0
billion from the second quarter, reflecting credit quality improvements in both
Corporate Banking and Middle Market.
Nonperforming loans at September 30, 2002 were $2.0 billion, up $136
million, or 7%, driven by a $177 million, or 21%, increase in Middle Market
nonperforming loans.
Year-to-Date Results
- --------------------
Commercial Banking year-to-date net income totaled $469 million, down $129
million, or 22%. 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 $1.9 billion, down $213 million, or 10%, driven by
a reduction in average loans of $15.3 billion, or 19%, primarily in Corporate
Banking.
Noninterest income was $1.3 billion, up $70 million, or 6%. Banking fees
and commissions increased $46 million, or 9%, primarily due to growth in
asset-backed finance underwriting fees and other capital markets businesses.
Service charges on deposits increased $89 million, or 20%, as Global Treasury
Services clients incurred higher fees because of the lower value of their
compensating deposit balances. Trading revenue increased $25 million, or 11%,
driven by a $100 million pre-tax gain in the credit derivatives portfolio used
to hedge the commercial loan portfolio. Partially offsetting this gain, capital
markets trading income declined $52 million, or 25%, reflecting lower results in
fixed income securities, foreign exchange, and asset-backed finance. Other
income was a $148 million loss, a decline of $77 million, primarily due to
higher than expected losses in tax-oriented investments and an increase in the
loss on loan sales.
Noninterest expense was $1.7 billion, up $60 million, or 4%, as a result of
a $51 million impact from the consolidation of Anexsys, LLC as well as higher
incentive compensation.
Commercial Banking provision for credit losses was $792 million, up $42
million, or 6%. Corporate Banking net charge-offs were $491 million, or 1.95% of
average loans, an increase of 0.57%. Net charge-offs included $111 million
related to loans sold or reclassified to held for sale, compared with $190
million in the prior year. Middle Market net charge-offs were $301 million, or
1.19% of average loans, an increase of 0.30%.
12
CARD SERVICES
Card Services (previously referred to as Credit Card) is the third largest
credit card provider in the United States and the largest VISA(R) credit card
issuer in the world.
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------------------
Change Change
------------------ -----------------
(Dollars in millions) 2002 (21) 2001 Amount Percent 2002 (21) 2001 Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(2)(20) $ 359 $ 349 $ 10 3% $ 878 $ 949 $ (71) (7)%
Banking fees and commissions 13 23 (10) (43) 55 70 (15) (21)
Credit card revenue 903 703 200 28 2,647 1,726 921 53
Other income (loss) (24) 22 (46) N/M (14) 95 (109) N/M
- ------------------------------------------------------------------ ----------------------------
Total noninterest income 892 748 144 19 2,688 1,891 797 42
- ------------------------------------------------------------------ ----------------------------
Total revenue, net of interest
expense 1,251 1,097 154 14 3,566 2,840 726 26
Provision for credit losses 148 118 30 25 363 279 84 30
Salaries and employee benefits 151 123 28 23 439 376 63 17
Other expense 464 412 52 13 1,401 1,195 206 17
- ------------------------------------------------------------------ ----------------------------
Total noninterest expense before
merger and restructuring-related
reversals 615 535 80 15 1,840 1,571 269 17
Restructuring-related reversals(22) - - - - (19) - (19) -
- ------------------------------------------------------------------ ----------------------------
Total noninterest expense 615 535 80 15 1,821 1,571 250 16
- ------------------------------------------------------------------ ----------------------------
Income before income taxes 488 444 44 10 1,382 990 392 40
Applicable income taxes 190 165 25 15 537 370 167 45
- ------------------------------------------------------------------ ----------------------------
Net income $ 298 $ 279 $ 19 7 $ 845 $ 620 $ 225 36
- ------------------------------------------------------------------ --------------------------------------
Memo-Net securitization gains
(amortization) $ (11) $ (22) $ 11 (50)% $ (55) $ (42) $ (13) 31%
FINANCIAL PERFORMANCE:
Return on equity 18% 17% 1% 18% 13% 5%
Efficiency ratio 49 49 - 51 55 (4)
Headcount-full-time 10,508 10,245 263 3
ENDING BALANCES (in billions):
Owned loans (23) $ 11.9 $ 8.4 $ 3.5 42
Seller's interest 24.4 18.4 6.0 33
- ------------------------------------------------------------------
Total 36.3 26.8 9.5 35
Assets 40.6 30.8 9.8 32
Equity 6.4 6.4 - -
- ---------------------------------------------------------------------------------------------------------------------
13
CARD SERVICES - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------------------
Change Change
------------------- -----------------
2002 (21) 2001 Amount Percent 2002 (21) 2001 Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCES (in billions):
Owned loans $ 10.5 $ 7.9 $ 2.6 33% $ 8.7 $ 6.4 $ 2.3 36%
Seller's interest 24.3 17.8 6.5 37 22.9 18.3 4.6 25
- ------------------------------------------------------------------ ---------------------------
Total 34.8 25.7 9.1 35 31.6 24.7 6.9 28
Assets 38.8 29.3 9.5 32 36.0 27.5 8.5 31
Equity 6.4 6.4 - - 6.4 6.3 0.1 2
CREDIT QUALITY (in millions):
Net charge-offs $ 131 $ 118 $ 13 11 $ 346 $ 279 $ 67 24
Net charge-off ratios:
For the period 4.99% 5.95% (0.96)% 5.30% 5.81% (0.51)%
12-month lagged(24) 6.63 10.04 (3.41) 7.21 7.91 (0.7)
Delinquency ratio:
30+ days 2.74 3.19 (0.45)
90+ days 1.11 1.40 (0.29)
Allowance for credit losses $ 396 $ 397 $ (1) -
Allowance to period-end owned loans 5.87% 8.35% (2.48)%
OTHER DATA:
Charge volume (in billions) $ 39.5 $ 35.2 $ 4.3 12 $ 111.9 $ 102.1 $ 9.8 10
New accounts opened (in thousands) 1,430 1,149 281 24 3,654 2,927 727 25
Credit cards issued (in thousands) 53,510 58,441 (4,931) (8)
Number of FirstUSA.com customers
(in millions) 3.0 2.8 0.2 7
Paymentech:
Bank card volume (in millions) $ 30,711 $ 28,237 $ 2,474 9 $ 88,748 $ 85,077 $ 3,671 4
Total transactions (in millions) 1,063 935 128 14 3,019 2,795 224 8
- ---------------------------------------------------------------------------------------------------------------------
The Corporation transforms a substantial portion of its credit card
receivables into securities, which are sold to investors - a process referred to
as securitization. Securitization impacts the Corporation's consolidated balance
sheet by removing those credit card receivables that have been sold and by
reclassifying those credit card receivables whose ownership has been transformed
into certificate form (referred to as "Seller's Interest") from loans to
investments. Gain or loss on the sale of credit card receivables, net of
amortization of transaction costs and amortization from securitization
repayments, is reported as securitization income. Securitization also impacts
the Corporation's consolidated income statement by reclassifying interest income
and fees, interchange income, credit losses and recoveries related to
securitized receivables as securitization income. Credit card interest income
and fees, interchange income, credit losses and recoveries related to credit
card receivables whose ownership has been converted to certificate form are
reclassified as investment income.
The Corporation evaluates its Card Services line of business trends on a
managed basis, which assumes that securitized receivables have not been sold and
are still on the balance sheet. The Corporation manages its Card Services
operations on a managed basis because the receivables that are securitized are
subject to underwriting standards comparable to the owned portfolio and are
serviced by operating personnel without regard to ownership. The Corporation
believes that investors should be informed, and often request information, about
the credit performance of the entire managed portfolio in order to understand
the quality of the Card Services originations and the related credit risks
inherent in the owned portfolio and retained interests in securitizations. In
addition, the Corporation funds its Card Services operations, reviews operating
results and makes decisions about allocating resources, such as employees and
capital, on a managed basis. See "Loan Securitizations" on page 64 and Note 9,
"Credit Card Securitizations," of the December 31, 2001 Annual Report for
additional information related to the Corporation's securitization activity.
14
CARD SERVICES - CONTINUED
The following table presents certain Card Services information on a managed
basis.
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------- ---------------------------------------
CARD SERVICES - MANAGED BASIS Change Change
------------------ -----------------
2002 (21) 2001 Amount Percent 2002 (21) 2001 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Owned(23) $ 11.9 $ 8.4 $ 3.5 42%
Seller's interest 24.4 18.4 6.0 33
- ------------------------------------------------------------------
Loans on balance sheet 36.3 26.8 9.5 35
Securitized loans 32.9 40.0 (7.1) (18)
- ------------------------------------------------------------------
Managed loans 69.2 66.8 2.4 4
Managed assets 73.4 70.8 2.6 4
AVERAGE MANAGED ASSETS (in
billions): 72.2 70.2 2.0 3 $ 71.2 $ 67.9 $ 3.3 5%
CREDIT QUALITY (in millions):
Managed net charge-offs 853 981 (128) (13) 2,722 2,893 (171) (6)
Managed net charge-off ratios:
For the period 5.00% 5.89% (0.89)% 5.43% 5.93% (0.50)%
12-month lagged(24) 5.12 5.95 (0.83) 5.58 5.81 (0.23)
Managed delinquency ratio:
30+ days 4.05 4.25 (0.20)
90+ days 1.68 1.80 (0.12)
- ----------------------------------------------------------------------------------------------------------------------
For additional footnote detail see pages 7 and 11.
(20) Net interest income-FTE did not have tax equivalent adjustments for the
three months ended September 30, 2002 and 2001 or for the nine months
ended September 30, 2002 and 2001.
(21) Results include the effect of consolidating Paymentech beginning in the
first quarter of 2002. The impact to third quarter and year to date
results was to increase net interest income by $3 million and $9 million,
noninterest income by $75 million and $228 million, expense by $64 million
and $201 million, respectively; there was no impact on net income.
(22) Restructuring-related charges (reversals) are discussed on page 47. Income
before restructuring-related reversals, net of $7 million tax, was $833
million for the nine months ended September 30, 2002.
(23) Includes loans held for sale of $5.2 billion and $3.6 billion at September
30, 2002 and 2001, respectively. These amounts are not included in
allowance coverage statistics. Prior periods have been recalculated to
conform to current period presentation.
(24) The current period lagged loss rate includes nine months of Wachovia net
credit losses while the prior period average loans only includes two
months of Wachovia balances. The prior period lagged loss rate includes
two months of Wachovia net credit losses while the 2001 average loans do
not include Wachovia balances.
Quarterly Results
- -----------------
Card Services reported third quarter net income of $298 million, up $19
million, or 7%. While there was relatively no incremental impact to net income
as a result of the consolidation in 2002 of the Corporation's interest in
Paymentech, Inc., individual income and expense lines were affected.
Total reported revenue was $1.2 billion for the quarter, an increase of
$154 million. Net interest income was $35 million, up $10 million or 3%
reflecting both higher owned loan balances and fees, offset by lower spreads.
Noninterest income was $892 million, an increase of $144 million, or 19%. The
consolidation of Paymentech contributed $75 million to this increase. Excluding
the impact of Paymentech, the $69 million increase in noninterest income was the
result of higher volume-related revenue and higher income earned on securitized
loans.
Noninterest expense totaled $615 million, an increase of $80 million, or
15%. The consolidation of Paymentech contributed $64 million to this increase.
Excluding the impact of Paymentech, the $16 million increase in noninterest
expense was a result of higher marketing expense, partially offset by lower
processing costs.
The reported provision for credit losses was $148 million, an increase of
$30 million or 25%, as a result of portfolio growth. Owned loans as of September
30, 2002, totaled $11.9 billion, an increase of $3.5 billion. The reported
charge-
15
CARD SERVICES - CONTINUED
off rate was 4.99%, down from 5.95% in the prior year and 5.62% in the
prior quarter. The reported 30-day delinquency rate was 2.74%, down from 3.19%
in the year-ago quarter and up from 2.15% in the second quarter.
Managed loans were $69.2 billion at September 30, 2002, up $2.4 billion.
Managed loans increased $3.3 billion from June 30, 2002. Card Services opened
1.4 million new credit card accounts during the quarter, a 24% increase from the
third quarter of 2001.
On a managed basis, provision for credit losses was $870 million, an 11%
decline. Managed loans were $69.2 billion at September 30, 2002, an increase of
$2.4 billion or 4%, reflecting lower attrition and increased organic growth.
Charge-offs were 5.00%, down from 5.89% and 5.62% in the prior quarter.
The 30-day delinquency ratio improved on both a reported and managed basis.
Delinquency rates, on a reported basis, continue to be lower than on a managed
basis because new originations represent a larger percentage of the on-balance
sheet portfolio. On a reported basis, the 30-day delinquency ratio was 2.74%,
down from 3.19% and unchanged from the prior quarter. The 30-day delinquency
ratio on a managed basis was 4.05%, down from 4.25% and up from 3.83% in the
prior quarter.
Securitization gains were $11 million resulting from the securitization of
$1.5 billion in credit card receivables. This compares with securitization gains
of $20 million resulting from the securitization of $2.8 billion in credit card
receivables in the previous quarter. In the year ago quarter, there were no new
securitizations.
Year-to-Date Results
- --------------------
Card Services reported net income of $845 million, up $225 million, or 36%.
The current period results reflected nine months of Wachovia earnings while the
prior period results reflected two months of Wachovia earnings (following the
addition of the Wachovia credit card business in the third quarter of 2001).
Total reported revenue was $3.6 billion, up $726 million, or 26%. Net
interest income was $878 million, down $71 million, or 7%, reflecting lower
spreads partially offset by both higher owned loan balances and fees.
Noninterest income was $2.7 billion, an increase of $797 million, or 42%. The
consolidation of Paymentech contributed $228 million to this increase. Excluding
the impact of Paymentech, the $569 million increase in noninterest income was
the result of higher income earned on securitized loans and higher
volume-related revenue.
Noninterest expense totaled $1.8 billion, an increase of $250 million, or
16%. The consolidation of Paymentech contributed $201 million to this increase.
Excluding the impact of Paymentech, the $49 million increase in noninterest
expense was a result of higher marketing expense, partially offset by lower
operating costs.
The reported provision for credit losses was $363 million, an increase of
$84 million, or 30%, as a result of portfolio growth.
Securitization gains were $30 million resulting from the securitizations of
$4.3 billion in credit card receivables. This compares with securitization gains
of $28 million resulting from the securitization of $3.8 billion in credit card
receivable.
16
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 September 30 Nine Months Ended September 30
------------------------------------ -------------------------------------
Change Change
----------------- -----------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(2)(25) $ 100 $ 106 $ (6) (6)% $ 320 $ 317 $ 3 1%
Banking fees and commissions 127 125 2 2 401 354 47 13
Service charges on deposits 5 4 1 25 14 12 2 17
Fiduciary and investment
management fees 181 187 (6) (3) 558 559 (1) -
Other income 2 1 1 N/M 13 7 6 86
- ----------------------------------------------------------------- -----------------------------
Total noninterest income 315 317 (2) (1) 986 932 54 6
- ----------------------------------------------------------------- -----------------------------
Total revenue, net of interest
expense 415 423 (8) (2) 1,306 1,249 57 5
Provision for credit losses 3 9 (6) (67) 8 25 (17) (68)
Salaries and employee benefits 142 140 2 1 422 430 (8) (2)
Other expense 110 113 (3) (3) 350 368 (18) (5)
- ----------------------------------------------------------------- -----------------------------
Total noninterest expense before
merger and restructuring-related
reversals 252 253 (1) - 772 798 (26) (3)
Restructuring-related reversals(26) - - - - (1) - (1) -
- ----------------------------------------------------------------- -----------------------------
Total noninterest expense 252 253 (1) - 771 798 (27) (3)
- ----------------------------------------------------------------- -----------------------------
Income before income taxes 160 161 (1) (1) 527 426 101 24
Applicable income taxes 60 60 - - 197 160 37 23
- ----------------------------------------------------------------- -----------------------------
Net income $ 100 $ 101 $ (1) (1) $ 330 $ 266 $ 64 24
- ---------------------------------------------------------------------------------------------------------------------
Memo - Insurance revenues $ 104 $ 115 $ (11) (10)% $ 343 $ 319 $ 24 8%
FINANCIAL PERFORMANCE:
Return on equity 36% 36% -% 40% 36% 4%
Efficiency ratio 61 60 1 59 64 (5)
Headcount-full-time 5,925 6,253 (328) (5)
ENDING BALANCES (in billions):
Loans $ 7.1 $ 7.0 $ 0.1 1
Assets 8.7 8.5 0.2 2
Demand deposits 2.6 2.1 0.5 24
Savings 3.9 2.9 1.0 34
Time 3.3 3.3 - -
Foreign offices 0.3 0.2 0.1 50
- -----------------------------------------------------------------
Total deposits 10.1 8.5 1.6 19
Equity 1.1 1.1 - -
AVERAGE BALANCES (in billions):
Loans $ 7.0 $ 6.9 $ 0.1 1 $ 7.0 $ 6.9 $ 0.1 1
Assets 8.5 8.2 0.3 4 8.5 8.1 0.4 5
Demand deposits 2.0 1.9 0.1 5 2.0 1.9 0.1 5
Savings 3.9 2.8 1.1 39 3.9 2.7 1.2 44
Time 3.3 3.3 - - 3.3 3.3 - -
Foreign offices 0.2 0.2 - - 0.2 0.2 - -
- ----------------------------------------------------------------- -----------------------------
Total deposits 9.4 8.2 1.2 15 9.4 8.1 1.3 16
Equity 1.1 1.1 - - 1.1 1.0 0.1 10
- ----------------------------------------------------------------- ---------------------------------------
17
INVESTMENT MANAGEMENT - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------- --------------------------------------
Change Change
----------------- -------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
- --------------------------------------------------------------------------------------------------------------------
CREDIT QUALITY (in millions):
Net charge-offs:
Commercial $ 2 $ 7 $ (5) (71)% $ 3 $ 17 $ (14) (82)%
Consumer 1 2 (1) (50) 5 5 - -
- ---------------------------------------------------------------- ---------------------------------------
Total net charge-offs 3 9 (6) (67) 8 22 (14) (64)
Net charge-off ratios:
Commercial 0.23% 0.76% (0.53)% 0.11% 0.68% (0.57)%
Consumer 0.11 0.24 (0.13) 0.17 0.20 (0.03)
- ---------------------------------------------------------------- -----------------------------
Total net charge-off ratio 0.17 0.52 (0.35) 0.15 0.43 (0.28)
Nonperforming assets:
Commercial $ 39 $ 37 $ 2 5
Consumer 8 3 5 N/M
- ----------------------------------------------------------------
Total nonperforming loans 47 40 7 18
Other, including OREO 1 1 - -
- ----------------------------------------------------------------
Total nonperforming assets 48 41 7 17
Allowance for credit losses 25 25 - -
Allowance to period end loans 0.35% 0.36% (0.01)%
Allowance to nonperforming loans 53 61 (8)
Nonperforming assets to related
assets 0.68 0.59 0.09
ASSETS UNDER MANAGEMENT
ENDING BALANCES (in billions):
Mutual funds $ 91.5 $ 75.3 $ 16.2 22
Other 57.5 55.5 2.0 4
- ----------------------------------------------------------------
Total 149.0 130.8 18.2 14
BY TYPE:
Money market 68.6 50.6 18.0 36
Equity 35.4 43.4 (8.0) (18)
Fixed income 45.0 36.8 8.2 22
- ----------------------------------------------------------------
Total 149.0 130.8 18.2 14
BY CHANNEL: (16)
Private Client Services 42.4 48.9 (6.5) (13)
Retail Brokerage 6.7 7.0 (0.3) (4)
Institutional 70.2 57.5 12.7 22
Commercial Cash Sweep 8.6 9.0 (0.4) (4)
Capital Markets 4.7 0.6 4.1 N/M
External(27) 8.4 1.9 6.5 N/M
All other direct(28) 8.0 5.9 2.1 36
- ----------------------------------------------------------------
Total 149.0 130.8 18.2 14
MORNINGSTAR RANKINGS: (29)
% of 4 and 5 ranked funds 48% 61% (13)%
% of 3+ ranked funds 93 90 3
TRUST ASSETS ENDING BALANCES:
Trust assets under
administration (in billions) $ 328.9 $ 333.8 $ (4.9) (1)
- ---------------------------------------------------------------------------------------------------------------------
18
INVESTMENT MANAGEMENT - CONTINUED
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------------------------------------------
Change Change
------------------- -------------------
2002 2001 Amount Percent 2002 2001 Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE TRUST SECURITIES ENDING
BALANCES:
Corporate trust securities under
administration (in billions) $ 1,071.9 $ 917.1 $ 154.8 17%
RETAIL BROKERAGE:
Mutual fund sales (in millions) 575 548 27 5 $ 1,792 $ 1,721 $ 71 4%
Annuity sales 752 683 69 10 2,363 1,789 574 32
- --------------------------------------------------------------------- ----------------------------
Total sales 1,327 1,231 96 8 4,155 3,510 645 18
Number of customers - end of period
(16)(in thousands) 676 631 45 7
Market value customer assets - end
of period (in billions):
Brokerage $ 16.1 $ 15.5 $ 0.6 4
Annuity account value
(in billions) 10.6 7.9 2.7 34
- ---------------------------------------------------------------------
Total market value(16) 26.7 23.4 3.3 14
Number of registered sales
representatives 828 703 125 18
Number of licensed retail bankers 3,118 2,985 133 4
PRIVATE CLIENT SERVICES:
Number of Private Client advisors 675 658 17 3
Number of Private Client offices 105 105 - -
Market value customer assets - end
of period(16) (in billions) $ 61.7 $ 71.0 $ (9.3) (13)
Ending balances (in billions):
Loans 7.0 6.8 0.2 3
Deposits 8.3 7.0 1.3 19
Average balances (in billions):
Loans 6.9 6.8 0.1 1 6.9 6.8 0.1 1
Deposits 8.2 6.8 1.4 21 8.2 6.9 1.3 19
- --------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see pages 7, 11 and 15.
(25) Net interest income-FTE did not have tax equivalent adjustments for the
three months ended September 30, 2002 and 2001 or for the nine months ended
September 30, 2002 and 2001.
(26) Restructuring-related charges (reversals) are discussed on page 47. Income
before restructuring-related reversals was $329 million for nine months
ended September 30, 2002.
(27) Includes broker/dealers, trust companies, and registered investment
advisors that sell, or offer, One Group funds.
(28) One Group funds invested in other One Group funds and other mutual funds
sub-advised.
(29) Morningstar changed the rating process effective June 30, 2002 with no
prior period restatements.
Quarterly Results
- -----------------
Investment Management net income totaled $100 million, down $1 million, or
1%, as lower revenue was mostly offset by lower provision expense.
Assets under management were $149 billion, up $18.2 billion, or 14%, as a
result of strong money market and fixed income asset growth, partially offset by
a decline in equity assets, reflecting weak market conditions. One Group(R)
mutual fund assets grew to $91.5 billion, up $16.2 billion, or 22%.
Performance of One Group(R) funds remained strong despite the economic
environment. The percent of client assets in funds rated in the top quartile was
48%, up from 45% in the second quarter, and 71% of assets were in funds rated in
the top two quartiles, down from 74% in the second quarter, based on one-year
Lipper rankings.
Revenue decreased $8 million, or 2%, to $415 million, primarily as a result
of the change in mix of assets under management from equities to money market
and fixed income assets. This decline was partially offset by an 8% increase in
the sale of mutual funds and annuities to retail clients. Revenue was down $32
million, or 7%, from the
19
INVESTMENT MANAGEMENT - CONTINUED
second quarter, primarily as a result of a change in mix of assets under
management, lower average deposit balances, and a 9% decrease in the sales of
mutual funds and annuities.
Noninterest expense was $252 million, down $1 million, primarily driven by
lower compensation costs. Overall headcount declined 5%, but the number of
retail brokerage registered sales representatives and Private Client advisors
increased 18% and 3%, respectively, as expected.
Year-to-Date Results
- --------------------
Investment Management reported year-to-date net income of $330 million, up
$64 million, or 24%, driven by higher revenue, lower provision, and reduced
expenses.
Revenue increased $57 million, or 5%, to $1.3 billion, primarily driven by
the 18% increase in the sale of mutual funds and annuities to retail clients and
the 14% growth in assets under management.
Noninterest expense was $771 million, down $27 million, or 3%, driven
primarily by increased operating efficiencies, including lower compensation
costs.
20
CORPORATE
Corporate includes Treasury, fixed income and principal investment
portfolios, mortgage servicing assets, unallocated corporate expenses, and any
gains or losses from corporate transactions.
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------------------------------
Change Change
---------------------- -----------------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income (expense)-FTE
(2)(30)(31) $ (38) $ (141) $ 103 73% $ (175) $ (582) $ 407 70%
Banking fees and commissions (8) 3 (11) N/M (17) (5) (12) N/M
Credit card revenue 2 (1) 3 N/M 2 (2) 4 N/M
Service charges on deposits 4 7 (3) (43) 10 15 (5) (33)
Fiduciary and investment
management fees - - - - 1 1 - -
Investment securities gains
(losses) (17) (30) 13 43 62 (58) 120 N/M
Trading (losses) - (11) 11 N/M (16) (28) 12 43
Other income 22 34 (12) (35) 135 240 (105) (44)
- ---------------------------------------------------------------------- --------------------------------
Total noninterest income(32) 3 2 1 50 177 163 14 9
- ---------------------------------------------------------------------- --------------------------------
Total revenue (loss), net of
interest expense (35) (139) 104 75 2 (419) 421 N/M
Provision for credit losses - - - - 15 - 15 N/M
Salaries and employee benefits 210 162 48 30 597 456 141 31
Other expense (49) (60) 11 18 (116) (281) 165 59
- ---------------------------------------------------------------------- --------------------------------
Total noninterest expense before
merger and restructuring-related
reversals 161 102 59 58 481 175 306 N/M
Restructuring-related reversals(33) - - - - (21) - (21) N/M
- ---------------------------------------------------------------------- --------------------------------
Total noninterest expense(34) 161 102 59 58 460 175 285 N/M
- ---------------------------------------------------------------------- --------------------------------
Income (loss) before income taxes (196) (241) 45 19 (473) (594) 121 20
Applicable income taxes (benefits) (88) (106) 18 17 (226) (291) 65 22
- ---------------------------------------------------------------------- --------------------------------
Net income (loss) $ (108) $ (135) $ 27 20 $ (247) $ (303) $ 56 18
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE:
Headcount-full-time(14) 14,386 13,938 448 3%
ENDING BALANCES (in billions):
Loans $ 0.7 $ 0.4 $ 0.3 75
Assets 58.2 49.4 8.8 18
Memo-
Treasury investments(35) 36.0 29.6 6.4 22
Principal investments(36) 2.4 3.0 (0.6) (20)
Deposits 14.6 21.9 (7.3) (33)
Equity 0.8 (0.8) 1.6 N/M
AVERAGE BALANCES (in billions):
Loans $ 0.2 $ 0.8 $ (0.6) (75) $ 0.3 $ 0.8 $ (0.5) (63)%
Assets 52.3 46.3 6.0 13 49.5 46.7 2.8 6
Deposits 13.3 23.3 (10.0) (43) 14.4 25.9 (11.5) (44)
Equity 1.0 (1.1) 2.1 N/M 0.4 (1.4) 1.8 N/M
- ----------------------------------------------------------------------------------------------------------------------------------
For additional footnote detail see pages 7, 11, 15 and 19.
(30) Net interest expense-FTE includes tax equivalent adjustments of $7 million
and $6 million for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002 and 2001 tax
equivalent adjustments were $24 million and $21 million, respectively.
(31) Net interest expense-FTE primarily includes Treasury results and interest
spread on investment related activities.
(32) Noninterest income primarily includes the gains and losses from investment
activities and other corporate transactions.
(33) Restructuring-related charges (reversals) are discussed on page 47. Loss
before restructuring-related reversals, net of $8 million tax, was $260
million for nine months ended September 30, 2002.
(34) Noninterest expense primarily includes corporate expenses not allocated to
the lines of business.
(35) Treasury investments may include U.S. government and agency debt
securities, mortgage and other asset backed securities and other fixed
income investments.
(36) Principal investments include primarily private equity investments and
venture capital fund investments.
21
CORPORATE - CONTINUED
Quarterly Results
- -----------------
Corporate net loss was $108 million, compared with a net loss of $135
million.
Net interest expense was $38 million, an improvement of $103 million,
reflecting lower interest rates that reduced the Corporation's funding costs and
higher average balances in the treasury investment portfolio. The Corporation
experienced a $58 million improvement from the previous quarter, also reflecting
an increase in the treasury investment portfolio.
Noninterest income was $3 million, relatively unchanged from the prior
year. Net investment securities losses were $17 million, compared to losses of
$30 million in the prior year. This improvement reflected higher gains in the
treasury investment portfolio, partially offset by higher losses in the
principal investment portfolio.
Compared to the previous quarter, noninterest income declined $141 million.
In the second quarter, the Corporation reported a gain on the sale of the GE
Monogram joint venture, partially offset by net writedowns in the investment
portfolios. The valuation adjustments in the principal investment portfolio, in
both the second and third quarters, were primarily a result of the overall
decline in the value of the equity market, the interest rate environment and a
decline in the value of private investments as a result of existing economic
conditions. These valuation adjustments were lower in the third quarter compared
to the previous quarter.
Unallocated corporate expenses were $161 million, compared to $102 million
in the prior year and $214 million in the previous quarter. The $59 million
increase from the prior year reflected increases in salaries and employee
benefits. The previous quarter included one-time charges of $89 million related
to the insourcing of certain vendor contracts partially offset by a $21 million
reversal of restructuring reserves. Adjusting for these items, unallocated
corporate expenses would have been $146 million in the second quarter.
In the second quarter, the Corporation began accounting for stock options
and stock purchase plans at fair value and recognized $12 million of expense in
Corporate. In the third quarter, the Corporation reported $16 million of expense
and allocated $20 million of the year-to-date expense to the lines of business,
with $8 million of expense remaining in Corporate.
Year-to-Date Results
- --------------------
Corporate had a net loss of $247 million, down $56 million, or 18%.
Net interest expense was $175 million, down $407 million, or 70%, driven by
lower interest rates that positively affected the Corporation's funding costs.
Noninterest income was $177 million, up $14 million, or 9%. Net investment
securities gains were $62 million, up $120 million, driven by higher gains in
the treasury investment portfolio and the gain on the sale of the GE Monogram
joint venture recognized in the second quarter of 2002. These gains were
partially offset by net write-downs in the principal investment portfolio. The
valuation adjustments in the principal investment portfolio in the first nine
months of 2002 were primarily due to the market conditions resulting from the
overall decline in the value of the stock market, the interest rate environment
and a decline in the value of private investments due to existing economic
conditions. Other income was $135 million, down $105 million, or 44%. The first
quarter of 2001 included $73 million in gains from the sale of the Corporation's
interest in EquiServe Limited Partnership and Star Systems, an ATM network.
Provision for credit losses was $15 million, compared to zero in the prior
year.
Unallocated corporate expenses were $460 million, up $285 million,
reflecting higher salaries and benefits and higher unallocated costs.
Year-to-date 2002 included $89 million of expenses related to insourcing of
certain vendor contracts and $8 million of expenses related to adopting the
fair value method of accounting for stock option and stock purchase plans.
22
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.
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------------------------------------------------------
Change Change
------------------- --------------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income-FTE basis(1) $ 2,235 $ 2,193 $ 42 2% $ 6,548 $ 6,496 $ 52 1%
Average earning assets 230,794 235,352 (4,558) (2) 229,534 238,861 (9,327) (4)
Net interest margin 3.84% 3.70% 0.14% 3.81% 3.64% 0.17%
- -----------------------------------------------------------------------------------------------------------------------------
(1) Net interest income-FTE includes tax equivalent adjustments of $38 million
and $30 million for the quarters ended September 30, 2002 and 2001,
respectively. For nine months ended September 30, 2002 and 2001, tax
equivalent adjustments were $109 million and $93 million, respectively.
Net interest income increased by $42 million, or 2%. Net interest margin
increased by 14 basis points. Both increases are 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 relatively low margin commercial loans, and an increase in credit
card assets.
Noninterest Income
The components of noninterest income for the periods indicated are:
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------------------------------------------------------
Change Change
-------------------- --------------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
Banking fees and commissions $ 409 $ 445 $ (36) (8)% $ 1,346 $ 1,287 $ 59 5%
Credit card revenue 971 767 204 27 2,833 1,909 924 48
Service charges on deposits 410 388 22 6 1,179 1,079 100 9
Fiduciary and investment
management fees 181 190 (9) (5) 558 561 (3) (1)
Investment securities gains (losses) (29) (42) 13 (31) 49 (69) 118 N/M
Trading 149 70 79 N/M 235 196 39 20
Other income (losses) (108) 35 (143) N/M (33) 288 (321) N/M
- --------------------------------------------------------------------- ------------------------------
Total noninterest income $ 1,983 $ 1,853 $ 130 7 $ 6,167 $ 5,251 $ 916 17
Noninterest income to total revenue 47.4% 46.1% 1.3% 48.9% 45.1% 3.8%
- -----------------------------------------------------------------------------------------------------------------------------
N/M - Not meaningful.
Components of noninterest income that are primarily related to a single
business segment are discussed within that business segment.
Banking fees and commissions decreased by $36 million, or 8%, primarily as
a result of lower mortgage-related revenue, lower revenue from the intentional
reduction of non-branded ATMs, lower loan syndication fees and decreased levels
of investment grade underwriting fees. For the first nine months of 2002,
banking fees and commissions increased by $59 million, or 5%. This increase was
primarily the result of increased annuity and mutual fund sales, as well as from
growth in asset-backed finance underwriting fees and multiple other capital
markets businesses, partially offset by lower mortgage-related revenue.
Credit card revenue in the third quarter of 2002 increased $204 million, or
27%, and by $924 million, or 48%, for the first nine months of 2002. These
increases were due to the addition of the Wachovia credit card business in the
third quarter of 2001, consolidation of Paymentech beginning January 1, 2002,
higher volume-related revenue and higher income earned on securitized loans.
23
Service charges on deposits increased $22 million for the third quarter of
2002 and by $100 million for the first nine months of 2002. These increases
primarily reflected improvement in Global Treasury Services as clients shifted
their payment method to fees due to the lower value of their compensating
deposit balances.
Net investment securities losses were $29 million for the third quarter of
2002, compared to $42 million in the year ago quarter. For the first nine months
ended 2002, net investment gains were $49 million compared to losses of $69
million in the previous year. The year to date period includes the gain on sale
of the GE Monogram joint venture, partially offset by net writedowns in the
investment portfolios.
Trading produced gains of $149 million in the third quarter, compared to
$70 million in the third quarter of 2001, an increase of $79 million. For the
first nine months of 2002, trading revenue increased $39 million, or 20%. These
gains were primarily the result of an increase in the fair value of credit
derivatives used to hedge the commercial loan portfolio and limit exposures for
specific credits, partially offset by lower results across multiple trading
products.
Other income for the third quarter and for the nine months ended September
30, 2002, decreased $143 million and $321 million, respectively. These decreases
were primarily a result of writedowns of tax-advantaged investments and leases,
mortgage-related losses as well as the consolidation of Paymentech. Gains on the
sale of ownership interests in EquiServe Limited Partnership and Star Systems
recognized in the prior year also contributed to the decrease for the nine
months ended September 30, 2002.
Noninterest Expense
The components of noninterest expense for the periods indicated are:
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------------------------------------------------------------
Change Change
--------------------- --------------------
(Dollars in millions) 2002 2001 Amount Percent 2002 2001 Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits:
Salaries $ 970 $ 916 $ 54 6% $ 2,831 $ 2,721 $ 110 4%
Employee benefits 160 130 30 23 496 417 79 19
- --------------------------------------------------------------------- -----------------------------
Total salaries and employee
benefits 1,130 1,046 84 8 3,327 3,138 189 6
Occupancy 159 175 (16) (9) 487 506 (19) (4)
Equipment 109 107 2 2 311 347 (36) (10)
Outside service fees and processing 304 303 1 N/M 976 872 104 12
Marketing and development 291 212 79 37 813 634 179 28
Telecommunication 74 105 (31) (30) 309 309 - -
Other intangible amortization 32 30 2 7 94 69 25 36
Goodwill amortization - 17 (17) N/M - 52 (52) N/M
Other expense 316 308 8 3 944 921 23 2
- --------------------------------------------------------------------- -----------------------------
Total noninterest expense before
merger and restructuring-related
reversals 2,415 2,303 112 5 7,261 6,848 413 6
Merger and restructuring-related
reversals - - - - (63) (3) (60) N/M
- --------------------------------------------------------------------- -----------------------------
Total noninterest expense 2,415 2,303 112 5 7,198 6,845 353 5
- -----------------------------------------------------------------------------------------------------------------------------
Employees 73,535 75,801 (2,266) (3)
Efficiency ratio 57.3% 56.9% 0.4% 56.6% 58.3% (1.7)%
- -----------------------------------------------------------------------------------------------------------------------------
N/M - Not meaningful.
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 third quarter and for the first nine
months of 2002 increased 8% and 6%, respectively. 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 first nine months of 2002 also included $28 million
expense related to adopting the fair value method of accounting for stock option
and stock purchase plans.
Outside service fees and processing expense remained relatively unchanged
in the current quarter and increased $104 million, or 12%, in the first nine
months of 2002. Contributing to the increase in outside service fees and
24
processing expenses for the first nine months of 2002 were increased contract
programming charges related to the Corporation's conversion efforts and
terminating and renegotiating certain vendor contracts.
Marketing and development expense increased in the third quarter and first
nine months of 2002 by 37% and 28%, respectively, primarily due to increased
advertising expenditures for Card Services and certain Retail products.
Telecommunication expense decreased $31 million in the third quarter
primarily due to lower servicing expenses resulting from terminating and
renegotiating certain vendor contracts in the second quarter 2002.
Other intangible amortization in the third quarter remained relatively
unchanged and increased $25 million for the first nine months of 2002, primarily
due to the amortization of purchased credit card relationships associated with
the addition of the Wachovia credit card business. In accordance with SFAS No.
142, "Goodwill and Other Intangible Assets", the Corporation no longer amortizes
goodwill and thus did not incur any goodwill amortization expense in the first
nine months of 2002.
Other expense in the third quarter and the first nine months of 2002
increased by $8 million and $23 million, respectively, primarily due to systems
conversion costs. The Corporation successfully completed the Michigan and
Florida conversion during the second quarter. The last major conversion,
Illinois, the largest and most complicated to date, is on track to be completed
in the fourth quarter.
As a result of the Significant Items noted on pages 41-42 of the
Corporation's 2001 Annual Report and restructuring plans initiated in 2000 and
2001, the Corporation expects noninterest expense, before restructuring-related
charges and the addition of Paymentech, Inc. and Anexsys, LLC, will be in the
range of $9.4 billion to $9.6 billion for 2002, which represents a reduction in
annualized noninterest expense of approximately $1.2 billion and decreased
headcount of approximately 9,000 employees from June 30, 2000.
Applicable Income Taxes
The Corporation's income before income taxes, applicable income tax expense
and effective tax rate for each of the periods indicated are:
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------------------------------------
(Dollars in millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle $ 1,178 $ 1,093 $ 3,549 $ 3,064
Applicable income taxes 355 339 1,096 923
Effective tax rate 30.1% 31.0% 30.9% 30.1%
- ----------------------------------------------------------------------------------------------------------
Applicable income tax expense for all 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 June 30,2002. 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.
25
At September 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.
For trading portfolios, value-at-risk measures the maximum fair value the
Corporation could be reasonably expected to lose on a trading position, 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.
Value-at-risk was not calculated for credit derivatives used to hedge
specific credits in the loan portfolio. However, stress testing is regularly
performed for these credit derivative positions. See discussion of credit
derivatives on page 37.
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 used to hedge specific credits in the loan
portfolio with a notional amount of $6.1 billion and $5.4 billion at September
30, 2002 and June 30, 2002, respectively).
THIRD QUARTER 2002
SEPTEMBER 30 ------------------------- June 30
(In millions) 2002 AVERAGE HIGH LOW 2002
- ----------------------------------------------------------------------------------------
Risk type:
Interest rate $ 14 $ 13 $ 15 $ 11 $ 11
Commodity price - - 2 - -
Currency exchange rate - - 1 - 1
Equity 1 1 1 - 1
Diversification benefit - - N/A N/A (1)
- ----------------------------------------------------------------------------------------
Aggregate portfolio market risk $ 15 $ 14 $ 15 $ 12 $ 12
- ----------------------------------------------------------------------------------------
Interest rate risk was the predominant type of market risk incurred during
the third quarter of 2002. At September 30, 2002, approximately 93% of primary
market risk exposures were related to interest rate risk. Exchange rate, equity
and commodity risks accounted for 7% of primary market risk exposures.
26
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, basis and yield curve risk associated with both on- and
off-balance sheet positions. The position is measured using sophisticated risk
management tools, including earnings simulation and economic value of equity
sensitivity analysis, to capture short-term and long-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-care scenario is
established using current interest rates. The comparative scenarios assume an
immediate parallel shock in increments of +/- 100 basis point rate movements
(see table below) and primarily reflect the repricing and option risk embedded
in the current balance sheet.
The Corporation's 12-month pre-tax earnings sensitivity profile as of
September 30, 2002 and June 30, 2002 is as follows:
Immediate Change
in Rates
- -------------------------------------------------------------------------------
(In millions) -100 bp +100 bp
- -------------------------------------------------------------------------------
September 30, 2002 $ (69) $ 52
- -------------------------------------------------------------------------------
June 30, 2002 $ (112) $ (52)
- -------------------------------------------------------------------------------
Parallel shocks are effective when used to measure trends in interest rate
risk exposure, but are limited in terms of analytical scope. Numerous
alternative scenarios are reviewed internally, including more gradual and severe
rate movements and non-parallel rate shifts. These scenarios are intended to
provide a more comprehensive view of the Corporation's interest rate risk
exposure by further detailing reprice, option, yield curve and basis risk.
Based on these scenarios the Corporation is negatively impacted by rapid
increases in short-term interest rates, particularly if they exceed 200 basis
points. If the rapid increase in short term rates is not prolonged the negative
impact is generally short lived due to asset repricing. Furthermore, the impact
of increasing short-term rates is partially mitigated when rates increase more
than 375 basis points and the rate earned on a portion of the credit card
portfolio moves above its contractual floor.
Steeper yield curves typically benefit earnings, particularly when the
increase in long-term rates is not accompanied by increasing short-term rates.
Falling long-term rates negatively impact earnings and can also expose
additional option risk. The Corporation's basis risk is largely the result of
corporate and consumer demand for Prime based loan products. Declines in the
Prime rate relative to bank funding costs will result in decreased earnings.
Management regularly reviews alternative strategies to manage the
Corporation's exposure to interest rate movements under a wide rate of market
based outcomes, balancing the risk and returns against the cost of incremental
strategies. During the quarter, the Corporation's earnings sensitivity to rising
interest rates declined, in part due to a change in the market's expectation 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 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.
27
CREDIT PORTFOLIO COMPOSITION
Selected Statistical Information
The significant components of credit risk and the related ratios for the
periods indicated are as follows:
SEPTEMBER 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2002 2002 2002 2001 2001
- ----------------------------------------------------------------------------------------------------------------
Loans outstanding(1) $ 150,389 $ 147,728 $ 152,126 $ 156,733 $ 164,251
Average loans 148,152 149,674 154,942 160,150 165,416
Nonperforming loans(1) 3,521 3,720 3,737 3,551 3,112
Other, including OREO 214 204 197 137 116
- ----------------------------------------------------------------------------------------------------------------
Nonperforming assets 3,735 3,924 3,934 3,688 3,228
Allowance for credit losses 4,518 4,521 4,520 4,528 4,479
Net charge-offs 573 607 663 717 566
Nonperforming assets to related
assets(2) 2.48% 2.65% 2.58% 2.35% 1.96%
Allowance to period end loans 3.17 3.19 3.06 2.97 2.81
Allowance to nonperforming loans 132 125 123 128 144
Net charge-offs to average loans 1.55 1.62 1.71 1.79 1.37
Allowance to net charge-offs 197 186 170 158 198
- ----------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale of $93 million, $107 million and $69 million
at September 30, 2002, June 30, 2002 and March 31, 2002, respectively. For
December 31, 2001 and September 30, 2001, there were no nonperforming loans
included in loans held for sale. These amounts are not included in
allowance coverage statistics. Prior periods have been recalculated to
conform to current period presentation.
(2) Related assets consist of loans outstanding, including loans held for sale,
and other real estate owned
28
Loan Composition
The Corporation's loan portfolios for the periods indicated are as follows:
September 30, 2002 June 30, 2002 March 31, 2002
- ---------------------------------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
Retail:
Small business
commercial $ 9,891 7% $ 10,027 7% $ 9,992 7%
Home equity 26,757 18 25,579 17 25,272 17
Vehicle 14,296 10 13,584 9 13,644 9
Other personal 8,868 6 8,238 6 8,604 6
- ---------------------------------------------------------------------------------------------
Core businesses 59,812 41 57,428 39 57,512 39
Brokered home equity
discontinued 3,648 2 4,120 3 4,619 3
Vehicle leases 4,204 3 4,722 3 5,431 4
- ---------------------------------------------------------------------------------------------
Home equity
discontinued/vehicle
leases 7,852 5 8,842 6 10,050 7
- ---------------------------------------------------------------------------------------------
Total Retail 67,664 46 66,270 45 67,562 46
Commercial Banking:
Corporate Banking:
Commercial and
industrial 17,388 12 17,912 12 20,226 13
Commercial real
estate 8,557 6 8,433 6 8,731 6
Lease financing 4,693 3 4,758 3 4,774 3
Other 514 - 670 - 975 -
- ---------------------------------------------------------------------------------------------
Total Corporate
Banking 31,152 21 31,773 21 34,706 22
Middle Market:
Commercial and
industrial 28,086 19 29,337 20 29,515 19
Commercial real
estate 2,353 2 2,421 2 3,516 2
Lease financing 1,039 1 1,092 1 1,156 1
Other 361 - 251 - 141 -
- ---------------------------------------------------------------------------------------------
Total Middle Market 31,839 22 33,101 23 34,328 22
- ---------------------------------------------------------------------------------------------
Total Commercial
Banking 62,991 43 64,874 44 69,034 44
Card Services 11,924 7 9,115 6 7,396 5
IMG and Corporate 7,810 4 7,469 5 8,134 5
- ---------------------------------------------------------------------------------------------
Total $ 150,389 100% $ 147,728 100% $ 152,126 100%
- ---------------------------------------------------------------------------------------------
December 31, 2001 September 30, 2001
- ----------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent
- ----------------------------------------------------------------------
Retail:
Small business
commercial $ 9,947 6% $ 9,966 6%
Home equity 25,143 16 24,733 15
Vehicle 13,481 9 13,497 8
Other personal 9,779 6 9,941 6
- ----------------------------------------------------------------------
Core businesses 58,350 37 58,137 35
Brokered home equity
discontinued 5,125 3 5,979 4
Vehicle leases 6,155 4 6,855 4
- ----------------------------------------------------------------------
Home equity
discontinued/vehicle
leases 11,280 7 12,834 8
- ----------------------------------------------------------------------
Total Retail 69,630 44 70,971 43
Commercial Banking:
Corporate Banking:
Commercial and
industrial 22,268 14 25,287 15
Commercial real
estate 8,975 6 9,391 6
Lease financing 4,669 3 4,536 3
Other 731 - 1,279 -
- ----------------------------------------------------------------------
Total Corporate
Banking 36,643 23 40,493 24
Middle Market:
Commercial and
industrial 31,076 20 32,325 20
Commercial real
estate 3,472 2 3,233 2
Lease financing 1,053 1 1,049 1
Other 294 - 300 -
- ----------------------------------------------------------------------
Total Middle Market 35,895 23 36,907 23
- ----------------------------------------------------------------------
Total Commercial
Banking 72,538 46 77,400 47
Card Services 6,786 5 8,400 5
IMG and Corporate 7,779 5 7,480 5
- ----------------------------------------------------------------------
Total $ 156,733 100% $ 164,251 100%
- ----------------------------------------------------------------------
Loans held for sale, which are classified as loans, are carried at lower of
cost or fair value, totaled $7.9 billion and $4.2 billion at September 30, 2002
and December 31, 2001, respectively. At September 30, 2002, loans held for sale
included Commercial Banking loans of $230 million, of which approximately $90
million were included in nonperforming loans, and Card Services and other
consumer loans of $7.7 billion.
29
Commercial and Industrial Loans
- -------------------------------
Commercial and industrial loans represent commercial loans other than
commercial real estate. At September 30, 2002, commercial and industrial loans
totaled $45.5 billion, which represented 72% 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:
September 30, 2002 June 30, 2002 March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Outstanding Percent (1) Outstanding Percent (1) Outstanding Percent (1)
- -----------------------------------------------------------------------------------------------------------------------------------
Wholesale trade $ 3,945 8.7% $ 3,952 8.4% $ 4,066 8.2%
Motor vehicles and parts/auto related 3,703 8.1 4,006 8.5 4,611 9.3
Oil and gas 2,899 6.4 2,997 6.3 3,474 7.0
Industrial materials 2,604 5.7 2,863 6.1 3,140 6.3
Business finance and leasing 2,422 5.3 2,603 5.5 2,427 4.9
Telephone, wireless and cable(2) 462 1.0 522 1.1 518 1.0
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Total outstanding by industry concentration as a percentage of total
commercial and industrial loans.
(2) Presented for informational purposes. Other industry concentrations
precede this category but are not presented in this table.
30
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 September 30, 2002, commercial real estate loans
totaled $10.9 billion, which represented 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) September 30, 2002 June 30, 2002 March 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
By Collateral Location: Amount Portfolio Amount Portfolio Amount Portfolio
--------------- ---------- --------------- ---------- ---------- ----------
Illinois $ 1,242 11% $ 1,245 11% $ 1,668 14%
Michigan 1,164 11 1,200 11 1,361 11
California 1,061 10 1,041 10 985 8
Texas 953 9 976 9 1,048 8
Ohio 820 7 793 7 835 7
Arizona 797 7 837 8 937 8
Indiana 408 4 431 4 496 4
Louisiana 391 3 392 4 439 4
Kentucky 360 3 357 3 352 3
Colorado 320 3 284 3 322 3
Other areas 1,627 15 1,675 15 1,877 15
Unsecured 1,266 12 1,103 10 1,397 11
Secured by other than
real estate 501 5 520 5 530 4
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 10,910 100% $ 10,854 100% $ 12,247 100%
- ---------------------------------------------------------------------------------------------------------------------------
By Property Type:
Apartment $ 1,940 18% $ 1,916 18% $ 1,825 15%
Office 1,571 14 1,552 14 1,730 14
Retail 1,567 14 1,667 15 1,862 15
Single family residential
development 1,047 10 1,069 10 1,299 11
REIT/REOC 920 9 788 7 1,312 11
Industrial/warehouse 878 8 857 8 1,230 10
Hotels 551 5 591 6 486 4
Residential lots 450 4 368 3 420 3
Miscellaneous commercial
income producing 1,628 15 1,881 17 1,918 16
Miscellaneous residential
developments 358 3 165 2 165 1
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 10,910 100% $ 10,854 100% $ 12,247 100%
- ---------------------------------------------------------------------------------------------------------------------------
31
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:
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2002 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------
Nonperforming Loans:
Retail $ 1,434 $ 1,349 $ 1,402 $ 1,344 $ 1,155
Commercial Banking:
Corporate Banking 1,010 1,161 1,170 1,154 1,051
Middle Market Banking 1,030 1,136 1,087 973 853
- -----------------------------------------------------------------------------------------------------------------
Total Commercial Banking(1) 2,040 2,297 2,257 2,127 1,904
IMG and Corporate 47 74 78 80 53
- -----------------------------------------------------------------------------------------------------------------
Total 3,521 3,720 3,737 3,551 3,112
Other, including other real estate owned 214 204 197 137 116
- -----------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,735 $ 3,924 $ 3,934 $ 3,688 $ 3,228
- -----------------------------------------------------------------------------------------------------------------
Nonperforming assets to related assets(2): 2.48% 2.65% 2.58% 2.35% 1.96%
Loans 90-days or more past due and
accruing interest:
Card Services $ 132 $ 112 $ 100 $ 96 $ 114
Other - - 2 1 9
- -----------------------------------------------------------------------------------------------------------------
Total $ 132 $ 112 $ 102 $ 97 $ 123
- -----------------------------------------------------------------------------------------------------------------
(1) Commercial Banking nonperforming loans at September 30, 2002 include $90
million of loans held for sale.
(2) Related assets consist of loans outstanding, including loans held for sale,
and other real estate owned.
Credit quality improved over the second quarter as nonperforming assets
declined $189 million from the prior quarter. In Commercial Banking,
nonperforming loans declined $257 million from the prior quarter. These declines
are a result of risk management actions including: loan sales, distressed
portfolio sales, and ongoing review of individual credits. The Corporation has
established processes for identifying potential problem areas of the portfolio,
which currently include exposure to energy, auto-related, telecommunications,
and airlines. The Corporation will continue to monitor and manage these
potential risks, however, concern remains due to the uncertain economic
environment and the effects that may have on credit quality in future quarters.
Nonperforming loans within Retail at September 30, 2002 were $1.4 billion,
an increase of $85 million from second quarter 2002. This increase was primarily
driven by discontinued segments of the brokered home equity business. 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
acquire title, real estate loans remain in nonperforming status for an extended
period.
32
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 for the periods indicated are as follows:
September 30, 2002 June 30, 2002 March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Net Net Net
charge- Average Net charge- charge- Average Net charge- charge- Average Net charge-
(Dollars in millions) offs balance off rate offs balance off rate offs balance off rate
- -----------------------------------------------------------------------------------------------------------------------------------
Retail $ 202 $ 66,829 1.21% $ 215 $ 66,826 1.29% $ 265 $ 69,228 1.53%
Commercial Banking:
Corporate Banking 160 31,600 2.03 168 33,322 2.02 163 36,040 1.81
Middle Market Banking 77 32,084 0.96 106 33,689 1.26 118 35,075 1.34
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 237 63,684 1.49 274 67,011 1.64 281 71,115 1.58
Card Services 131 10,523 4.99 118 8,459 5.58 97 7,217 5.38
IMG and Corporate 3 7,116 - - 7,378 - 20 7,382 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 573 $ 148,152 1.55% $ 607 $ 149,674 1.62% $ 663 $ 154,942 1.71%
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 September 30, 2001
- -----------------------------------------------------------------------------------------------------------------
Net Net
charge- Average Net charge- charge- Average Net charge-
(Dollars in millions) offs balance off rate offs balance off rate
- -----------------------------------------------------------------------------------------------------------------
Retail $ 268 $ 70,049 1.53% $ 209 $ 71,682 1.17%
Commercial Banking:
Corporate Banking 164 38,065 1.72 131 41,410 1.27
Middle Market Banking 158 36,185 1.75 99 36,657 1.08
- -----------------------------------------------------------------------------------------------------------------
Total Commercial Banking 322 74,250 1.73 230 78,067 1.18
Card Services 113 8,358 5.41 118 7,935 5.95
IMG and Corporate 14 7,493 - 9 7,732 -
- -----------------------------------------------------------------------------------------------------------------
Total $ 717 $ 160,150 1.79% $ 566 $ 165,416 1.37%
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs decreased 6% during the third quarter of 2002 to $573
million from the second quarter of 2002, reflecting lower charge-offs in nearly
all lines of businesses. The net charge-off rate decreased to 1.55% in the third
quarter 2002 compared to 1.62% in the second quarter 2002.
33
Loan Sales
A summary of the Corporation's Commercial Banking loan sales for the
periods indicated is as follows:
September 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- ----------------------------------------------------------------------------------------------------------------------
Loans sold and loans transferred
to loans held for sale:(1)
Nonperforming loans $ 139 $ 208 $ 99 $ 18 $ 42
Other loans with credit related losses 158 148 160 93 86
Other loans 182 193 343 179 438
- ----------------------------------------------------------------------------------------------------------------------
Total $ 479 549 $ 602 $ 290 $ 566
- ----------------------------------------------------------------------------------------------------------------------
Losses on sale:
Charge-offs:(2)
Nonperforming loans $ 5 $ 39 $ 48 $ 8 $ 11
Other loans with credit related losses 6 12 19 18 22
- ----------------------------------------------------------------------------------------------------------------------
Total charge-offs 11 51 67 26 33
Losses on loans sold and held for sale 12 22 4 12 18
- ----------------------------------------------------------------------------------------------------------------------
Total $ 23 $ 73 $ 71 $ 38 $ 51
- ----------------------------------------------------------------------------------------------------------------------
(1) Third quarter 2002 includes loans reclassified to loans held for sale of
approximately $90 million, $105 million and $35 million in nonperforming,
other loans with credit related losses and other loans, respectively.
(2) Charge-offs on loans reclassified to held for sale in the third quarter
2002 of approximately $2 million and $1 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 and is one alternative the Corporation uses to manage credit
risk. These loans are subject to the Corporation's overall risk management
practices. 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 reclassified to loans held
for sale, appropriate charge-offs are recorded. Subsequent writedowns in fair
value on loans held for sale are reflected in other income/(loss).
Loans classified as held for sale are carried at the lower of cost or
market value. Accordingly, these loans are no longer included in the evaluation
of the adequacy of the allowance for credit 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.
34
The changes in the Corporation's allowance for credit losses for the
periods indicated are as follows:
SEPTEMBER 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 4,521 $ 4,520 $ 4,528 $ 4,479 $ 4,229
Charge-offs:
Retail:
Small business commercial 21 28 18 29 24
Home equity 66 67 89 83 50
Vehicle 67 56 82 75 61
Other personal 29 38 41 39 39
- -----------------------------------------------------------------------------------------------------------------------
Core businesses 183 189 230 226 174
Brokered home equity discontinued 35 45 49 48 41
Vehicle leases 20 19 34 33 31
- -----------------------------------------------------------------------------------------------------------------------
Home equity discontinued/vehicle leases 55 64 83 81 72
Total consumer 217 225 295 278 222
- -----------------------------------------------------------------------------------------------------------------------
Total Retail 238 253 313 307 246
- -----------------------------------------------------------------------------------------------------------------------
Commercial Banking:
Corporate Banking:
Commercial and industrial 133 152 182 158 147
Commercial real estate 8 19 2 8 1
Lease financing 31 25 2 17 -
- -----------------------------------------------------------------------------------------------------------------------
Total Corporate Banking 172 196 186 183 148
Middle Market:
Commercial and industrial 71 113 126 165 96
Commercial real estate 15 2 4 4 1
Lease financing 4 19 5 19 11
- -----------------------------------------------------------------------------------------------------------------------
Total Middle Market 90 134 135 188 108
- -----------------------------------------------------------------------------------------------------------------------
Total Commercial Banking 262 330 321 371 256
Card Services 142 129 111 120 123
IMG and Corporate 6 2 22 14 11
- -----------------------------------------------------------------------------------------------------------------------
Total charge-offs 648 714 767 812 636
Recoveries:
Retail:
Small business commercial 6 5 4 6 4
Home equity 8 9 7 5 5
Vehicle 14 15 17 15 16
Other personal 3 4 15 5 4
- -----------------------------------------------------------------------------------------------------------------------
Core businesses 31 33 43 31 29
Brokered home equity discontinued 1 1 1 1 2
Vehicle leases 4 4 4 7 6
- -----------------------------------------------------------------------------------------------------------------------
Home equity discontinued/vehicle leases 5 5 5 8 8
Total consumer 30 33 44 33 33
- -----------------------------------------------------------------------------------------------------------------------
Total Retail 36 38 48 39 37
- -----------------------------------------------------------------------------------------------------------------------
Commercial Banking:
Corporate Banking:
Commercial and industrial 11 26 21 17 14
Commercial real estate 1 2 2 2 3
Lease financing - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total Corporate Banking 12 28 23 19 17
Middle Market:
Commercial and industrial 12 24 14 24 8
Commercial real estate 1 1 2 - -
Lease financing - 3 1 6 1
- -----------------------------------------------------------------------------------------------------------------------
Total Middle Market 13 28 17 30 9
- -----------------------------------------------------------------------------------------------------------------------
Total Commercial Banking 25 56 40 49 26
Card Services 11 11 14 7 5
IMG and Corporate 3 2 2 - 2
- -----------------------------------------------------------------------------------------------------------------------
Total recoveries 75 107 104 95 70
- -----------------------------------------------------------------------------------------------------------------------
Net charge-offs:
Retail 202 215 265 268 209
Commercial Banking 237 274 281 322 230
Card Services 131 118 97 113 118
IMG and Corporate 3 - 20 14 9
- -----------------------------------------------------------------------------------------------------------------------
Total net charge-offs 573 607 663 717 566
- -----------------------------------------------------------------------------------------------------------------------
Provision for credit losses 587 607 665 765 620
Transfers (17) 1 (10) 1 196
- -----------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 4,518 $ 4,521 $ 4,520 $ 4,528 $ 4,479
- -----------------------------------------------------------------------------------------------------------------------
35
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:
September 30 June 30 March 31 December 31 September 30
2002 2002 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Amount % Amount % Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------------
Retail $ 1,026 23% $ 1,029 23% $ 1,028 23% $ 1,027 23% $ 979 22%
Commercial Banking:
Corporate Banking 1,706 38 1,706 38 1,706 38 1,714 38 1,714 38
Middle Market 1,365 30 1,365 30 1,365 30 1,365 30 1,364 30
- ---------------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 3,071 68 3,071 68 3,071 68 3,079 68 3,078 68
Card Services 396 9 396 9 396 9 396 8 397 9
IMG and Corporate 25 - 25 - 25 - 26 1 25 1
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 4,518 100% $ 4,521 100% $ 4,520 100% $ 4,528 100% $ 4,479 100%
- ---------------------------------------------------------------------------------------------------------------------------
Components of Allowance for Credit Losses
- -----------------------------------------
The Corporation determines allowance levels based upon the probable losses
in the credit portfolios. Several methodologies are employed for estimating
probable losses. A detailed discussion of the process is presented in the
Corporation's 2001 Annual Report beginning on page 60.
The table below presents the components of the probable loss estimate for
the periods indicated:
September 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- ------------------------------------------------------------------------------------------------------------
Asset specific $ 756 $ 828 $ 843 $ 731 $ 684
Expected loss 2,862 3,051 3,104 3,167 2,943
Stress 900 642 573 630 852
- ------------------------------------------------------------------------------------------------------------
Total /1/ $ 4,518 $ 4,521 $ 4,520 $ 4,528 $ 4,479
- ------------------------------------------------------------------------------------------------------------
(1) The underlying assumptions, estimates and assessments made by management to
determine the components of the allowance for credit losses are continually
evaluated by management and updated to reflect management's judgments
regarding economic conditions and various relevant factors impacting credit
quality and inherent losses.
The September 30, 2002 allowance for credit losses remained essentially
flat compared with the prior periods. The asset specific and expected loss
components of allowance for credit losses declined from June 30, 2002 reflecting
some improvement in credit quality. However, this was offset by an increase in
the stress component of the allowance for credit losses reflecting management's
ongoing assessment and outlook of the probable losses inherent in the portfolio
resulting from the overall economic environment.
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
Management section on page 27). Pre-tax income reflects the effective use of
these derivatives. Without their use, pre-tax income for the nine months ended
September 30, 2002 and 2001, would have been higher by $109 million in 2002 and
lower by $5 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 September 30, 2002, the total
36
amount of such reclassification into earnings is projected to be a decrease in
income of $286 million after-tax ($452 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 nine months ended September 30, 2002 was a loss of $6 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 30 months. No events have occurred in 2002
that changed 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 quality 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 September 30, 2002, the notional amount of credit
derivatives protecting commercial credit exposure totaled $6.1 billion, and
related trading revenue was $101 million and $100 million, respectively, for the
three months and nine months ended September 30, 2002.
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:
September 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------------
Gross replacement cost $ 20,806 $ 15,494 $ 10,736 $ 12,262 $ 13,942
Less: Adjustment due to master netting agreements 16,601 12,498 8,072 9,037 10,681
- -------------------------------------------------------------------------------------------------------------------------------
Balance sheet credit exposure $ 4,205 $ 2,996 $ 2,664 $ 3,225 $ 3,261
- -------------------------------------------------------------------------------------------------------------------------------
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 September 30, 2002, the notional value of ALM 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 3,550 - 14,227 17,777
- -----------------------------------------------------------------------------------------------------
Total $ 3,550 $ 50 $ 17,227 $ 20,827
- -----------------------------------------------------------------------------------------------------
37
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 $13.8 billion at
September 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 under the securitization 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 the 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 $132 million and $198 million at
September 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.
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
September 30, 2002 are as follows:
Amount of Commitment Expiration Per Period
- --------------------------------------------------------------------------------------------------------------
Less Than 1 - 3 3 - 5 Over 5
(In billions) Total 1 Year Years Years Years
- --------------------------------------------------------------------------------------------------------------
Unused credit card lines $ 327.5 $ 327.5 $ - $ - $ -
Unused loan commitments 128.1 95.4 21.8 10.6 0.3
Standby letters of credit and foreign office
guarantees 21.4 13.7 5.8 1.5 0.4
Commercial letters of credit 0.6 0.6 - - -
- --------------------------------------------------------------------------------------------------------------
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 September 30, 2002 are as follows:
2007
(In millions) 2002 2003 2004 2005 2006 and After Total
- ------------------------------------------------------------------------------------------------------------------------------
Operating leases $ 67 $ 252 $ 217 $ 170 $ 152 $ 890 $ 1,748
Trust preferred capital securities - - - - - 3,315 3,315
Long-term debt, including capital leases 1,148 7,755 6,190 6,354 6,917 10,802 39,166
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 1,215 $ 8,007 $ 6,407 $ 6,524 $ 7,069 $ 15,007 $ 44,229
- ------------------------------------------------------------------------------------------------------------------------------
The Corporation assists its customers in obtaining sources of liquidity, by
structuring financing transactions to sell customers' trade receivables or other
financial assets to specialized financing entities that issue commercial paper.
The
38
Corporation provides liquidity facilities and subordinated loans to the
specialized financing entities, which totaled $37.3 billion and $1.1 billion,
respectively, at September 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 $321 million at September
30, 2002.
The Corporation also provides liquidity lines to commercial paper issuing
specialized financing entities not sponsored by Bank One, which approximated
$2.2 billion at September 30, 2002.
In the normal course of business, the Corporation invests in venture
capital and other investments. Commitments to fund such investments at September
30, 2002 totaled $1.1 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 in 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 September 30,
2002.
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 Corporation's capital ratios are as follows:
Well-Capitalized
September 30 June 30 March 31 December 31 September 30 Regulatory
2002 2002 2002 2001 2001 Guidelines
- --------------------------------------------------------------------------------------------------------------------------------
Risk-based capital ratios:
Tier 1 9.5% 9.4% 9.0% 8.6% 8.4% 6.0%
Total 13.0 13.0 12.7 12.2 11.7 10.0
Leverage ratio (1) 9.0 9.1 8.6 8.2 8.1 -
Common equity/assets 8.0 8.0 8.0 7.5 7.5 -
Tangible common equity/
tangible reported assets 7.2 7.1 7.1 6.8 6.7 -
Tangible common equity/
tangible managed assets 6.4 6.3 6.2 5.9 5.8 -
Double leverage ratio 104 103 103 103 102 -
Dividend payout ratio 30 30 31 38 35 -
- --------------------------------------------------------------------------------------------------------------------------------
(1) The minimum regulatory guideline is 3%.
39
The components of the Corporation's regulatory risk-based capital and
risk-weighted assets are as follows:
September 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------
Regulatory risk-based capital:
Tier 1 capital $ 23,428 $ 23,039 $ 22,513 $ 21,749 $ 21,330
Tier 2 capital 8,650 8,924 9,115 9,091 8,547
- -----------------------------------------------------------------------------------------------------------------
Total capital 32,078 31,963 31,628 30,840 29,877
- -----------------------------------------------------------------------------------------------------------------
Total risk weighted assets $ 247,050 $ 246,032 $ 249,128 $ 253,330 $ 254,943
- -----------------------------------------------------------------------------------------------------------------
In deriving Tier 1 and Total Capital, goodwill and other nonqualifying
intangible assets are deducted for the periods indicated:
September 30 June 30 March 31 December 31 September 30
(In millions) 2002 2002 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------
Goodwill $ 1,829 $ 1,829 $ 1,840 $ 1,560 $ 1,577
Other nonqualifying intangibles 215 237 251 207 289
- -----------------------------------------------------------------------------------------------------------------
Subtotal 2,044 2,066 2,091 1,767 1,866
Qualifying intangibles 421 405 422 414 442
- -----------------------------------------------------------------------------------------------------------------
Total intangibles $ 2,465 $ 2,471 $ 2,513 $ 2,181 $ 2,308
- -----------------------------------------------------------------------------------------------------------------
Goodwill and other intangibles increased in the first quarter 2002
primarily due to the consolidation of Paymentech, Inc.
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 beginning March 31, 2002 the ratios include the
effect of these changes. The Corporation implemented the remaining provisions of
these rules in the 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 September 30, 2002, Tier 1 and
Total Capital ratios of 0.20% and 0.24%, respectively. This change increased
risk weighted assets and Total Capital by $5.1 billion and $106 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 October 15,
2002, the Corporation declared its quarterly common cash dividend of 21 cents
per share, payable on January 1, 2003.
Double Leverage
Double leverage is the extent to which the Corporation's resources are used
to finance investments in subsidiaries. Double leverage was 104% and 103% at
September 30, 2002 and December 31, 2001, respectively. Trust Preferred Capital
Securities of $3.3 billion at September 30, 2002 and June 30, 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
third quarter 2002, the Corporation purchased 8.4 million shares of common stock
at an average price of $37.44 per share pursuant to the current buyback program.
There remains available $1.7 billion of common stock that may be repurchased
under the Board authorization.
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 (the
"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, the Public Company Accounting Oversight Board 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
SEPTEMBER 30 December 31 September 30
(Dollars in millions) 2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 21,699 $ 17,383 $ 16,553
Interest-bearing due from banks 2,960 1,030 3,307
Federal funds sold and securities under resale agreements 8,062 9,347 9,459
Trading assets 6,367 6,167 5,952
Derivative product assets 4,205 3,225 3,261
Investment securities 66,129 60,883 52,070
Loans(1) 150,389 156,733 164,251
Allowance for credit losses (4,518) (4,528) (4,479)
- -------------------------------------------------------------------------------------------------------------------------
Loans, net 145,871 152,205 159,772
Other assets 18,894 18,714 19,878
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 274,187 $ 268,954 $ 270,252
- -------------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits:
Demand $ 30,870 $ 32,179 $ 29,958
Savings 85,245 80,599 69,786
Time:
Under $100,000 17,747 20,106 21,741
$100,000 and over 14,518 18,071 20,178
Foreign offices 15,656 16,575 20,722
- -------------------------------------------------------------------------------------------------------------------------
Total deposits 164,036 167,530 162,385
Federal funds purchased and securities sold under repurchase agreements 15,499 13,728 16,696
Other short-term borrowings 12,810 10,255 10,901
Long-term debt 39,166 40,103 41,046
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated debt 3,315 3,315 3,315
Derivative product liabilities 3,886 2,574 2,743
Other liabilities 13,550 11,223 12,784
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 252,262 248,728 249,870
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 10,224 10,311 10,332
Retained earnings 12,423 10,707 10,413
Accumulated other adjustments to stockholders' equity 26 (65) 203
Deferred compensation (177) (121) (138)
Treasury stock, at cost (14,865,928, 14,415,873 and 14,301,792 shares,
respectively) (583) (618) (630)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,925 20,226 20,382
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 274,187 $ 268,954 $ 270,252
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale of $7.9 billion, $4.2 billion and $4.8 billion
at September 30, 2002, December 31, 2001 and September 30, 2001,
respectively.
The accompanying notes are an integral part of this statement.
42
CONSOLIDATED INCOME STATEMENTS
BANK ONE CORPORATION and Subsidiaries
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------
(In millions, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income:
Interest income $ 3,535 $ 4,179 $ 10,486 $ 13,485
Interest expense 1,338 2,016 4,047 7,082
- ---------------------------------------------------------------------------------------------------------------------------
Total net interest income 2,197 2,163 6,439 6,403
Noninterest Income:
Banking fees and commissions 409 445 1,346 1,287
Credit card revenue 971 767 2,833 1,909
Service charges on deposits 410 388 1,179 1,079
Fiduciary and investment management fees 181 190 558 561
Investment securities gains (losses) (29) (42) 49 (69)
Trading 149 70 235 196
Other income (losses) (108) 35 (33) 288
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,983 1,853 6,167 5,251
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue, net of interest expense 4,180 4,016 12,606 11,654
Provision for credit losses 587 620 1,859 1,745
Noninterest Expense:
Salaries and employee benefits 1,130 1,046 3,327 3,138
Occupancy 159 175 487 506
Equipment 109 107 311 347
Outside service fees and processing 304 303 976 872
Marketing and development 291 212 813 634
Telecommunication 74 105 309 309
Other intangible amortization 32 30 94 69
Goodwill amortization - 17 - 52
Other expense 316 308 944 921
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense before merger and restructuring-related
reversals 2,415 2,303 7,261 6,848
- ---------------------------------------------------------------------------------------------------------------------------
Merger and restructuring-related reversals - - (63) (3)
- ---------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,415 2,303 7,198 6,845
Income before income taxes and cumulative effect of change in
accounting principle 1,178 1,093 3,549 3,064
Applicable income taxes 355 339 1,096 923
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle 823 754 2,453 2,141
Cumulative effect of change in accounting principle, net of taxes of
($25) - - - (44)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 823 $ 754 $ 2,453 $ 2,097
- ---------------------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders' equity 823 751 2,453 2,088
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share before cumulative effect of change in accounting
principle:
Basic $ 0.71 $ 0.64 $ 2.10 $ 1.82
Diluted 0.70 0.64 2.08 1.82
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.71 $ 0.64 $ 2.10 $ 1.79
Diluted 0.70 0.64 2.08 1.78
- ---------------------------------------------------------------------------------------------------------------------------
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 2,097 2,097
Change in fair value, investment
securities-available for sale,
net of taxes 382 382
Change in fair value of cash-flow
hedge derivative securities,
net of taxes (171) (171)
Translation loss,
net of hedge results and taxes (3) (3)
------------------------ -------------
Net income and changes in
accumulated other adjustments
to stockholders' equity 2,097 208 2,305
Cash dividends declared:
Common stock (735) (735)
Preferred stock (9) (9)
Net issuance of common stock (157) 403 246
Purchase of common stock (45) (45)
Restricted stock awards granted,
net of forfeitures and amortization (17) (17)
Other 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Balance-September 30, 2001 $ 190 $ 12 $ 10,332 $ 10,413 $ 203 $ (138) $ (630) $ 20,382
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 2001 $ - $ 12 $ 10,311 $ 10,707 $ (65) $ (121) $ (618) $ 20,226
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 2,453 2,453
Change in fair value, investment
securities-available for sale,
net of taxes 491 491
Change in fair value of cash-flow
hedge derivative securities,
net of taxes (399) (399)
Translation loss,
net of hedge results and taxes (1) (1)
------------------------ -------------
Net income and changes in
accumulated other adjustments
to stockholders' equity 2,453 91 2,544
Common stock cash dividends
declared (737) (737)
Net issuance of common stock (132) 35 (97)
Restricted stock awards granted,
net of forfeitures and amortization (56) (56)
Stock option grants 28 28
Other 17 17
- -----------------------------------------------------------------------------------------------------------------------------------
Balance-September 30, 2002 $ - $ 12 $ 10,224 $ 12,423 $ 26 $ (177) $ (583) $ 21,925
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
44
CONSOLIDATED STATEMENTS OF CASH FLOWS
BANK ONE CORPORATION and Subsidiaries
Nine Months Ended
September 30
------------------------
(In millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 2,453 $ 2,097
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 388 423
Cumulative effect of accounting change - 69
Provision for credit losses 1,859 1,745
Investment securities (gains) losses, net (49) 69
Net (increase) decrease in net derivative product assets and liabilities (96) 236
Net increase in trading assets (198) (3,241)
Net decrease (increase) in other assets 742 (753)
Net increase in other liabilities 1,650 2,070
Merger-related and restructuring reversals (62) (3)
Other operating adjustments 282 (784)
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,969 1,928
Cash Flows from Investing Activities:
Net decrease (increase) in federal funds sold and securities under resale agreements 1,285 (4,721)
Securities available for sale:
Purchases (45,746) (41,756)
Maturities 4,989 19,328
Sales 36,390 17,028
Credit card receivables securitized 3,500 3,845
Net decrease in loans 212 12,221
Purchase of Wachovia credit card business - (5,776)
Loan recoveries 286 247
Additions to premises and equipment (369) (209)
Proceeds from sales of premises and equipment 39 72
All other investing activities, net 140 259
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 726 538
Cash Flows from Financing Activities:
Net decrease in deposits (3,424) (4,722)
Net increase in federal funds purchased and securities under repurchase agreements 1,772 4,575
Net increase (decrease) in other short-term borrowings 2,564 (7,103)
Proceeds from issuance of long-term debt 6,321 10,881
Repayment of long-term debt (7,754) (8,997)
Repurchase of treasury stock (494) (45)
Cash dividends paid (737) (742)
Proceeds from issuance of trust preferred capital securities - 825
Proceeds from issuance of common and treasury stock 265 164
All other financing activities, net 55 23
- ---------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,432) (5,141)
Effect of exchange rate changes on cash and cash equivalents (17) 34
- ---------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 6,246 (2,641)
Cash and Cash Equivalents at Beginning of Period 18,413 22,501
- ---------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 24,659 $ 19,860
- ---------------------------------------------------------------------------------------------------------------
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 Nine Months Ended
September 30 September 30
---------------------------------------------
(In millions, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle $ 823 $ 754 $ 2,453 $ 2,141
Cumulative effect of change in accounting principle, net of taxes of ($25) - - - (44)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 823 754 2,453 2,097
Preferred stock dividends - (3) - (9)
- ---------------------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders for basic and diluted EPS $ 823 $ 751 $ 2,453 $ 2,088
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 1,162 1,168 1,163 1,166
Stock options 9 8 11 9
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding assuming full dilution 1,171 1,176 1,174 1,175
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per share before cumulative effect of change in
accounting principle:
Basic $ 0.71 $ 0.64 $ 2.10 $ 1.82
Diluted 0.70 0.64 2.08 1.82
Earnings per share:
Basic $ 0.71 $ 0.64 $ 2.10 $ 1.79
Diluted 0.70 0.64 2.08 1.78
- ---------------------------------------------------------------------------------------------------------------------------
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
Amounts utilized (13) (9) (22)
- --------------------------------------------------------------------------------------------
September 30, 2002 Reserve balance $ 30 $ 105 $ 135
- --------------------------------------------------------------------------------------------
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 for: the consolidation of various telephone
banking and related sites and loan processing locations for Retail; the
consolidation of call centers by Card Services; the closing of certain
international locations and the consolidation of credit processing activities to
one primary loan system for Middle Market Banking; and certain other
consolidations. At September 30, 2002, approximately 2,100 of these identified
employees have been terminated under these programs. During the 2002 second
quarter, the reserve was adjusted for approximately 3,100 employees, primarily
in the Retail and Card Services lines of business, due to changes in attrition
and circumstances for elimination under these programs.
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 3-6 month period. Certain contractual payments associated
with these actions, as required, will extend beyond this 3-6 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 $42 million as of September 30, 2002, and
will be paid as required over the remaining contractual periods.
47
Note 5 - Business Segments
The information presented on page 3 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 segments see the
"Business Segment Results" section beginning on page 3.
The following table presents certain information regarding business
segments:
Provision for Identifiable assets at
Total Revenues-FTE (1) Income taxes (1) Net Income (loss) period-end
-----------------------------------------------------------------------------------------
Three Months Ended September 30 2002 2001 2002 2001 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
(In millions, except identifiable
assets in billions)
Retail $ 1,545 $ 1,580 $ 189 $ 163 $ 354 $ 304 $ 71.0 $ 75.0
Commercial Banking 1,042 1,084 42 86 179 205 95.7 106.5
Card Services 1,251 1,097 190 165 298 279 40.6 30.8
Investment Management 415 423 60 60 100 101 8.7 8.5
Corporate (35) (139) (88) (106) (108) (135) 58.2 49.4
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 4,218 $ 4,045 $ 393 $ 368 $ 823 $ 754 $ 274.2 $ 270.2
- --------------------------------------------------------------------------------------------------------------------------------
Provision for
Total Revenues-FTE (1) Income taxes (1) Net Income (loss)
------------------------------------------------------------------
Nine Months Ended September 30 2002 2001 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
(In millions)
Retail $ 4,721 $ 4,814 $ 570 $ 534 $ 1,056 $ 960
Commercial Banking 3,120 3,263 127 243 469 598
Card Services 3,566 2,840 537 370 845 620
Investment Management 1,306 1,249 197 160 330 266
Corporate 2 (419) (226) (291) (247) (303)
- ---------------------------------------------------------------------------------------------------------
Total before cumulative effect
of change in accounting principle 12,715 11,747 1,205 1,016 2,453 2,141
Cumulative effect of change in
accounting principle, net of
taxes ($25) - - - - - (44)
- ---------------------------------------------------------------------------------------------------------
Total $ 12,715 $ 11,747 $ 1,205 $ 1,016 $ 2,453 $ 2,097
- ---------------------------------------------------------------------------------------------------------
(1) Revenue and provision for income tax includes tax equivalent adjustments
of $38 million and $30 million for quarters ended September 30, 2002 and
2001, respectively. For the nine months ended September 30, 2002 and 2001,
tax equivalent adjustments were $109 million and $93 million, respectively.
48
Note 6 - Goodwill
The impact of adopting SFAS No. 142 on net income and earnings per share
adjusted to exclude amortization expense (net of taxes) related to goodwill is
as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
(In millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
Reported net income $ 823 $ 754 $ 2,453 $ 2,097
Goodwill amortization - 11 - 33
- ------------------------------------------------------------------------------------------
Adjusted net income $ 823 $ 765 $ 2,453 $ 2,130
- ------------------------------------------------------------------------------------------
Basic earnings per share:
Reported earnings per share $ 0.71 $ 0.64 $ 2.10 $ 1.79
Goodwill amortization - 0.01 - 0.03
- ------------------------------------------------------------------------------------------
Adjusted basic earnings per share $ 0.71 $ 0.65 $ 2.10 $ 1.82
- ------------------------------------------------------------------------------------------
Diluted earnings per share:
Reported earnings per share $ 0.70 $ 0.64 $ 2.08 $ 1.78
Goodwill amortization - 0.01 - 0.03
- ------------------------------------------------------------------------------------------
Adjusted diluted earnings per share $ 0.70 $ 0.65 $ 2.08 $ 1.81
- ------------------------------------------------------------------------------------------
Note 7 - Interest Income and Interest Expense
Details of interest income and interest expense are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
(In millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Interest Income
Loans, including fees $ 2,464 $ 3,191 $ 7,482 $ 10,388
Bank balances 13 19 40 126
Federal funds sold and securities under resale agreements 36 96 116 348
Trading assets 65 78 190 246
Investment securities 957 795 2,658 2,377
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 3,535 4,179 10,486 13,485
Interest Expense
Deposits 667 1,163 2,087 3,995
Federal funds purchased and securities sold under repurchase agreements 73 145 208 553
Other short-term borrowings 77 113 172 594
Long-term debt 521 595 1,580 1,940
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,338 2,016 4,047 7,082
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 2,197 2,163 6,439 6,403
Provision for credit losses 587 620 1,859 1,745
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses $ 1,610 $ 1,543 $ 4,580 $ 4,658
- ----------------------------------------------------------------------------------------------------------------------------
49
Note 8 - Investment Securities
The summary of the Corporation's investment portfolio follows:
Gross Unrealized Gross Unrealized Fair Value
September 30, 2002 Amortized Cost Gains Losses (Book Value)
- -----------------------------------------------------------------------------------------------------------------------------------
(In millions)
U.S. Treasury $ 1,275 $ 31 $ - $ 1,306
U.S. government agencies 28,140 697 (34) 28,803
States and political subdivisions 1,152 60 - 1,212
Interests in credit card securitized receivables 24,576 108 - 24,684
Other debt securities 5,491 55 (12) 5,534
Equity securities(1) 2,942 1 (1) 2,942
- -----------------------------------------------------------------------------------------------------------------------------------
Total available for sale securities $ 63,576 $ 952 $ (47) 64,481
- -----------------------------------------------------------------------------------------------------------------------------------
Principal and other investments(2) 1,648
---------------
Total investment securities $ 66,129
- -----------------------------------------------------------------------------------------------------------------------------------
(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 three months ended September 30, 2002, gross recognized gains and
losses on investment securities were $426 million and $455 million,
respectively. For the three months ended September 30, 2001, gross recognized
gains and losses on investment securities were $226 million and $268 million,
respectively.
For the nine months ended September 30, 2002, gross recognized gains and
losses on investment securities were $971 million and $921 million,
respectively. For the nine months ended September 30, 2001, gross recognized
gains and losses on investment securities were $647 million and $716 million,
respectively.
50
Note 9 - Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
At September 30, 2002, the Corporation sponsored ten trusts with a total
aggregate issuance of $3.3 billion in trust preferred securities as follows:
Trust Preferred
- ----------------------------------------------------------------------------------------------
Initial
Liquidation
(Dollars in millions) Issuance Date Value Distribution Rate
- ----------------------------------------------------------------------------------------------
Capital VI September 28, 2001 $ 525 7.20%
Capital V January 30, 2001 300 8.00%
Capital IV August 30, 2000 160 3-mo LIBOR
plus 1.50%
Capital III August 30, 2000 475 8.75%
Capital II August 8, 2000 280 8.50%
Capital I September 20, 1999 575 8.00%
First Chicago
NBD Capital 1 January 31, 1997 250 3-mo LIBOR
plus 0.55%
First USA
Capital Trust I(2) December 20, 1996 200 9.33%
First Chicago
NBD Institutional
Capital A December 3, 1996 500 7.95%
First Chicago
NBD Institutional
Capital B December 5, 1996 250 7.75%
- ------------------------------------------------------------------------------------------------
Junior Subordinated Debt Owned by Trust
- ------------------------------------------------------------------------------------------------
Initial
Principal Redeemable
(Dollars in millions) Amount Maturity Beginning
- ------------------------------------------------------------------------------------------------
Capital VI $ 541.2 October 15, 2031 October 15, 2006
Capital V 309.3 January 30, 2031 January 30, 2006
Capital IV 164.9 September 1, 2030 September 1, 2005
Capital III 489.7 September 1, 2030 See (1) below.
Capital II 288.7 August 15, 2030 August 15, 2005
Capital I 592.8 September 15, 2029 September 20, 2004
First Chicago
NBD Capital 1 257.7 February 1, 2027 February 1, 2007
First USA
Capital Trust I(2) 206.2 January 15, 2027 January 15, 2007
First Chicago
NBD Institutional
Capital A 515.5 December 1, 2026 December 1, 2006
First Chicago
NBD Institutional
Capital B 257.7 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.
51
Note 10 - Supplemental Disclosures for Accumulated Other Adjustments to
Stockholders' Equity
Accumulated other adjustments to stockholders' equity are as follows:
Nine Months Ended
September 30
-------------------
(In millions) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
Fair value adjustment on investment securities-available for sale:
Balance, beginning of period $ 78 $ (15)
Change in fair value, net of taxes of $(307) and $(222) for the nine months ended
September 30, 2002 and 2001, respectively 532 396
Reclassification adjustment, net of taxes of $26 and $8, for the nine months ended
September 30, 2002 and 2001, respectively (41) (14)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end-of-period 569 367
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
$368 and $65 for the nine months ended September 30, 2002 and 2001, respectively (614) (132)
Net reclassification into earnings, net of taxes of $(129) and $(29) for the nine months ended
September 30, 2002 and 2001, respectively 215 59
- ------------------------------------------------------------------------------------------------------------------------
Balance, end-of-period (545) (171)
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 $ 26 $ 203
- ------------------------------------------------------------------------------------------------------------------------
Note 11 - Stock-Based Compensation
In the second quarter 2002, the Corporation 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 for all stock option and Employee Stock Purchase Plan awards
were estimated using the following assumptions for 2002, depending on the date
of grant and varying expected lives: expected dividend yield of 2.04% - 2.32%,
expected volatility of 31.86% - 35.38%, risk-free interest rates of 2.02% -
4.53%, and expected lives of 1.9 - 5 years.
For the nine months ended September 30, 2002, the net income and fully
diluted earnings per share impacts were $18 million and $0.02, 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.
52
Note 12 - 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 or results of
operations of the Corporation.
53
SELECTED STATISTICAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
September 30, 2002 June 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 9,484 $ 49 2.05% $ 10,300 $ 49 1.91%
Trading assets(1) 6,426 66 4.07 6,941 65 3.76
Investment securities:(1)
U.S. government and federal agency 30,331 401 5.25 26,655 364 5.48
States and political subdivisions 1,171 21 7.11 1,178 22 7.49
Other 35,230 558 6.28 31,257 484 6.21
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 66,732 980 5.83 59,090 870 5.91
Loans(1)(2) 148,152 2,478 6.64 149,674 2,463 6.60
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 230,794 3,573 6.14 226,005 3,447 6.12
Allowance for credit losses (4,533) (4,521)
Other assets - nonearning 36,277 34,383
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 262,538 $ 255,867
Liabilities and Stockholders' Equity
Deposits - interest-bearing:(3)
Savings $ 9,953 $ 46 1.83% $ 10,997 $ 48 1.75%
Money market 73,522 172 0.93 67,546 163 0.97
Time 33,340 374 4.45 35,529 414 4.67
Foreign offices(4) 14,634 75 2.03 14,293 71 1.99
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits - interest-bearing 131,449 667 2.01 128,365 696 2.17
Federal funds purchased and securities
under repurchase agreements 15,115 73 1.92 15,188 73 1.93
Other short-term borrowings 9,802 77 3.12 6,031 55 3.66
Long-term debt(5) 43,229 521 4.78 43,870 545 4.98
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 199,595 1,338 2.66 193,454 1,369 2.84
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits 26,216 27,266
Other liabilities 14,646 13,557
Preferred stock - -
Common stockholders' equity 22,081 21,590
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 262,538 $ 255,867
Interest income/earning assets $ 3,573 6.14% $ 3,447 6.12%
Interest expense/earning assets 1,338 2.30 1,369 2.43
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income/margin $ 2,235 3.84% $ 2,078 3.69%
- ---------------------------------------------------------------------------------------------------------------------------
(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) On a consolidated basis, demand deposit balances are routinely swept into
overnight interest bearing deposits and are included in interest bearing
deposit average balances and average rate information. On a line of
business basis, the swept balances are included in demand deposits and are
included in demand deposit average balances and average rate information.
(4) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and oversees offices.
(5) Includes trust preferred capital securities.
54
March 31, 2002 December 31, 2001 September 30, 2001
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
$ 12,560 $ 58 1.87% $ 14,442 $ 89 2.44% $ 12,704 $ 117 3.65%
6,239 60 3.90 6,487 63 3.85 6,982 78 4.43
25,883 352 5.52 23,317 332 5.65 21,655 312 5.72
1,287 23 7.25 1,327 25 7.47 1,303 25 7.61
30,904 501 6.57 29,201 507 6.89 27,292 473 6.88
- -----------------------------------------------------------------------------------------------------------------------------
58,074 876 6.12 53,845 864 6.37 50,250 810 6.40
154,942 2,581 6.76 160,150 2,841 7.04 165,416 3,204 7.68
- -----------------------------------------------------------------------------------------------------------------------------
231,815 3,575 6.25 234,924 3,857 6.51 235,352 4,209 7.10
(4,563) (4,516) (4,499)
36,102 36,348 34,993
- -----------------------------------------------------------------------------------------------------------------------------
$ 263,354 $ 266,756 $ 265,846
$ 12,731 $ 43 1.37% $ 15,509 $ 30 0.77% $ 14,969 $ 42 1.11%
70,387 168 0.97 60,333 235 1.55 53,189 305 2.28
37,387 445 4.83 39,456 521 5.24 42,891 621 5.74
14,064 68 1.96 17,979 114 2.52 21,817 195 3.55
- -----------------------------------------------------------------------------------------------------------------------------
134,569 724 2.18 133,277 900 2.68 132,866 1,163 3.47
14,531 62 1.73 15,611 80 2.03 17,038 145 3.38
7,376 40 2.20 9,657 65 2.67 11,217 113 4.00
43,022 514 4.85 44,282 539 4.83 42,862 595 5.51
- -----------------------------------------------------------------------------------------------------------------------------
199,498 1,340 2.72 202,827 1,584 3.10 203,983 2,016 3.92
- -----------------------------------------------------------------------------------------------------------------------------
29,165 29,983 28,576
13,828 13,443 13,203
- 64 190
20,863 20,439 19,894
- -----------------------------------------------------------------------------------------------------------------------------
$ 263,354 $ 266,756 $ 265,846
$ 3,575 6.25% $ 3,857 6.51% $ 4,209 7.10%
1,340 2.34 1,584 2.67 2,016 3.40
- -----------------------------------------------------------------------------------------------------------------------------
$ 2,235 3.91% $ 2,273 3.84% $ 2,193 3.70%
- -----------------------------------------------------------------------------------------------------------------------------
55
SELECTED STATISTICAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Average Balances/Net Interest Margin/Rates
Nine Months Ended September 30
---------------------------------------------------------------------------
2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 10,770 $ 156 1.94% $ 13,327 $ 474 4.76%
Trading assets (1) 6,536 191 3.91 6,658 246 4.94
Investment securities: (1)
U.S. government and federal agency 27,639 1,117 5.40 20,340 868 5.71
States and political subdivisions 1,212 66 7.28 1,279 72 7.53
Other 32,479 1,543 6.35 27,876 1,490 7.15
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 61,330 2,726 5.94 49,495 2,430 6.56
Loans (1)(2) 150,898 7,522 6.66 169,381 10,428 8.23
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets 229,534 10,595 6.17 238,861 13,578 7.60
Allowance for credit losses (4,539) (4,320)
Other assets - nonearning 35,588 33,319
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 260,583 $ 267,860
Liabilities and Stockholders' Equity
Deposits - interest-bearing: (3)
Savings $ 11,217 $ 137 1.63 $ 15,447 $ 138 1.19
Money market 70,497 503 0.95 49,726 1,019 2.74
Time 35,404 1,233 4.66 45,253 2,052 6.06
Foreign offices (4) 14,332 214 2.00 22,885 786 4.59
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits - interest-bearing 131,450 2,087 2.12 133,311 3,995 4.01
Federal funds purchased and securities
under repurchase agreements 14,947 208 1.86 17,019 553 4.34
Other short-term borrowings 7,745 172 2.97 14,806 594 5.36
Long-term debt (5) 43,374 1,580 4.87 42,282 1,940 6.13
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 197,516 $ 4,047 2.74 207,418 $ 7,082 4.56
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits 27,538 27,999
Other liabilities 14,013 12,974
Preferred stock - 190
Common stockholders' equity 21,516 19,279
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 260,583 $ 267,860
Interest income/earning assets $ 10,595 6.17% $ 13,578 7.60%
Interest expense/earning assets 4,047 2.36 7,082 3.96
- ---------------------------------------------------------------------------------------------------------------------------
Net interest margin $ 6,548 3.81% $ 6,496 3.64%
- ---------------------------------------------------------------------------------------------------------------------------
For footnote detail see page 54.
56
REPORT OF MANAGEMENT
Management of BANK ONE CORPORATION and its subsidiaries (the "Corporation")
is responsible for the preparation, integrity and fair presentation of its
published financial reports. These reports include consolidated financial
statements that have been prepared in accordance with generally accepted
accounting principles in the United States of America, using management's best
judgment and all information available.
The condensed consolidated financial statements of the Corporation have
been reviewed by KPMG LLP, independent public accountants. Their accompanying
report is based upon a review conducted in accordance with standards established
by the American Institute of Certified Public Accountants. The Audit and Risk
Management Committee of the Board of Directors, which consists solely of outside
directors, meets at least quarterly with the independent auditors, Corporate
Audit and representatives of management to discuss, among other things,
accounting and financial reporting matters.
Management of the Corporation is responsible for establishing and
maintaining disclosure controls and procedures to ensure that information
required to be disclosed in reports filed or submitted under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms.
In addition to disclosure controls and procedures, management of the Corporation
is responsible for establishing and maintaining an effective internal control
structure, which provides reasonable, but not absolute, assurance of the
safeguarding of assets against unauthorized acquisition, use or disposition. The
Corporation maintains systems of controls that it believes are reasonably
designed to provide management with timely and accurate information about the
operations of the Corporation. This process is supported by an internal audit
function that evaluates the Corporation's systems of controls. Both the
Corporation's independent auditors and the internal audit function directly
provide to the Audit and Risk Management Committee reports on significant
matters and their respective evaluation of the Corporation's systems of control.
The Corporation's independent auditors, the internal audit function and the
Audit and Risk Management Committee have free access to each other. Disclosure
controls and procedures, internal controls, systems and corporate-wide processes
and procedures are continually evaluated and enhanced.
Management of the Corporation evaluated its disclosure controls and
procedures as of September 30, 2002. Based on this evaluation, the Principal
Executive Officer and Principal Financial Officer each concludes that as of
September 30, 2002, the Corporation maintained effective disclosure controls and
procedures in all material respects, including those to ensure that information
required to be disclosed in reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms, and is accumulated and communicated to
management, including the Principal Executive Officer and the Principal
Financial Officer, as appropriate to allow for timely disclosure. There have
been no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to our most recent evaluation.
The Corporation is dedicated to maintaining a culture that reflects the
highest standards of integrity and ethical conduct when engaging in its business
activities. Management of the Corporation is responsible for compliance with
various federal and state laws and regulations, and the Corporation has
established procedures that are designed to ensure that management's policies
relating to conduct, ethics and business practices are followed on a uniform
basis.
BANK ONE CORPORATION
November 13, 2002
/s/ James Dimon
--------------------------------
James Dimon
Principal Executive Officer
/s/ Heidi Miller
--------------------------------
Heidi Miller
Principal Financial Officer
57
REVIEW REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
BANK ONE CORPORATION:
We have reviewed the consolidated balance sheets of BANK ONE CORPORATION
and subsidiaries (the "Corporation") as of September 30, 2002 and 2001, the
related consolidated income statements for the three and nine-month periods
ended September 30, 2002 and 2001, and the related consolidated statements of
stockholders' equity and cash flows for the nine-month periods ended September
30, 2002 and 2001. These condensed financial statements are the responsibility
of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Corporation as of December 31, 2001, and the related consolidated income
statement and statements of stockholders' equity and cash flows for the year
then ended (not presented herein). In our report dated January 15, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly stated in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
November 13, 2002
/s/ KPMG LLP
--------------------------------
KPMG LLP
58
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2002.
Class Number of Shares Outstanding
- ------------------------------------ ------------------------------------
Common Stock $0.01 par value 1,164,609,477
59
Form 10-Q Cross-Reference Index
PART I-FINANCIAL INFORMATION
----------------------------
Page
----
ITEM 1. Financial Statements
- ----------------------------
Consolidated Balance Sheets-
September 30, 2002 and 2001, and December 31, 2001 42
Consolidated Income Statements-
Three Months and Nine months ended September 30, 2002 and 2001 43
Consolidated Statements of Stockholders' Equity-
Nine months ended September 30, 2002 and 2001 44
Consolidated Statements of Cash Flows-
Nine months ended September 30, 2002 and 2001 45
Notes to Consolidated Financial Statements 46
Selected Statistical Information 54
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
- ------------------------------------------------------------------
ITEM 4. Controls and Procedures 57
- -------------------------------
PART II-OTHER INFORMATION
-------------------------
ITEM 1. Legal Proceedings 61
- -------------------------
ITEM 2. Changes in Securities and Use of Proceeds 61
- -------------------------------------------------
ITEM 3. Defaults Upon Senior Securities 61
- ---------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 61
- -----------------------------------------------------------
ITEM 5. Other Information 61
- -------------------------
ITEM 6. Exhibits and Reports on Form 8-K 61
- ----------------------------------------
Signatures 62
60
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
- ------------------------------------------------------------
None
ITEM 5. Other Information
- --------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit 12-Statement regarding computation of ratios.
Exhibit 15-Letter of independent accountant regarding unaudited
interim financial information.
Exhibit 99(a)-Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99(b)-Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) The Registrant filed the following Current Reports on Form 8-K during
the quarter ended September 30, 2002.
Date Item Reported
--------------- -------------------------------------------------------
July 16, 2002 Registrant's July 16, 2002 news release announcing its
2002 second quarter earnings.
July 16, 2002 Registrant's July 16, 2002 news release announcing the
Board of Directors' approval of the repurchase of up
to $2 billion of the registrant's common stock.
August 12, 2002 Registrant's sworn statements delivered pursuant to
Securities and Exchange Commission Order No. 4-460.
61
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK ONE CORPORATION
--------------------
Date November 13, 2002 /s/ James Dimon
---------------- ----------------------------
James Dimon
Principal Executive Officer
Date November 13, 2002 /s/ Heidi Miller
----------------- ----------------------------
Heidi Miller
Principal Financial Officer
Date November 13, 2002 /s/ Melissa J. Moore
----------------- ----------------------------
Melissa J. Moore
Principal Accounting Officer
62
CERTIFICATIONS
- --------------
I, James Dimon, certify that:
1) I have reviewed this quarterly report on Form 10-Q of BANK ONE
CORPORATION;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
November 13, 2002
/s/ James Dimon
----------------------------
James Dimon
Principal Executive Officer
63
I, Heidi Miller, certify that:
1) I have reviewed this quarterly report on Form 10-Q of BANK ONE
CORPORATION;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
November 13, 2002
/s/ Heidi Miller
----------------------------------------
Heidi Miller
Principal Financial Officer
64
BANK ONE CORPORATION
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
- -------------- --------------------------
12 Statement regarding computation of ratios.
15 Letter of independent accountant regarding unaudited interim
financial information.
99(a)- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99(b)- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
65