<PAGE>
BANK ONE CORPORATION
Financial Supplement and Form 10-Q
Contents Page
-------- ----
Five-Quarter Summary of Selected Financial Information 1
Earnings Analysis (including Business Segments) 2
Risk Management 17
Liquidity Risk Management 17
Market Risk Management 18
Credit Risk Management 22
Derivative Financial Instruments 28
Loan Securitizations 29
Capital Management 31
Forward Looking Statements 33
Consolidated Financial Statements 34
Notes to Consolidated Financial Statements 38
Selected Statistical Information 43
Form 10-Q 48
<PAGE>
Five-Quarter Summary of Selected Financial Information
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
September 30 June 30 March 31 December 31 September 30
2000 2000 2000 1999 1999
-----------------------------------------------------------------------------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income--tax-equivalent basis........ $ 2,242 $ 2,257 $ 2,228 $ 2,221 $ 2,271
Provision for credit losses...................... 516 1,013 362 416 277
Noninterest income............................... 1,734 288 1,821 1,782 2,098
Noninterest expense.............................. 2,593 3,507 2,661 3,030 2,713
Net income (loss)................................ 581 (1,269) 689 411 925
Per Common Share Data:
Net income (loss), basic......................... $ 0.50 $ (1.11) $ 0.60 $ 0.36 $ 0.79
Net income (loss), diluted (1)................... 0.50 (1.11) 0.60 0.36 0.79
Cash dividends declared.......................... 0.21 0.42 0.42 0.42 0.42
Book value....................................... 16.47 16.12 17.43 17.34 17.32
Balance Sheet:
Loans:
Managed........................................ $237,505 $234,412 $229,673 $229,196 $222,117
Reported....................................... 176,419 172,591 168,078 163,877 158,143
Deposits......................................... 164,130 163,169 164,643 162,278 156,900
Long-term debt (2)............................... 42,641 39,093 38,753 35,435 34,735
Total assets:
Managed........................................ 324,780 316,011 317,176 315,064 311,490
Reported....................................... 283,373 272,709 273,008 269,425 264,135
Common stockholders' equity...................... 19,042 18,630 20,081 19,900 19,860
Total stockholders' equity....................... 19,232 18,820 20,271 20,090 20,050
Credit Quality Ratios:
Net charge-offs to average loans................. 0.74% 0.75% 0.64% 0.95% 0.68%
Allowance for credit losses to loans outstanding. 1.75 1.73 1.39 1.39 1.42
Nonperforming assets to related assets........... 1.21 1.03 0.99 1.02 1.06
Financial Performance Ratios:
Return on assets................................. 0.85% (1.87)% 1.03% 0.62% 1.44%
Return on common equity.......................... 12.2 (26.0) 13.9 8.2 18.2
Net interest margin:
Managed........................................ 4.66 4.80 4.91 4.98 5.32
Reported....................................... 3.68 3.77 3.78 3.79 4.04
Efficiency Ratio:
Managed........................................ 54.6% 103.8% 53.7% 62.1% 52.1%
Reported....................................... 65.2 137.8 65.7 75.7 62.1
Capital Ratios:
Regulatory leverage (2).......................... 7.5% 7.0% 7.7% 7.7% 7.9%
Risk-based capital: (2)
Tier 1......................................... 7.5 7.2 7.7 7.7 7.7
Total.......................................... 10.9 10.3 10.6 10.7 10.8
Common equity/managed assets..................... 5.9 5.9 6.3 6.3 6.4
Tangible common equity/tangible managed assets... 5.4 5.4 5.7 5.7 5.7
Common Stock Data:
Average shares outstanding, basic................ 1,156 1,153 1,149 1,147 1,167
Average shares outstanding, diluted (1).......... 1,167 1,153 1,155 1,154 1,177
Stock price, quarter-end......................... $ 38.06 $ 26.56 $ 34.38 $ 32.00 $ 34.81
</TABLE>
---------------
(1) Common equivalent shares have been excluded from the computation of diluted
loss per share in the second quarter of 2000 as the effect would be
antidilutive.
(2) Includes trust preferred capital securities.
NOTE: Throughout this report, "the Corporation" and "Bank One"
refer to BANK ONE CORPORATION.
-1-
<PAGE>
Earnings Analysis
Summary of Consolidated Financial Results
The Corporation reported net income of $581 million, or $0.50 per diluted
share, for the third quarter of 2000, compared to net income of $925 million, or
$0.79 per share, for the third quarter of 1999.
For the first nine months of 2000, net income was $1 million. After preferred
dividends, however, there was a net loss of $8 million, or $0.01 per diluted
share. The comparable year-ago period produced net income of $3.068 billion, or
$2.58 per diluted share.
The following table summarizes key income statement financial captions and
ratios on a reported basis for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
(Dollars in millions, ------------------------------------------- -----------------------------------
except per share data) 2000 1999 % Change 2000 1999 % Change
--------------------------- -------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis...... $2,242 $2,271 (1)% $6,727 $6,921 (3)%
Provision for credit losses 516 277 86 1,891 833 N/M
Noninterest income......... 1,734 2,098 (17) 3,843 6,910 (44)
Noninterest expense........ 2,593 2,713 (4) 8,761 8,460 4
Net income................. 581 925 (37) 1 3,068 N/M
Earnings (loss) per share:
Basic..................... 0.50 0.79 (37) (0.01) 2.60 N/M
Diluted................... 0.50 0.79 (37) (0.01) 2.58 N/M
Return on assets........... 0.85% 1.44% --% 1.62%
Return on common equity.... 12.2 18.2 (0.1) 20.0
Net interest margin........ 3.68 4.04 3.74 4.20
Efficiency ratio........... 65.2 62.1 82.9 61.2
---------------------------
N/M - Not meaningful.
</TABLE>
Business Segments
The Corporation is managed on a line of business basis which depicts the
management organization of the Corporation for the current period. The
following table summarizes certain financial information by line of business for
the periods indicated:
<TABLE>
<CAPTION>
Average
Net Income (Loss) Managed Assets
(In millions) (In billions)
------------------------- --------------------
Three Months Ended September 30 2000 1999 2000 1999
----------------------------------------------------- ------------------------- --------------------
<S> <C> <C> <C> <C>
Retail............................................... $ 251 $ 268 $ 78.8 $ 73.4
Commercial Banking................................... 172 198 111.0 104.4
First USA............................................ 177 288 69.2 75.0
Investment Management................................ 86 82 7.6 7.1
Corporate Investments................................ 52 89 8.7 7.6
Corporate/Unallocated................................ (157) 89 40.6 34.1
----- ------ ------ ------
Total business segment results...................... 581 1,014 315.9 301.6
Merger-related items and other significant items..... -- (89) -- --
----- ------ ------ ------
Total Corporation................................... $ 581 $ 925 $315.9 $301.6
===== ====== ====== ======
Nine Months Ended September 30
------------------------------
Retail............................................... $ 406 $ 805 $ 78.3 $ 71.7
Commercial Banking................................... 159 589 109.4 104.7
First USA............................................ (135) 929 70.5 74.9
Investment Management................................ 240 231 7.6 7.0
Corporate Investments................................ 254 283 8.4 7.7
Corporate/Unallocated................................ (923) 335 41.1 33.1
----- ------ ------ ------
Total business segment results...................... 1 3,172 315.3 299.1
Merger-related items and other significant items..... -- (104) -- --
----- ------ ------ ------
Total Corporation................................... $ 1 $3,068 $315.3 $299.1
===== ====== ====== ======
</TABLE>
-2-
<PAGE>
The 2000 nine month period included $2.940 billion pretax ($1.913 billion
after tax, $1.66 per share) in charges taken in the second quarter. See table
on page 11 for a summary of these charges by line of business. These charges
impacted all lines of business except Corporate Investments.
Description of Methodology
Key elements of the management reporting process that determines the line of
business results include:
. Funds Transfer Pricing - To derive net interest income for the business
units, a detailed process of charging/crediting for assets/liabilities is
employed. This system is designed to be consistent with the Corporation's
asset and liability management principles.
. Credit Costs - Provision for credit losses in the lines of business is
representative of management's estimate of ongoing credit losses. Beginning
in the second quarter of 2000, the provision was fully allocated to the
appropriate lines of business.
. Cost Allocation - Costs of support units are allocated to the business lines
as indirect expenses and overhead costs. This allocation methodology was
changed in the current quarter to better reflect the actual cost of services
provided and was consistently applied across all lines of business. Only
First USA and Corporate/Unallocated results were affected by this change
which decreased costs allocated to First USA and increased costs in
Corporate/Unallocated.
. All disclosures are on a managed basis; securitized credit card receivables
and related income statement line items are presented as if they were on-
balance sheet loans.
The Corporation continuously evaluates its management reporting process,
including funds transfer pricing, credit costs, support costs and capital
allocation processes.
The merger-related charges and the effect of certain identified transactions
in prior periods were not attributed to any line of business. For analytical
purposes, these items were not considered part of core business activities.
Line of Business Financial Results
As noted above, the 2000 second quarter included a number of significant items
that affected nine month results and prior year comparisons. See the table on
page 11 for a summary of these charges by line of business. For analytical
purposes, the tables in this section display nine month results for 2000 with
and without the effect of these items. The basis for the related discussion of
nine month results excludes the effect of these items.
-3-
<PAGE>
Retail
Retail offers a full range of products through a network of more than 1,800
banking centers, 6,300 ATMs, online banking and other distribution channels.
Deposits, investments, loans and insurance products are offered to consumers and
small businesses. The financial results of Retail are presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- -------------------------------------------------
Adjusted(1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
------------------------------------------------------------------ -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (2)...... $1,236 $1,100 12% $3,668 $3,261 12% $3,677
Provision for credit losses.. 207 83 N/M 506 299 69 495
Noninterest income........... 326 395 (17) 537 1,202 (55) 962
Noninterest expense.......... 959 1,000 (4) 3,058 2,938 4 2,985
Net income................... 251 268 (6) 406 805 (50) 734
Return on equity............. 17% 23% 9% 23% 17%
Efficiency ratio............. 61 67 73 66 64
(Dollars in billions)
Loans - average.............. $ 74.7 $ 66.9 12% $ 74.0 $ 65.2 13% $ 74.0
Assets - average............. 78.8 73.4 7 78.3 71.7 9 78.3
Deposits - average........... 87.9 88.5 (1) 88.4 89.5 (1) 88.4
Common equity - average...... 5.9 4.7 26 5.8 4.6 26 5.8
-----------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
</TABLE>
Quarterly results
-----------------
Retail reported net income of $251 million, a decrease of $17 million, or
6%, from the year-ago quarter, reflecting increased provision for credit loss
expense, partially offset by a 4% increase in revenue and a 4% decline in
expenses.
Net interest income of $1.236 billion increased $136 million, or 12%, from
the year-ago quarter, primarily driven by wider loan and deposit spreads and a
12% increase in average loans outstanding. Loan growth was concentrated in home
equity loans, which were up 37% from a year ago and 8% from the second quarter.
Excluding the impact of the 2000 first quarter sale of the consumer finance
branch network, net interest income increased 15% and average home equity loans
increased 48% from the year-ago quarter. Compared to the second quarter, the
growth in home equity loans was offset by a decline in indirect auto loans and
leases, reflecting increased pricing discipline.
Provision expense was $207 million, up $124 million from the year-ago
quarter. This increase reflected significant loan growth and higher losses in
home equity loans.
Noninterest income declined $69 million, or 17%, from the year-ago quarter,
reflecting the impact of higher auto lease residual losses and lower asset sale
gains. The negative impact of auto lease residuals totaled $58 million in the
current quarter, compared with $15 million in the year-ago quarter.
Noninterest expense decreased $41 million, or 4%, from the year-ago
quarter. This decrease reflected the sale of the consumer finance branch
network, a decline in development-related expenses, as well as the impact of
previous expense initiatives.
Year-to-date results, as adjusted
---------------------------------
Retail's adjusted earnings were $734 million, down $71 million, or 9%. Net
interest income increased 13% from 1999. Loan growth of 13% and wider deposit
spreads contributed to this improved performance. The provision increased to
$495 million related to loan growth and the adoption of the Federal Financial
Institution Examination Council's ("FFIEC") charge-off guidelines.
-4-
<PAGE>
Noninterest income declined to $962 million reflecting higher auto lease
residual losses and lower loan sale gains. Noninterest expense increased $47
million, or 2%, reflecting the launch of WingspanBank.com in late June 1999.
Commercial Banking
Commercial Banking serves business customers ranging in size from middle
market companies to large corporations, governments and institutions. Commercial
Banking's product offerings include traditional credit products, corporate
finance, treasury services and capital markets products. The financial results
of Commercial Banking are presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
-------------------------------- ----------------------------------------------
Adjusted (1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (2)...... $ 685 $ 636 8% $2,043 $1,866 9% $2,043
Provision for credit losses.. 225 109 N/M 1,135 322 N/M 507
Noninterest income........... 378 285 33 1,044 965 8 1,088
Noninterest expense.......... 566 507 12 1,700 1,613 5 1,699
Net income................... 172 198 (13) 159 589 (73) 586
Return on equity............. 10% 14% 3% 14% 12%
Efficiency ratio............. 53 55 55 57 54
(Dollars in billions)
Loans - average.............. $ 83.4 $ 74.9 11% $ 81.9 $ 73.1 12% $ 81.9
Assets - average............. 111.0 104.4 6 109.4 104.6 5 109.4
Deposits - average........... 39.2 37.3 5 40.0 37.3 7 40.0
Common equity - average...... 6.7 5.7 18 6.5 5.7 14 6.5
-----------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
</TABLE>
Quarterly results
-----------------
Commercial Banking net income decreased $26 million, or 13%, from the year-
ago period and was down $42 million from the adjusted second quarter, reflecting
an increase in the provision for credit losses.
Net interest income increased $49 million, or 8%, from the year-ago
quarter, reflecting 11% average loan growth. Large Corporate and Middle Market
loans grew 12% and 11%, respectively. This benefit was partially offset by a
slight decline in the net interest margin, reflecting continued competitive
pricing pressures in both the Middle Market and Large Corporate markets.
The provision for credit losses was $225 million, up $116 million
year-over-year, reflecting loan growth as well as continued deterioration in the
commercial portfolio across several industries and leveraged acquisition finance
transactions. At September 30, 2000, nonperforming loans as a percent of total
commercial loans were 1.54%, up from 1.24% a year ago. Net charge-offs were
0.52% of average commercial loans in the quarter, up slightly from 0.50% in the
year-earlier period.
Noninterest income of $378 million increased $93 million, or 33%,
year-over-year. Lending-related fees were up $35 million, reflecting increases
in syndication and other credit-related fees. Market-driven revenue improved $31
million from the year-ago period, driven by trading performance. Treasury
management services (TMS) revenue increased $9 million, or 6%, from the year-ago
quarter, reflecting growth in corporate sweep accounts, lockbox services and
commercial credit cards.
Noninterest expense was $566 million, up $59 million, or 12%, from the
year-ago quarter. This increase mostly reflected higher compensation-related
expenses in the current period.
-5-
<PAGE>
Year-to-date results, as adjusted
---------------------------------
Commercial Banking's adjusted net income was $586 million, slightly lower than
in the comparable 1999 period.
Net interest income increased 9% driven by 12% loan growth. The provision for
credit losses was $507 million, an increase of $185 million from 1999, primarily
reflecting deterioration in the commercial portfolio.
Noninterest income increased 13%, related to higher lending fees and treasury
management revenues. Noninterest expense increased 5% reflecting higher
treasury management volumes and compensation-related expenses.
First USA
First USA offers credit cards for consumers and businesses and is the largest
issuer of VISA credit cards. The financial results of First USA are presented
below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------- -------------------------------------------
Adjusted (1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
----------------------------- ----------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (2)...... $1,442 $1,733 (17)% $4,418 $5,311 (17)% $4,418
Provision for credit losses.. 853 922 (7) 2,757 2,660 4 2,722
Noninterest income........... 324 410 (21) 435 1,213 (64) 895
Noninterest expense.......... 633 778 (19) 2,309 2,450 (6) 2,027
Net income (loss)............ 177 288 (39) (135) 929 N/M 357
Return on outstandings
(pretax)................... 1.7% 2.5% (0.4)% 2.7% 1.1%
Return on equity............. 12 19 (3) 21 8
Efficiency ratio............. 36 36 48 38 38
Managed net charge-off
ratio...................... 5.03 5.33 5.42 5.16
(Dollars in billions)
Loans - average.............. $ 65.9 $ 69.2 (5)% $ 66.4 $ 69.0 (4)% $ 66.4
Assets - average............. 69.2 75.0 (8) 70.5 74.9 (6) 70.5
Common equity - average...... 6.1 6.1 -- 6.1 6.0 2 6.1
-----------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
</TABLE>
Quarterly results
-----------------
First USA reported net income of $177 million, a decrease of $111 million, or
39%, from the year-ago quarter. This reflected an 18% decline in revenue,
partially offset by lower expenses and provision for credit losses. Third
quarter results reflected a 1.7% pretax return on outstandings, down from 2.5%
in the year-ago quarter, but up from 1.1% in the second quarter on an adjusted
basis.
Net interest income of $1.442 billion was essentially unchanged from the
second quarter but decreased $291 million, or 17%, from the year-ago quarter.
The principal drivers were lower average outstandings and fee revenue, as well
as a narrower spread.
Average managed outstandings for the third quarter were $65.9 billion, down 5%
from the year-ago period and relatively flat with the second quarter average.
First USA had 53.6 million cards issued at quarter end, with 727,000 new
accounts opened during the quarter. Overall, year-over-year attrition on mature
vintage balances has improved and remained stable the last two quarters.
-6-
<PAGE>
The provision for credit losses of $853 million was down $69 million from the
year-ago quarter, and $47 million from the adjusted second quarter, reflecting
continued reductions in managed net charge-offs. The managed net charge-off
rate declined to 5.03% from 5.33% in the year-ago period and from 5.44% in the
prior quarter, reflecting lower bankruptcies. Future charge-off rates may
increase due to a return to normal bankruptcy levels and continued maturing of
the portfolio. The managed 30-day and 90-day delinquency rates were 4.14% and
1.79%, respectively. These were down from 4.74% and 2.07%, respectively, in the
year-ago quarter, but up slightly from the prior quarter, reflecting normal
seasonality.
Noninterest income declined $86 million, or 21%, from the prior year due to
lower securitization income, as well as lower fee revenue. The third quarter
reflected net securitization amortization expense of $22 million. Compared to
the adjusted second quarter, noninterest income increased $17 million, or 6%,
reflecting improved run-rates in a number of fee categories.
Noninterest expense declined $145 million, or 19%, from the prior year,
reflecting the impact of waste-reduction initiatives, such as lowering headcount
and processing costs, the sale of the international operations, reduced
marketing expense, as well as a decrease reflecting a change in the methodology
of allocating internal costs which better reflects the actual costs of services
provided. Higher compensation-related expenses partially offset this decrease.
The $46 million, or 7%, decrease from the adjusted second quarter primarily
reflected the same change in the methodology of allocating internal costs, which
accounted for $30 million of the decline.
Year-to-date results, as adjusted
---------------------------------
First USA's adjusted net income was $357 million, compared with $929 million
in 1999 period. Net interest income declined 17%. This decrease was related to
a narrower spread, lower late fee revenue, and lower average outstandings. The
provision for credit losses was $2.722 billion, a 2% increase from the 1999
period.
Noninterest income was $895 million down 26% from the 1999 period. The prior
year period included net securitization gains of $87 million and the current
period included net amortization of $93 million. Additional revenue sharing
payments to third party groups and lower fee revenue from fee-based products
also contributed to the decline of noninterest income.
Noninterest expense declined 17% driven by staff reductions, and lower
processing costs and marketing expenses partially offset by increased fraud
losses and operational losses. Also contributing to the decrease in expenses
were the change in methodology for allocating internal costs as noted above and
the sale of the international operations in 2000.
-7-
<PAGE>
Investment Management
Investment Management provides investment advisory, credit products,
insurance, trust and investment-related services to individual and institutional
clients. The One Group(R) mutual funds, the Corporation's proprietary fund
family, is managed in this line of business. The financial results of Investment
Management are presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -----------------------------------------------
Adjusted (1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (2)...... $ 104 $ 93 12% $ 305 $ 285 7% $ 305
Provision for credit losses.. 2 1 N/M 6 1 N/M 6
Noninterest income........... 286 285 -- 861 882 (2) 861
Noninterest expense.......... 252 251 -- 781 814 (4) 772
Net income................... 86 82 5 240 231 4 246
Return on equity............. 36% 41% 36% 34% 36%
Efficiency ratio............. 65 66 67 70 66
(Dollars in billions)
Loans - average.............. $ 6.6 $ 5.8 14% $ 6.5 $ 5.6 16% $ 6.5
Assets - average............. 7.6 7.1 7 7.6 7.0 9 7.6
Deposits - average........... 8.2 8.6 (5) 8.5 8.7 (2) 8.5
Common equity - average...... 0.9 0.8 13 0.9 0.9 -- 0.9
Assets under
management - eop........... 134.6 123.2 9 134.6 123.2 9 134.6
</TABLE>
-----------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
Quarterly results
-----------------
Investment Management net income improved $4 million, or 5%, from the year-
ago period and 9% from the second quarter on an adjusted basis.
Net interest income of $104 million increased 12% from the year-ago period.
Higher spread income associated with the 14% increase in average loans was
partially offset by the effect of a 5% decrease in average deposits.
Noninterest income was essentially unchanged from the year-ago period. Fee
income growth in retail brokerage and insurance activities was offset by a
decline in institutional trust fees.
Noninterest expense was essentially unchanged from the year-ago period.
Increases in volume-driven brokerage commissions and insurance claims expenses
were offset by the impact of waste-reduction initiatives.
Period-end assets under management increased to $134.6 billion, or 9%, from
the year-ago period. One Group(R) mutual fund assets under management increased
19% to $69.5 billion in the third quarter of 2000. One Group(R) fund performance
continues to remain strong, with 93% of funds rated three stars or higher by
Morningstar. Average assets under management were basically unchanged from the
prior quarter.
Year-to-date results, as adjusted
---------------------------------
Adjusted net income increased 6% primarily driven by lower noninterest
expenses as revenues were essentially unchanged.
Net interest income increased $20 million, or 7%, reflecting 16% loan
growth partially offset by narrower spreads.
-8-
<PAGE>
Noninterest income and noninterest expense both decreased from 1999's nine
months due to the sale of a subsidiary. Excluding the effect of this sale and
other items, noninterest income increased 5%, due to growth in the retail
brokerage, insurance and wealth management portions of the business while
noninterest expense was relatively flat.
Corporate Investments
Corporate Investments engages in proprietary investment activities, which
include growth, tax-oriented and value investing, and leveraged and equipment
leasing. The financial results for Corporate Investments are presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -----------------------------------------------
Adjusted (1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
---------------------------- ------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (2)...... $ 18 $ 41 (56)% $ 83 $139 (40)% $ 83
Provision for credit losses.. -- -- N/M 2 -- N/M 2
Noninterest income........... 52 97 (46) 289 310 (7) 289
Noninterest expense.......... 25 30 (17) 95 101 (6) 95
Net income................... 52 89 (42) 254 283 (10) 254
Return on equity............. 17% 35% 28% 38% 28%
Efficiency ratio............. 36 22 26 22 26
(Dollars in billions)
Loans - average.............. $3.6 $3.5 3 $3.5 $3.5 --% $3.5
Assets - average............. 8.7 7.6 14 8.4 7.7 9 8.4
Common equity - average...... 1.2 1.0 20 1.2 1.0 20 1.2
-----------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
</TABLE>
Quarterly results
-----------------
Corporate Investments net income declined $37 million, or 42%, from the year-
ago period and $9 million from the prior quarter. Net interest income of $18
million declined $23 million from the year-ago quarter, reflecting continued
higher funding rates as well as growth in noninterest-bearing investments. The
$12 million decline from the prior quarter was driven by lower yields on the
leasing and collateralized debt obligation portfolios, as well as higher volumes
and funding rates. Noninterest income declined $45 million from the year-ago
quarter but was unchanged from the prior quarter. The year-ago comparison
reflected lower venture capital valuations and the continued weakness in the IPO
market, partially offset by improved gains from investments. Noninterest
expense decreased $5 million, or 17%, from the year-ago quarter and $6 million,
or 19%, from the second quarter as a result of waste-reduction efforts.
Year-to-date results, as adjusted
---------------------------------
Net income declined $29 million, or 10%. Net interest income declined $56
million, or 40%, with higher funding rates and growth in noninterest-bearing
investments the principal causes of the decrease. Noninterest income declined
$21 million, or 7%, reflecting lower equity securities gains, partially offset
by higher gains on hedge funds and other investment portfolios. Noninterest
expense was $95 million for the nine months, down 6% from the prior year.
-9-
<PAGE>
Corporate/Unallocated
The financial results of Corporate/Unallocated are presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- -----------------------------------------------
Adjusted (1)
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change 2000
---------------------------- ------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income (loss)(2)... $(140) $ 21 N/M $(330) $ 100 N/M $(330)
Provision for credit losses..... -- -- -- -- (63) N/M --
Noninterest income.............. 36 110 (67) (268) 322 N/M 164
Noninterest expense............. 157 17 N/M 817 30 N/M 286
Net income (loss)............... (157) 89 N/M (923) 335 N/M [263)
(Dollars in billions)
Assets - average................ $40.6 $34.1 19% $41.1 $33.1 24% $41.1
Deposits - average.............. 22.9 20.2 13 21.6 17.7 22 21.6
Common equity - average......... (1.9) 1.8 N/M (1.1) 2.2 N/M (1.1)
--------------------------------
(1) Excludes second quarter 2000 significant items.
(2) Fully taxable equivalent basis.
N/M - Not meaningful.
</TABLE>
Quarterly results
-----------------
Corporate/Unallocated reported a net loss of $157 million, compared with net
income of $89 million in the year-ago quarter.
Net interest income in the current quarter represented a net expense of $140
million. Net interest income for this line of business represents the earnings
on the corporate investment securities portfolio, net of the impact of interest
rate risk not allocated to the lines of business and the cost to carry
unallocated net assets and capital. This net amount will vary from period to
period as the unallocated net asset and capital positions change. The Company
continues to review the allocation methodology of interest expense.
Noninterest income of $36 million primarily included earnings on miscellaneous
assets. The year-ago quarter included several, previously disclosed, one-time
transactions. The investment securities portfolio restructuring was completed
during the quarter.
Noninterest expense in the quarter totaled $157 million. Of this amount,
approximately $70 million represented costs associated with losses from
operational errors, asset dispositions and severance-related expense. The
remainder represented unallocated corporate expenses, of which $30 million
resulted from this quarter's change in the methodology of allocating internal
overhead costs to the lines of business which better reflects the actual costs
of services provided.
Year-to-date results, as adjusted
---------------------------------
Corporate/Unallocated activities generated a net loss of $263 million compared
with net income of $335 million in the prior year. Net interest income in 2000
was a net expense of $330 million, reflecting increases in both the cost
associated with the unallocated interest rate risk and the cost to carry
unallocated net assets. Noninterest income was $164 million, down $158 million
reflecting fewer gains on sales of assets. Noninterest expense was $286 million
up from $30 million in 1999, reflecting higher unallocated support costs.
-10-
<PAGE>
Second Quarter 2000 Significant Items
The following table summarizes significant items recorded in the second
quarter by each line of business (in millions):
<TABLE>
<CAPTION>
Pretax After-tax
--------------- ---------
<S> <C> <C> <C>
Retail
---------------------------------------------------------------
Writedown of auto lease residuals............................ $307
Writedowns primarily related to the planned disposition of
vehicle-related assets...................................... 167
Other........................................................ 44
----
Total.................................................... $ 518 $ 328
Commercial
---------------------------------------------------------------
Provision for credit losses.................................. 647
Other........................................................ 26
----
Total.................................................... 673 427
First USA
---------------------------------------------------------------
Writedown of interest-only strip............................. 354
Writedown of purchase credit card relationship intangibles... 275
Writedown of marketing partnership agreements................ 121
Other........................................................ 27
----
Total.................................................... 777 492
Investment Management
---------------------------------------------------------------
Other........................................................ 9 6
Corporate/Unallocated
---------------------------------------------------------------
Repositioning of investment securities portfolio............. 415
Increase to legal accruals................................... 190
Facilities restructuring..................................... 141
Losses due to operational errors............................. 100
Other........................................................ 117
----
Total.................................................... 963 660
------ ------
Total................................................. $2,940 $1,913
====== ======
</TABLE>
For a more detailed discussion of these significant items, see the
Corporation's June 30, 2000, Form 10-Q.
-11-
<PAGE>
Summary of Consolidated Financial Results
The following table summarizes key income statement financial captions and
ratios on a reported basis for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- --------------------------------
(Dollars in millions, except per share data) 2000 1999 % Change 2000 1999 % Change
-------------------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income--
tax-equivalent basis................ $2,242 $2,271 (1)% $6,727 $6,921 (3)%
Provision for credit losses.......... 516 277 86 1,891 833 N/M
Noninterest income................... 1,734 2,098 (17) 3,843 6,910 (44)
Noninterest expense.................. 2,593 2,713 (4) 8,761 8,460 4
Net income........................... 581 925 (37) 1 3,068 N/M
Earnings (loss) per share:
Basic............................... 0.50 0.79 (37) (0.01) 2.60 N/M
Diluted............................. 0.50 0.79 (37) (0.01) 2.58 N/M
Return on assets..................... 0.85% 1.44% --% 1.62%
Return on common equity.............. 12.2 18.2 (0.1) 20.0
Net interest margin.................. 3.68 4.04 3.74 4.20
Efficiency ratio..................... 65.2 62.1 82.9 61.2
-------------------------------------
</TABLE>
N/M - Not meaningful.
The 2000 nine-month period included $2.940 billion pretax ($1.913 billion
after-tax, $1.66 per share) in charges taken in the second quarter. See the
table on page 11 for a summary of these charges by line of business.
Net Interest Income
Net interest income includes spreads on earning assets as well as items
such as loan fees, cash interest collections on problem loans, dividend income,
interest reversals, and income or expense on derivatives used to manage interest
rate risk. Net interest margin measures how efficiently the Corporation uses its
earning assets and underlying capital.
In order to understand fundamental trends in net interest income, average
earning assets and net interest margins, it is useful to analyze financial
performance on a managed portfolio basis, which adds data on securitized loans
to reported data on loans as presented below:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------ -------------------------------------
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change
------------------------------------- ------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Managed:
Net interest income--
tax-equivalent basis................ $ 3,346 $ 3,624 (8)% $ 10,187 $ 10,960 (7)%
Average earning assets............... 285,371 270,279 6 284,048 266,047 7
Net interest margin.................. 4.66% 5.32% 4.79% 5.51%
Reported:
Net interest income--
tax-equivalent basis................ $ 2,242 $ 2,271 (1)% $ 6,727 $ 6,921 (3)%
Average earning assets............... 242,516 223,205 9 240,227 220,559 9
Net interest margin.................. 3.68% 4.04% 3.74% 4.20%
</TABLE>
-12-
<PAGE>
Managed net interest income declined 8% and 7% in the third quarter and the
first nine months of 2000, respectively, versus year-ago periods driven by
declines in the managed net interest margin that were partially offset by an
increase in average earnings assets. The managed net interest margin declined in
the third quarter and first nine months of 2000 by 66 and 72 basis points,
respectively, from the year-ago periods. Average managed earning assets
increased 6% and 7% from the year-ago quarter and nine-month period,
respectively. These increases primarily reflected growth in average loans, as
investment securities and other earning assets were up 2% and 5%, respectively.
Lower average receivables, lower fee revenue and narrower spreads in the
credit card business accounted for much of the decline in both net interest
income and related margin in the third quarter and first nine months of 2000,
compared with the year-ago periods. Competitive pricing pressures in the large
corporate and middle markets reduced margins slightly in the commercial loan
portfolio.
Loans, which are presented on a managed basis, are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------------------------ ---------------------------------------------
(Dollars in millions) 2000 Percent 1999 Percent 2000 Percent 1999 Percent
--------------------------- ------------------------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average managed loans:
Credit card............... $ 65,849 28% $ 69,153 32% $ 66,362 29% $ 69,082 32%
Commercial................ 101,224 43 91,186 41 99,786 43 89,067 41
Other consumer............ 67,331 29 59,876 27 65,997 28 58,382 27
-------- --- -------- --- -------- --- -------- ---
Total......... $234,404 100% $220,215 100% $232,145 100% $216,531 100%
======== === ======== === ======== === ======== ===
</TABLE>
Growth in both average commercial and other consumer loans and wider
consumer loan and deposit spreads partially offset the decline in net interest
income in both comparable periods.
Average managed credit card loans were down 5% and 4% for both the third
quarter and nine months ended September 30, 2000, respectively, compared to 1999
levels. The Corporation anticipates that average credit card loan outstandings
will continue to be flat to slightly down throughout the remainder of 2000.
Average commercial loan outstandings increased 11% to $101.2 billion from
the year-ago quarter, reflecting underlying growth concentrated in the large
corporate and middle market customer base. The increase in average commercial
loans on a year-to-date basis was 12%.
Average consumer loans, excluding credit card loans, increased 12% from the
year-ago quarter and 13% on a year-to-date basis. This growth reflected a
significant increase in home equity loan products.
-13-
<PAGE>
Noninterest Income
In order to provide more meaningful trend analysis, credit card fee revenue
and total noninterest income in the following table are shown on a managed
basis. Credit card fee revenue excludes the net interest revenue associated
with securitized credit card receivables.
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- ---------------------------------
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equity securities gains.............. $ 31 $ 86 (64)% $ 234 $ 315 (26)%
Trading profits...................... 58 30 93 119 130 (8)
Investment securities gains
(losses)............................ 16 6 N/M (383) 92 N/M
------ ------ ------ ------ ----- -----
Market-driven revenue (loss).... 105 122 (14) (30) 537 N/M
Credit card revenue.................. 337 382 (12) 779 1,045 (25)
Fiduciary and investment
management fees..................... 196 201 (2) 591 577 2
Service charges on deposits.......... 320 321 -- 974 951 2
Other service charges and
commissions......................... 382 350 9 1,135 1,133 --
------ ------ ------ ------ ----- -----
Managed fee-based revenue....... 1,235 1,254 (2) 3,479 3,706 (6)
Other income (loss).................. 62 207 (70) (551) 653 N/M
Gain on Indiana divestitures......... -- -- -- -- 249 N/M
Gain on sale of Concord/EPS.......... -- -- -- -- 111 N/M
------ ------ ------ ------ ------ -----
Managed noninterest income...... $1,402 $1,583 (11)% $2,898 $5,256 (45)%
====== ====== ====== ====== ====== =====
</TABLE>
---------------
N/M - Not meaningful.
Noninterest income in the third quarter of 2000 decreased $181 million, or
11%, from the year-earlier period. Noninterest income for the first nine months
decreased $637 million, or 13%, after excluding the impact of $1.361 billion of
second-quarter 2000 charges and $360 million of gains in the year-earlier
period.
Market-Driven Revenue
Market-driven revenue for the third quarter of 2000 decreased $17 million, or
14%, from the year-ago quarter reflecting lower equity securities gains,
partially offset by higher trading and investment securities gains. The
decrease in equity securities gains was driven by lower venture capital
valuations and the continued weakness in the IPO market which also affected
nine-month comparisons. Trading profits increased $28 million from the year-ago
quarter.
For the first nine months, there was a $30 million loss, which resulted in a
$567 million decline from the comparable year-ago period. This primarily
reflected the $415 million loss resulting from the repositioning of the
Corporation's investment securities portfolio in the second quarter of 2000. On
a year-to-date basis, equity securities gains declined $81 million and trading
profits were down $11 million.
Managed Fee-Based Revenue
Managed fee-based revenue declined $19 million and $227 million, respectively,
for the third quarter and first nine months of 2000. The primary driver of
these decreases was a decline in managed credit card fee revenue of $45 million
and $266 million, respectively. Included in the nine-month results were
writedowns of certain affinity partnership arrangements of $135 million. The
quarterly and nine-month comparisons also reflected reduced fee generation
resulting from customer attrition and fee-based transaction flow.
Other service charges and commissions were up 9% from the year-ago quarter,
with a slight increase on a year-to-date basis, reflecting growth in treasury
management fees in the Commercial Banking line of business.
-14-
<PAGE>
Other Income
Other activities generated gains of $62 million for the third quarter and
losses of $551 million for the first nine months of 2000. The nine-month
results include second-quarter charges totaling $750 million related to asset
writedowns associated with interest-only strips resulting from credit card
securitization transactions, auto lease residuals and estimated losses
associated with the committed sale of identified pools of vehicle-related loans.
The nine-month results also included gains of $22 million on the sale of
consumer installment loans and $46 million on the disposition of the
Corporation's Canadian and U.K. credit card operations.
Asset impairment writedowns associated with credit card-related interest-only
strip securities were $432 million for the nine months ended September 30, 2000,
including the second-quarter charges. Third-quarter 2000 results included $22
million of net securitization amortization, while the 1999 third-quarter results
reflected net securitization gains of $12 million. For the first nine months of
2000, such net securitization amortization totaled $93 million, compared with
net gains of $87 million in 1999. The carrying value of the Corporation's
credit card-related interest only strips totaled $234 million at September 30,
2000. The value of the interest-only strip is periodically reviewed for other-
than-temporary impairment.
Auto residual losses totaled $58 million for the third quarter and $495
million for the first nine months of 2000, including the second-quarter charge.
This compares with losses of $9 million and $62 million for the third quarter
and first nine months of 1999, respectively. While the Corporation has
estimated the level of permanent impairment inherent in its leasing residual
portfolio at September 30, 2000, continued deterioration in used car prices may
result in additional charges, further reducing the carrying value of the
Corporation's auto lease residual portfolio.
Noninterest Expense
Noninterest expense for the 2000 third quarter decreased 4% compared with the
year-ago 1999 period, and was up 4% on a year-to-date basis. However, amounts
in all periods were affected by merger-related and restructuring charges with
the 2000 nine-month results reflecting an additional $663 million of second-
quarter charges. Excluding the impact of these items, noninterest expense in
the third quarter was down $62 million, or 2%, from the year-ago quarter, and
$205 million, or 3% for the first nine months. Waste-reduction initiatives also
contributed to the decline.
The table below shows the components of noninterest expense for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- ---------------------------------
(Dollars in millions) 2000 1999 % Change 2000 1999 % Change
------------------------------ --------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits:
Salaries..................... $ 938 $ 840 12% $2,802 $2,723 3%
Employee benefits............ 168 130 29 534 467 14
------ ------ ---- ------ ------ ----
Total salaries and employee
benefits................... 1,106 970 14 3,336 3,190 5
Net occupancy and equipment
expense...................... 207 220 (6) 652 666 (2)
Depreciation and amortization. 143 167 (14) 745 511 46
Outside service fees and
processing................... 344 458 (25) 1,127 1,284 (12)
Marketing and development..... 200 341 (41) 671 958 (30)
Communication and
transportation............... 187 205 (9) 606 613 (1)
Other ........................ 408 296 38 1,416 873 62
------ ------ ---- ------ ------ ----
Total noninterest expense
before merger and
restructuring charges..... 2,595 2,657 (2) 8,553 8,095 6
Merger-related and
restructuring charges........ (2) 56 N/M 208 365 (43)
------ ------ ---- ------ ------ ----
Noninterest expense........... $2,593 $2,713 (4)% $8,761 $8,460 4%
====== ====== ==== ====== ====== ====
</TABLE>
-------------
N/M - Not meaningful.
-15-
<PAGE>
Salaries and benefit costs for both the third quarter and first nine months of
2000 included higher compensation-related expense, including severance-related
costs. The 1999 third quarter included a reduction of senior management
incentive accruals based on reduced individual business unit and overall
corporate performance.
Net occupancy and equipment costs were down 6% in the third quarter of 2000
and 2% for the first nine months, compared with the year-ago periods. During
the second quarter of 2000, corporate decisions were made to abandon identified
facilities and discontinue the use of certain application software. The costs
related to these decisions were recorded as restructuring charges. Absent other
investment decisions, these actions are anticipated to reduce longer-term
corporate occupancy costs.
Depreciation and amortization expense was down 14% from the year-ago quarter
and 10% on a year-to-date basis after excluding the second quarter's impairment
charge that includes $275 million of writedowns in purchased credit card
relationships. These asset writedowns reduced the carrying value of identified
intangibles and will reduce the ongoing level of related amortization expense.
Outside service fees and processing expenses, as well as communication and
transportation costs, declined on a quarterly and nine-month comparison basis
reflecting the effect of waste-reduction efforts.
Targeted reductions in identified credit card marketing programs produced
reduced marketing costs in both the third quarter and first nine months of 2000.
However, higher marketing expenses are expected in the near-term as First USA
begins to refocus on certain marketing programs.
Other noninterest expense increased $112 million in the third quarter of 2000
from the year-ago quarter. This increase reflected costs associated with losses
from operational errors and asset dispositions and writeoffs.
The first nine months of 2000 included $325 million of noninterest expense
charges taken in the second quarter of 2000. Excluding these charges, other
noninterest expense was up 25% compared with the 1999 nine months, reflecting
increased fraud costs related to the Corporation's credit card business and
additional costs associated with losses from operational errors and asset
dispositions. The Corporation continues to evaluate its business strategies and
practices regarding operational matters, which could result in additional
charges.
Applicable Income Taxes
The following table shows how the effective tax rates were derived:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
---------------------------------- ---------------------------------
(Dollars in millions) 2000 1999 2000 1999
-------------------------------------------- ---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes........... $ 833 $1,350 $(187) $4,450
Applicable income taxes (benefit)........... 252 425 (188) 1,382
Effective tax rates......................... 30.3% 31.5% N/M 31.1%
</TABLE>
---------------
N/M = Not meaningful.
Income tax expense or (benefit) for both periods included benefits for tax-
exempt income, tax-advantaged investment and general business tax credits offset
by the effect of nondeductible expenses, including goodwill. In the case of a
loss before income taxes, the effect of the net tax benefits described above is
to increase, rather than decrease, the effective rate of tax. This is the
primary reason a calculated effective tax rate for the nine months of 2000 is
not meaningful.
-16-
<PAGE>
Risk Management
The Corporation's various business activities generate liquidity, market and
credit risks.
. Liquidity risk is the possibility of being unable to meet all current and
future financial obligations in a timely manner.
. Market risk is the possibility that changes in future market rates or
prices will make the Corporation's positions less valuable.
. Credit risk is the possibility of loss from a customer's failure to perform
according to the terms of a transaction.
Compensation for assuming these risks is reflected in interest income, trading
profits and fee income. In addition, these risks are factored into the
allocation of capital to support various business activities, as discussed in
the "Capital Management" section, beginning on page 31.
The Corporation is a party to transactions involving financial instruments
that create risks that may or may not be reflected on a traditional balance
sheet. These financial instruments can be subdivided into three categories:
. Cash financial instruments, which are generally characterized as on-balance
sheet transactions and include loans, bonds, stocks and deposits.
. Credit-related financial instruments, which include such instruments as
commitments to extend credit and standby letters of credit.
. Derivative financial instruments, which include such instruments as
interest rate, foreign exchange, equity price and commodity price
contracts, including forwards, swaps and options.
The Corporation's risk management policies are intended to identify, monitor
and limit exposure to liquidity, market and credit risks that arise from each of
these types of financial instruments.
Liquidity Risk Management
Liquidity is managed in order to preserve stable, reliable and cost-effective
sources of cash to meet all current and future financial obligations in a timely
manner. The Corporation considers strong capital ratios, credit quality and
core earnings as essential to retaining high credit ratings and, consequently,
cost-effective access to market liquidity. In addition, a portfolio of liquid
assets, consisting of federal funds sold, deposit placements and selected highly
marketable investment securities, is maintained to meet short-term demands on
liquidity.
The Consolidated Statement of Cash Flows, on page 37, presents data on cash
and cash equivalents provided and used in operating, investing and financing
activities.
The Corporation's ability to attract wholesale funds on a regular basis and at
a competitive cost is fostered by strong ratings from the major credit rating
agencies. As of September 30, 2000, the Corporation and its principal banks had
the following long- and short-term debt ratings:
<TABLE>
<CAPTION>
Senior
Short-Term Debt Long-Term Debt
-------------------------- -------------------------
S & P Moody's S & P Moody's
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
The Corporation (Parent)............... A-1 P-1 A Aa3
Principal Banks........................ A-1 P-1 A+ Aa2
</TABLE>
The Treasury Department is responsible for identifying, measuring and
monitoring the Corporation's liquidity profile. The position is evaluated
monthly by analyzing the composition of the liquid asset portfolio, performing
various measures to determine the sources and stability of the wholesale
purchased funds market, tracking the exposure to off-balance sheet draws on
liquidity, and monitoring the timing differences in short-term cash flow
obligations.
-17-
<PAGE>
Access to a variety of funding markets and customers in the retail and
wholesale sectors is vital both to liquidity management and to cost
minimization. A large retail customer deposit base is one of the significant
strengths of the Corporation's liquidity position. In addition, a diversified
mix of short- and long-term funding sources from the wholesale markets is
maintained through active participation in global capital markets and by
securitizing and selling assets such as credit card receivables.
Deposits and Other Purchased Funds
The following table shows the total funding source mix for the dates indicated:
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
(In millions) 2000 2000 2000 1999 1999
--------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic offices
Demand................................................. $ 28,424 $ 29,055 $ 29,923 $ 31,194 $ 29,979
Savings................................................ 62,456 63,722 65,292 64,435 65,906
Time
Under $100,000........................................ 24,495 23,338 23,355 22,825 22,911
$100,000 and over..................................... 22,450 19,832 16,908 14,052 12,225
Foreign offices.......................................... 26,305 27,222 29,165 29,772 25,879
-------- -------- -------- -------- --------
Total deposits...................................... 164,130 163,169 164,643 162,278 156,900
Federal funds purchased and securities
under repurchase agreements............................ 23,983 17,610 18,451 18,720 20,493
Commercial paper......................................... 2,584 3,230 2,765 3,184 3,009
Other short-term borrowings.............................. 17,216 18,597 15,496 18,027 16,396
Long-term debt (1)....................................... 42,641 39,093 38,753 35,435 34,735
-------- -------- -------- -------- --------
Total other purchased funds......................... 86,424 78,530 75,465 75,366 74,633
-------- -------- -------- -------- --------
Total............................................... $250,554 $241,699 $240,108 $237,644 $231,533
======== ======== ======== ======== ========
-------------------------
</TABLE>
(1) Includes trust preferred capital securities.
Market Risk Management
Overview
Market risk refers to potential losses arising from changes in interest rates,
foreign exchange rates, equity prices and commodity prices, as well as the
correlation among these factors and their volatility. The portfolio effect of
engaging in diverse trading activities helps reduce the potential impact of
market risk on earnings. Through its trading activities, the Corporation
strives to take advantage of profit opportunities available in interest and
exchange rate movements. In asset and liability management activities, policies
are in place that are designed to closely manage structural interest rate and
foreign exchange rate risk.
Trading Activities
The Corporation's trading activities are primarily customer-oriented. Cash
instruments are sold to satisfy customers' investment needs. Derivative
contracts are initially entered into to meet the risk management needs of
customers. In general, the Corporation then enters into offsetting positions to
reduce market risk. In order to accommodate customers, an inventory of capital
markets instruments is carried, and access to market liquidity is maintained by
making bid-offer prices to other market makers. The Corporation may also take
proprietary trading positions in various capital markets cash instruments and
derivatives, and these positions are designed to profit from anticipated changes
in market factors.
Many trading positions are kept open for brief periods of time, often less
than one day. Other positions may be held for longer periods. Trading
positions are valued at estimated fair value. Realized and unrealized gains and
losses on these positions are included in noninterest income as trading profits.
-18-
<PAGE>
Value-At-Risk
The Corporation manages its market risk through a value-at-risk measurement
and control system, through stress testing and through dollar limits imposed on
trading desks and individual traders. A committee of the Corporation's Board of
Directors reviews the overall market risk and the amount that any line of
business can assume. The primary oversight unit for market risk arising from
trading and trading related activity is the Market Risk Policy and Review
Department, which develops policy to monitor and limit market risk and oversees
the Corporation's process for managing risk.
Value-at-risk is intended to measure the maximum fair value the Corporation
could lose on a trading position, given a specified confidence level and time
horizon. Value-at-risk limits and exposures are monitored on a daily basis for
each significant trading portfolio. Stress testing is similar to value-at-risk
except that the confidence level is geared to capture more extreme, less
frequent market events.
The following table shows the value-at-risk at September 30, 2000 (in millions):
<TABLE>
<CAPTION>
Risk Type
<S> <C>
Interest rate............................................ $10
Currency exchange rate................................... --
Equity................................................... 2
Commodity................................................ --
Diversification benefit.................................. --
---
Aggregate portfolio market risk........................... $12
===
</TABLE>
The table includes trading activities and other activities, including certain
overseas balance sheet positions that are managed principally as trading risk.
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 losses are expected to exceed value-at-risk one out of
every 100 overnight trading days. Value-at-risk is calculated using various
statistical models and techniques for cash and derivative positions, including
options. Because of market relationships, the Corporation is able to recognize
risk-reducing diversification benefits across certain trading portfolios.
However, the reported value-at-risk remains somewhat overstated because not all
offsets and correlations are fully considered in the calculation.
Structural Interest Rate Risk Management
Interest rate risk exposure in the Corporation's non-trading activities (i.e.,
asset-liability management ("ALM") position) is created from repricing, option
and basis risks that exist in on- and off-balance sheet positions. Repricing
risk occurs when interest-rate-sensitive financial asset or liability positions
reprice at different times as interest rates change. Basis risk arises from a
shift in the relationship of the rates on different financial instruments.
Option risk is due to "embedded options" often present in customer products
including interest rate, prepayment and early withdrawal options; administered
interest rate products; deposit products with no contractual maturity structure;
and certain off-balance sheet sensitivities. These embedded option positions
are complex risk positions that are difficult to offset completely and, thus,
represent the primary risk of loss to the Corporation.
The Corporation's policies strictly limit which business units are permitted
to assume interest rate risk. The level of interest rate risk that can be taken
is closely monitored and managed by a comprehensive risk control process.
Senior executives of the finance group, credit and market risk oversight units,
and line of business units are responsible for establishing the market risk
parameters acceptable for the Corporation's ALM position. Through these
parameters, the Corporation balances the return potential of the ALM position
against the desire to limit volatility in earnings and/or economic value. The
ALM position is measured and monitored using sophisticated and detailed risk
management tools, including earnings simulation modeling and economic value of
equity sensitivity analysis, to capture both near-term and longer-term interest
rate risk exposures. The Corporation establishes the risk measures, risk
limits, policy guidelines and internal control mechanisms (collectively referred
to as the Interest Rate Risk Policy) for managing the overall ALM exposure. The
Interest Rate Risk Policy is reviewed and approved by a committee of the
Corporation's Board of Directors.
-19-
<PAGE>
Earnings simulation analysis, or earnings-at-risk, measures the sensitivity of
pretax earnings to various interest rate movements. The base-case scenario is
established using the forward yield curve. The comparative scenarios assume an
immediate parallel shock of the forward curve in increments of /plus or minus/
100 basis point rate movements. Additional scenarios are analyzed, including
more gradual rising or falling rate changes and non-parallel rate shifts. The
interest rate scenarios are used for analytical purposes and do not necessarily
represent management's view of future market movements. This sensitivity
analysis includes the volatility inherent in the Corporation's credit card
securitization interest-only strip. Estimated earnings for each scenario are
calculated over a 12-month horizon. The table below shows pretax earnings at
risk for the dates indicated (in millions):
<TABLE>
<CAPTION>
Immediate Change
in Rates
--------------------
-100 bp +100 bp
--------- -------
<S> <C> <C>
September 30, 2000.................................................................................... $29 $ 9
=== =====
June 30, 2000......................................................................................... $16 $(117)
=== =====
</TABLE>
The reduction in earnings at risk from June 30, 2000 to September 30, 2000 for
a 100 basis point increase in interest rates is primarily attributed to the
reduced risk inherent in the fair value of the interest-only strip from credit
card securitizations, as a result of the decline of the forward interest rates
at September 30, 2000. The addition of brokered certificates of deposit and
interest rate swap positions has also contributed to a decrease in this pre-tax
earnings risk.
Approximately $8 billion of vehicle-related loans that are available for sale
have fixed interest rates and are included in the Corporation's measure of
interest rate exposure for non-trading activities. The Corporation continues to
evaluate its plans regarding the disposition of these loans. Although partially
hedged, changes in interest rates could potentially affect both the sales price
and estimated gain (loss) on the disposition of such loans.
Assumptions are made in modeling the sensitivity of earnings to interest rate
changes. For residential mortgage whole loans, mortgage-backed securities, home
equity loans and collateralized mortgage obligations, the earnings simulation
model captures the expected prepayment behavior under changing interest rate
environments. Additionally, the model measures the impact of interest rate caps
and floors on adjustable-rate products. Assumptions and methodologies regarding
the interest rate or balance behavior of indeterminate maturity products
(savings, money market, NOW and demand deposits) reflect management's best
estimate of expected future behavior and are continually being reviewed.
Sensitivity of service fee income to market interest rate levels, such as those
related to cash management products, is included as well.
The Corporation has risk exposure at time periods beyond the 12 months
captured in earnings sensitivity analysis. Management uses an economic value of
equity sensitivity technique to capture the risk in both short- and long-term
positions. This analysis involves calculating future cash flows over the full
life of all current assets, liabilities and off-balance sheet positions under
different rate scenarios. The discounted present value of all cash flows
represents the Corporation's economic value of equity. The sensitivity of this
value to shifts in the yield curve allows management to measure longer-term
repricing and option risk in the portfolio. Interest rate risk in trading
activities and other activities, including certain overseas balance sheet
positions, is managed principally as trading risk.
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 off-balance sheet instruments, principally plain vanilla
interest rate swaps (ALM swaps), the interest rate sensitivity of specific on-
balance sheet transactions, as well as pools of assets, is adjusted to maintain
the desired interest rate risk profile.
-20-
<PAGE>
At September 30, 2000, the notional value of ALM interest rate swaps
totaled $15.5 billion, including $13.3 billion against specific transactions and
$2.2 billion against specific pools of assets, as follows (in millions):
<TABLE>
<CAPTION>
Receive Fixed Pay Fixed Basis
Pay Floating Receive Floating Swaps
-------------- ---------------- -------------- Total
Specific Pool Specific Pool Specific Pool Swaps
-------- ---- -------- ------ -------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate swaps associated with:
Loans.......................................... $ -- $ -- $ 292 $2,118 $-- $ -- $ 2,410
Investment securities.......................... -- -- 50 -- -- -- 50
Deposits....................................... 520 -- -- -- -- -- 520
Funds borrowed (including long-term debt)...... 7,148 -- 5,320 -- 60 -- 12,528
------ ---- ------ ------ --- ---- -------
Total........................................ $7,668 $ -- $5,662 $2,118 $60 $ -- $15,508
====== ==== ====== ====== === ==== =======
</TABLE>
Interest rate swaps used to adjust the interest rate sensitivity of
specific transactions will not need to be replaced at maturity, since the
corresponding asset or liability will mature along with the swap. However,
interest rate swaps against the asset and liability pools will have an impact on
the overall risk position as they mature and may need to be reissued to maintain
the same interest rate risk profile. These interest rate swaps could create
modest earnings sensitivity to changes in interest rates.
Asset and Liability Management Swaps--Maturities and Rates
The notional amounts, expected maturity, and weighted-average pay and
receive rates for the ALM swap position at September 30, 2000 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 2001 2002 2003 2004 Thereafter Total
---------------------------------- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive fixed/pay floating swaps
Notional amount.................. $2,368 $ 475 $ -- $ 25 $ -- $4,800 $ 7,668
Weighted average
Receive rate.................... 6.25% 7.24% -- 7.61% -- 7.03% 6.81%
Pay rate........................ 6.78% 6.72% -- 6.78% -- 6.80% 6.79%
Pay fixed/receive floating swaps
Notional amount.................. $ 5 $ 2 $2,888 $1,379 $2,777 $ 729 $ 7,780
Weighted average
Receive rate.................... 6.63% 6.74% 6.77% 6.77% 6.80% 6.87% 6.79%
Pay rate........................ 8.74% 7.03% 6.92% 7.11% 6.74% 7.45% 6.94%
Basis swaps
Notional amount.................. -- $ 50 -- -- $ 10 -- $ 60
------ ----- ------ ------ ------ ------ -------
Total notional amount............. $2,373 $ 527 $2,888 $1,404 $2,787 $5,529 $15,508
====== ===== ====== ====== ====== ====== =======
</TABLE>
For generic interest rate swaps, the maturities are contractual. Variable
interest rates--which generally are the prime rate, federal funds rate or the
one-month, three-month and six-month London interbank offered rates ("LIBOR") in
effect on the date of repricing--are assumed to remain constant. However,
interest rates will change and consequently will affect the related weighted-
average information presented.
Foreign Exchange Risk Management
Whenever possible, foreign currency-denominated assets are funded with
liability instruments denominated in the same currency. If a liability
denominated in the same currency is not immediately available or desired, a
forward foreign exchange or cross-currency swap contract is used to fully hedge
the risk due to cross-currency funding.
To minimize the earnings and capital impact of translation gains or losses
measured on an after-tax basis, the Corporation uses forward foreign exchange
contracts to hedge the exposure created by investments in overseas branches and
subsidiaries.
-21-
<PAGE>
Credit Risk Management
The Corporation has developed policies and procedures to manage the level
and composition of risk in its credit portfolio. The objective of this credit
risk management process is to quantify and manage credit risk on a portfolio
basis as well as to reduce the risk of a loss resulting from a customer's
failure to perform according to the terms of a transaction.
Customer transactions create credit exposure that is reported both on and
off the balance sheet. On-balance sheet credit exposure includes such items as
loans. Off-balance sheet credit exposure includes unfunded credit commitments
and other credit-related financial instruments. Credit exposures resulting from
derivative financial instruments are reported both on and off the balance sheet;
see page 28 for more details.
Selected Statistical Information
The significant components of credit risk and the related ratios for the
dates indicated are as follows:
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2000 2000 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At period-end:
Loans outstanding............................... $176,419 $172,591 $168,078 $163,877 $158,143
Nonperforming loans............................. 2,026 1,690 1,564 1,559 1,569
Other, including other real estate owned........ 110 94 97 106 113
Nonperforming assets............................ 2,136 1,784 1,661 1,665 1,682
Allowance for credit losses..................... 3,090 2,983 2,338 2,285 2,252
Nonperforming assets/related assets............. 1.21% 1.03% 0.99% 1.02% 1.06%
Allowance for credit losses/loans outstandings.. 1.75 1.73 1.39 1.39 1.42
Allowance for credit losses/nonperforming loans. 153 177 149 147 144
For the three months ended:
Average loans................................... $173,259 $170,743 $167,423 $160,594 $157,967
Net charge-offs................................. 319 319 266 383(1) 267
Net charge-offs/average loans................... 0.74% 0.75% 0.64% 0.95% 0.68%
Allowance/net charge-offs....................... 242 234 220 149(1) 211
</TABLE>
-------------
(1) The $383 million net charge-off amount includes $143 million of charges
required to bring the consumer portfolio into compliance with FFIEC
guidelines. Excluding these incremental charge-offs, the adjusted coverage
ratio would have been 238%.
-22-
<PAGE>
Loan Composition
For analytical purposes, the Corporation's portfolio is divided into
commercial, consumer and credit card segments for the dates indicated:
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
(In millions) 2000 2000 2000 1999 1999
----------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial
Domestic
Commercial...................... $ 65,446 $ 63,552 $ 60,253 $ 59,070 $ 56,789
Real estate
Construction.................. 6,295 6,005 5,824 5,836 5,694
Other......................... 18,220 19,119 19,500 18,817 18,566
Lease financing................. 5,514 5,789 5,597 5,562 5,630
Foreign........................... 7,344 7,348 6,925 7,067 6,504
-------- -------- -------- -------- --------
Total commercial.............. 102,819 101,813 98,099 96,352 93,183
Consumer
Residential real estate (1)..... 39,299 36,589 33,999 32,313 29,211
Automotive (2).................. 21,860 22,199 23,371 23,567 20,990
Other........................... 7,643 7,518 7,717 7,608 8,743
-------- -------- -------- -------- --------
Total consumer............... 68,802 66,306 65,087 63,488 58,944
Credit card
On-balance sheet................ 4,798 4,472 4,892 4,037 6,016
Securitized..................... 61,086 61,821 61,595 65,319 63,974
-------- -------- -------- -------- --------
Managed credit card.......... 65,884 66,293 66,487 69,356 69,990
-------- -------- -------- -------- --------
Total managed................ $237,505 $234,412 $229,673 $229,196 $222,117
======== ======== ======== ======== ========
-----------------------------------
</TABLE>
(1) Includes first mortgages and home equity loans.
(2) Includes auto lease receivables.
Nonperforming Assets
The following table shows the Corporation's nonperforming assets for the
dates indicated:
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2000 2000 2000 1999 1999
--------------------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming Loans:
Commercial.................................. $1,464 $1,250 $1,093 $1,053 $1,027
Consumer.................................... 562 440 471 506 542
------ ------ ------ ------ ------
Total...................................... 2,026 1,690 1,564 1,559 1,569
Other, primarily other real estate owned..... 110 94 97 106 113
------ ------ ------ ------ ------
Total nonperforming assets................. $2,136 $1,784 $1,661 $1,665 $1,682
====== ====== ====== ====== ======
Nonperforming assets/related assets.......... 1.21% 1.03% 0.99% 1.02% 1.06%
====== ====== ====== ====== ======
</TABLE>
Nonperforming assets were $2.136 billion at the end of the third quarter,
up $352 million from June 30, 2000. Nonperforming assets include nonperforming
commercial loans, other real estate owned and consumer loans that are 90 days
past due. The nonperforming to related assets ratio was 1.21% at September 30,
2000, up from 1.03% at June 30, 2000. This increase reflected the continued
deterioration in the commercial loan portfolio, with areas of weakness across
several industries and leveraged acquisition finance transactions.
Overall credit quality continues to perform as expected, reflecting the
broad-based diversification of the portfolio. Based on the current economic
environment, the Corporation anticipates that there may be a continuing increase
in nonperforming loans in the near term.
During the 2000 second quarter, the Corporation adopted a policy of
including in nonperforming loans all non-credit card consumer loans that were 90
days or more past due. All periods presented reflect this policy change.
-23-
<PAGE>
Consumer Risk Management
Consumer risk management uses advanced risk assessment tools across each of
the consumer lines of business, including credit cards, loans secured by real
estate, automobile loans and leases, and other unsecured loans. With these
tools, product and price offerings are targeted to best match the consumer risk
profile.
Management continues to proactively manage the risk/reward relationship of
each consumer product loan segment, such that profitability targets and required
rates of return on investments are achieved.
Consumer and Credit Card Loans
Consumer loans consist of credit card receivables as well as loans secured by
residential real estate, automobile financing, and other forms of secured and
unsecured consumer installment credit. Excluding securitized receivables, the
consumer and credit card loan portfolio totaled $73.6 billion at September 30,
2000, an increase of 13% compared with a year ago.
Managed Credit Card Receivables
The following table shows the average managed credit card receivables and the
related charge-off and delinquency rates for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2000 2000 2000 1999 1999
--------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balances:
Credit card loans................................. $ 4,704 $ 5,070 $ 4,332 $ 4,526 $ 6,905
Securitized credit card receivables............... 61,145 61,078 62,763 64,152 62,248
------- ------- ------- ------- -------
Total average credit card receivables............ $65,849 $66,148 $67,095 $68,678 $69,153
======= ======= ======= ======= =======
Total net charge-offs (including
securitizations).................................. $ 828 $ 900 $ 969 $ 1,119 $ 921
======= ======= ======= ======= =======
Net charge-offs/average total receivables.......... 5.03% 5.44% 5.78% 6.52%(1) 5.33%
Credit card delinquency rate at period-end:
30 or more days................................... 4.14 3.83 4.08 4.57 4.74
90 or more days................................... 1.79 1.69 1.91 2.13 2.07
</TABLE>
---------
(1) Ratio includes $183 million of securitized charge-offs taken in the fourth
quarter of 1999, related to the early adoption of certain of the FFIEC's new
consumer charge-off guidelines. Excluding such incremental charge-offs, the
adjusted charge-off rate would have been 5.45%.
Average managed credit card receivables (i.e., those held in the portfolio and
those sold to investors through securitization) were $65.8 billion at September
30, 2000, down modestly from both year-end 1999 and a year ago.
The 30- and 90-day delinquency rates at September 30, 2000, increased from
those experienced in the prior quarter, but decreased from the year-ago period
and reflect performance that is favorable to that of the industry peer group.
While overall credit quality is projected to remain stable for the remainder
of 2000, reported net charge-off rates may increase into 2001 reflecting a
return to normal bankruptcy levels and the continued maturing of the portfolio.
Management continues to review credit limits, close high-risk unprofitable
accounts, monitor authorization criteria, and review policies and procedures for
delinquency management and projected collection activities.
-24-
<PAGE>
Consumer Loans
Information pertaining to consumer loans is as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
September 30 June 30 March 31 December 31 September 30
(Dollars in millions) 2000 2000 2000 1999 1999
------------------------------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average balances..................... $67,331 $65,527 $65,118 $62,577 $ 59,876
Total net charge-offs................ 147 135 123 256 93
Net charge-offs/average balances..... 0.87% 0.82% 0.76% 1.64%(1) 0.62%
</TABLE>
-------------
(1) Ratio includes $143 million of consumer charge-offs taken in the fourth
quarter of 1999 related to the early adoption of certain of the FFIEC's new
consumer charge-off guidelines. Excluding such incremental charge-offs, the
adjusted charge-off rate would have been 0.72%.
The composition of the consumer loan portfolio, primarily loans secured by
real estate as well as auto loans and leases, provides broad diversification of
risk from both a product and geographic perspective. Based on the current
economic environment, the Corporation anticipates that there may be an increase
in nonperforming consumer loans in the near term. The net charge-off rate for
the third quarter of 2000 was 0.87%, up from 0.82% in the second quarter of 2000
and 0.62% in the year-earlier period. The absolute level of charge-off dollars
is likely to increase as the portfolio matures, and modest charge-off rate
increases should reflect this portfolio seasoning.
Commercial Risk Management
The commercial credit portfolio includes all domestic and foreign commercial
credit exposure. Credit exposure includes the credit risks associated with both
on- and off-balance sheet financial instruments.
In the commercial portfolio, borrowers/transactions are assigned specific risk
ratings based upon an established underwriting and approval process. Risk
ratings are reviewed periodically and revised, if needed, to reflect the
borrower's/transaction's current risk profile. The lower categories of credit
risk are equivalent to the four bank regulatory classifications: Special
Mention, Substandard, Doubtful and Loss.
Commercial loans increased to $102.8 billion at September 30, 2000, from $96.4
billion at December 31, 1999. Commercial net charge-offs were $116 million, or
0.46% of average loans, in the third quarter of 2000, compared with $117
million, or 0.47%, in the second quarter of 2000. Nonperforming commercial
loans increased $411 million to $1.464 billion at September 30, 2000, from
$1.053 billion at December 31, 1999. This increase reflected the continued
deterioration in the commercial loan portfolio, with specific areas of weakness
including health care and certain acquisition finance transactions. Based on
the current economic environment, the Corporation anticipates that there may be
a continuing increase in nonperforming commercial loans in the near term.
Commercial Real Estate
Commercial real estate is the largest product category in the commercial
portfolio and consists primarily of loans secured by real estate as well as
certain loans that are real estate-related. This exposure includes loans and
commitments that finance both owner-occupied and investment properties/projects.
As of September 30, 2000, commercial real estate loans totaled $24.5 billion or
24% of total commercial loans. This compares with $24.7 billion or 26% of
commercial loans at year-end 1999.
-25-
<PAGE>
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.
Reserves are based on an estimate of potential inherent loss at a point in time
using a combination of empirically driven tests and management's judgment.
Quarterly, reserves are formally estimated by each line of business and reviewed
and modified by Corporate Risk Management. Securitized and held for sale loans,
including credit card receivables, are not subject to this reserve process.
The allowance for credit losses is intended to be an estimate of inherent
losses in an existing portfolio at a point in time. Management bases its
assessment of inherent losses on the expected default rate and the expected loss
rate in the event of default, considering the existence of collateral where
appropriate. Loss factors are based upon the Corporation's historical loss
experience and may be adjusted for conditions that affect the collectibility of
the portfolio. Factors for graded loans (primarily business loans) are derived
from historical loss experience and may be periodically updated based on tests
of reasonableness.
It is Corporate Risk Management's responsibility to recommend a reserve and
provision that result in adequate coverage of inherent losses within the
Corporation's credit portfolios. Corporate Risk Management's assessment is based
on line-of-business reserve tests, portfolio-level econometric modeling and
stress testing, as well as management's judgment. Corporate Risk Management also
utilizes third-party analysis to validate internal measures of expected inherent
loss, credit quality and reserve adequacy.
The table below summarized the changes in the allowance for loan loss (in
millions):
<TABLE>
<CAPTION>
September 30 June 30 March 31 December 31 September 30
2000 2000 2000 1999 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period..... $2,983 $2,338 $2,285 $2,252 $2,250
Provision for credit losses...... 516 1,013 362 416 277
Charge-offs:
Commercial...................... 148 142 106 109 112
Consumer........................ 181 169 171 291 138
Credit card..................... 59 72 61 68 92
------ ------ ------ ------ ------
Total charge-offs............ 388 383 338 468 342
Recoveries:
Commercial...................... 32 25 22 38 21
Consumer........................ 34 34 48 35 45
Credit card..................... 3 5 2 12 9
------ ------ ------ ------ ------
Total recoveries............. 69 64 72 85 75
Net charge-offs:.................
Commercial...................... 116 117 84 71 91
Consumer........................ 147 135 123 256 93
Credit card..................... 56 67 59 56 83
------ ------ ------ ------ ------
Total net charge-offs........ 319 319 266 383 267
------
Transfers........................ (90) (49) (43) -- (8)
------ ------ ------ ------ ------
Balance, end of period........... $3,090 $2,983 $2,338 $2,285 $2,252
====== ====== ====== ====== ======
</TABLE>
Transfers from the allowance for credit losses primarily represent
allocable credit reserves associated with consumer loan sale transactions,
including securitization transactions.
-26-
<PAGE>
Composition of Allowance for Credit Losses
While the allowance for credit losses is available to absorb credit losses in
the entire portfolio, the tables below present an estimate of the allowance for
credit losses allocated by loan type and the percentage of loans in each
category to total loans:
<TABLE>
<CAPTION>
(Dollars in September 30 June 30 March 31 December 31 September 30
millions) 2000 2000 2000 1999 1999
------------------- ---------------- --------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial (1)..... $1,755 57% $1,638 55% $ 987 42% $ 972 43% $ 894 40%
Consumer........... 457 15 496 17 514 22 486 21 394 17
Credit card........ 189 6 160 5 148 6 148 6 184 8
Unallocated........ 689 22 689 23 689 30 679 30 780 35
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total...... $3,090 100% $2,983 100% $2,338 100% $2,285 100% $2,252 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
Percentage of loans
to total loans
Commercial........ 58% 59% 58% 59% 59%
Consumer.......... 39 38 39 39 37
Credit card....... 3 3 3 2 4
---- ---- ---- ---- ----
Total...... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</TABLE>
-------------------
(1) Includes reserves related to Business and Community Banking loans, which
are included in the Retail line of business results.
Overall credit quality trends continued to perform as expected, reflecting the
broad-based diversification of the portfolio. Nevertheless, further increases
in nonperforming assets and net-charge-offs could occur, which could result in
the need to further build the allowance for credit losses.
Allocated Reserves
The Corporation employs several different methodologies for estimating
allocated reserves. Methodologies are determined based upon a number of
factors, including type of asset (consumer installment versus commercial loan),
risk measurement parameters (delinquency status and bureau score versus
commercial risk rating), and risk management and collection process (retail
collection center versus centrally managed workout units). Reserving
methodologies generally fall into one of the following categories:
- Empirically driven calculated reserves based on probable loss.
- Asset-specific reserves based, in part, on loan-specific analysis of
collateral coverage.
For each of the consumer portfolios, including the credit card portfolio,
reserves are established based on a statistical analysis of inherent loss over
discrete periods of time. The analysis reviews historical losses, vintage
performance, delinquencies and other risk characteristics of the various
consumer products to estimate probable losses. These factors and analysis are
updated on a quarterly basis.
During the 2000 second quarter, the Corporation refined its measurement
process for estimating probable losses inherent in the commercial portfolio. To
refine the process, the Corporation analyzed historical credit loss and risk-
rating migration data. The results of the analysis showed deterioration in the
Corporation's risk-class-specific default probabilities and loss given default
estimates. The factors were updated to reflect a higher estimate of incurred
losses in the portfolio, based on recent experience and management's view of the
current portfolio and economic conditions. The Corporation will continue to
review its estimated loss factors on a regular basis and update such factors
where appropriate.
Unallocated Reserves
Unallocated reserves are established in order to appropriately reflect the
presence of indicators of inherent losses that are not fully reflected in the
historical loss information and analysis used in the development of allocated
reserves. The factors considered in establishing the unallocated reserve
include: nonperforming, charge-off, delinquency, portfolio growth and
concentration trends, portfolio stress testing, the imprecision inherent in the
rating process that drives the application of reserve factors, and the effect of
known changes in the economy or other events that affect loss performance and
management's judgment.
-27-
<PAGE>
Unallocated reserves are based on recent experience and management's judgment
but are increasingly supported and reviewed in light of quantitative analysis.
Commercial stress tests are conducted to estimate the range of probable loss
resulting from observed deterioration in certain industry sectors of the economy
and/or the Corporation's downside macroeconomic forecast. Stress testing for
credit card and other consumer portfolio product segments identified risk
factors not reflected in historical loss rates, such as changes in product mix,
origination source, and product characteristics.
Derivative Financial Instruments
The Corporation uses a variety of derivative financial instruments in its
trading, asset and liability management, and corporate investment activities.
These instruments include interest rate, currency, equity and commodity swaps,
forwards, spot, futures, options, caps, floors, forward rate agreements, and
other conditional or exchange contracts, and include both exchange-traded and
over-the-counter contracts. For a full discussion of accounting for derivative
financial instruments see pages 30-32 of the Corporation's 1999 Annual Report on
Form 10-K as amended.
Income Resulting from Derivative Financial Instruments
The Corporation uses interest rate derivative financial instruments to reduce
structural interest rate risk and the volatility of net interest margin. Net
interest margin reflects the effective use of these derivatives. Without their
use, net interest income would have been lower by $22 million in the third
quarter of 2000, and lower by $49 million in the third quarter of 1999.
Deferred gains, net of deferred losses, on interest rate swaps terminated
early or dedesignated as ALM derivatives totaled $57 million as of September 30,
2000. This amount will be amortized as an adjustment to interest income or
expense on the linked interest rate exposure position. The net adjustment
remaining to be amortized is $13 million in 2000, $24 million in 2001 and $20
million in 2002.
Credit Exposure Resulting from Derivative Financial Instruments
The Corporation maintains risk management policies that monitor and limit
exposure to credit risks. For a further discussion of credit risks, see the
"Credit Risk Management" section, beginning on page 22.
Credit exposure from derivative financial instruments arises from the risk of
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 counterparty default.
The table below shows the impact of these master netting agreements:
<TABLE>
<CAPTION>
September 30 December 31
(In millions) 2000 1999
--------------------------------------------------------------- -----------------------------
<S> <C> <C>
Gross replacement cost......................................... $ 9,888 $12,254
Less: Adjustment due to master netting agreements............ (6,217) (8,895)
------- -------
Current credit exposure........................................ 3,671 3,359
Unrecognized net (gains) losses due to nontrading activity..... (179) 13
------- -------
Balance sheet exposure......................................... $ 3,492 $ 3,372
======= =======
</TABLE>
Current credit exposure represents the total loss the Corporation would have
suffered had every counterparty been in default on those dates. These amounts
are reduced by the unrealized and unrecognized gains and losses on derivatives
used in asset and liability management activities to arrive at the balance sheet
exposure.
-28-
<PAGE>
Loan Securitizations
The Corporation transforms loans into securities, which are sold to investors
-- a process referred to as securitization. The Corporation primarily
securitizes credit card receivables but also securitizes home equity loans and
other consumer assets. In a credit card securitization, a designated pool of
credit card receivables is removed from the balance sheet and a security is sold
to investors entitling them to receive specified cash flows during the life of
the security. The Corporation receives: fees for servicing the receivables and
net interest revenue (the interest-only strip), which includes the contractual
interest and yield-related fees on the receivables less the interest paid to the
investors, net credit losses and servicing fees.
The following represents the balance sheet impact of the Corporation's managed
credit card loans at September 30, 2000 (in millions):
<TABLE>
<S> <C>
Owned credit card loans.......................................................... $ 4,798
Seller's interest in credit card loans (investment securities)................... 19,679
-------
Total credit card loans reflected on balance sheet............................... 24,477
Securities sold to investors and removed from balance sheet...................... 41,407
-------
Managed credit card loans........................................................ $65,884
=======
</TABLE>
The Corporation maintains an undivided, pro rata interest in the credit card
securitized assets, referred to as seller's interest, which is generally equal
to the pool of assets included in the securitization less the investors' portion
of those assets. As the amount of the loans in the securitized pool fluctuates
due to customer payments, purchases, cash advances and credit losses, the amount
of the seller's interest will vary. This seller's interest is classified on the
balance sheet as investment securities -- available for sale.
At the time the Corporation enters into a securitization, an interest-only
strip asset is recognized, and the resulting gain or loss on sale is recorded in
noninterest income as other income. The interest-only strip represents the
present value of the net interest revenue related to the securitized loans and
is also classified as investment securities -- available for sale. During the
revolving period of a credit card securitization, an additional gain is
recognized each month over the life of the transaction as additional receivables
are sold. The interest-only strip is reduced as the securities sold to
investors are repaid.
At September 30, 2000, the estimated fair values of seller's interest and
interest-only strip from credit card securitizations were as follows (in
millions):
<TABLE>
<S> <C>
Seller's interest................................................. $19,572
Interest-only strip............................................... 234
</TABLE>
Certain estimates are used in determining the fair value of the interest-only
strip, including net interest revenues, receivable lives and the discount rate.
The components of net interest revenues, which are estimated, include finance
charge and fee revenue (excluding interchange income) generated by the
securitized loans in excess of interest paid to investors, related net credit
losses and servicing fees. The resulting expected cash flows over the lives of
the receivables are discounted to determine the fair value. Such estimates and
assumptions are subject to change, and, accordingly, the Corporation may not
recover all of the recorded investment of the interest-only strip. The
receivables in each trust have unique attributes; thus the interest-only strip
related to each trust is evaluated separately. Seller's interest resulting from
credit card securitizations is recorded at fair value using a present value
approach; the assumptions are consistent with the valuation of the interest-only
strip.
The weighted-average assumptions used to estimate the fair value of interest-
only strip and seller's interest related to credit card securitizations as of
September 30, 2000 were as follows:
<TABLE>
<S> <C>
Net interest revenue.............................................. 1.24%
Receivables lives................................................. 6 months
Discount rate..................................................... 10.00%
</TABLE>
-29-
<PAGE>
Credit enhancements associated with credit card securitizations, such as cash
collateral or spread accounts, totaled $525 million at September 30, 2000, and
are classified on the balance sheet as other assets. A servicing asset or
liability is not generally recognized in a credit card securitization since the
Corporation receives adequate compensation relative to current market servicing
prices to service the receivables sold. Transaction costs in credit card
securitizations are typically deferred and amortized over the life of the
security as a reduction of noninterest income. Other securitization transaction
costs are included in the gain or loss on sale.
The asset values of seller's interest, interest-only strip and credit
enhancements are periodically reviewed for other-than-temporary impairment.
Securitization of Credit Card Receivables
The Corporation continues to service credit card accounts even after
receivables are securitized. Net interest income and certain fee revenue on the
securitized portfolio are not recognized; however, these are offset by servicing
fees as well as by lower provisions for credit losses.
For analytical purposes only, the following table shows income statement line
items adjusted for the net impact of securitization of credit card receivables
(dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------- ----------------------------------
Credit Card Credit Card
Reported Securitizations Managed Reported Securitizations Managed
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income-tax-equivalent basis... $ 2,242 $ 1,104 $ 3,346 $ 2,271 $ 1,353 $ 3,624
Provision for credit losses................ 516 772 1,288 277 838 1,115
Noninterest income......................... 1,734 (332) 1,402 2,098 (515) 1,583
Noninterest expense........................ 2,593 -- 2,593 2,713 -- 2,713
Net income................................. 581 -- 581 925 -- 925
Total average loans........................ $173,259 $61,145 $234,404 $157,967 $62,248 $220,215
Total average earning assets............... 242,516 42,855 285,371 223,205 47,074 270,279
Total average assets....................... 273,014 42,855 315,869 254,643 47,074 301,717
Net interest margin........................ 3.68% 10.25% 4.66% 4.04% 11.40% 5.32%
Nine Months Ended
------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------- ----------------------------------
Credit Card Credit Card
Reported Securitizations Managed Reported Securitizations Managed
------------------------------------------------------------------------
Net interest income-tax-equivalent basis... $ 6,727 $ 3,460 $ 10,187 $ 6,921 $ 4,039 $ 10,960
Provision for credit losses................ 1,891 2,515 4,406 833 2,385 3,218
Noninterest income......................... 3,843 (945) 2,898 6,910 (1,654) 5,256
Noninterest expense........................ 8,761 -- 8,761 8,460 -- 8,460
Net income................................. 1 -- 1 3,068 -- 3,068
Total average loans........................ $170,485 $61,660 $232,145 $155,595 $60,936 $216,531
Total average earning assets............... 240,227 43,821 284,048 220,559 45,488 266,047
Total average assets....................... 271,524 43,821 315,345 253,616 45,488 299,104
Net interest margin........................ 3.74% 10.55% 4.79% 4.20% 11.87% 5.51%
=====================================================================================================================
</TABLE>
-30-
<PAGE>
Capital Management
Capital represents the stockholders' investment on which the Corporation
strives to generate attractive returns. It is the foundation of a cohesive risk
management framework and links return with risk. Capital supports business
growth and provides protection to depositors and creditors.
In conjunction with the annual financial planning process, a capital plan is
established to ensure that the Corporation and all of its subsidiaries have
capital structures consistent with prudent management principles and regulatory
requirements.
Economic Capital
An important aspect of risk management and performance measurement is the
ability to evaluate the risk and return of a business unit, product or customer
consistently across all lines of business. The Corporation's economic capital
framework facilitates this standard measure of risk and return. Business units
are assigned capital consistent with the underlying risks of their product
methodology set, customer base and delivery channels. The following principles
are inherent in the capital attribution employed:
. An equal amount of capital is assigned for each measured unit of risk.
. Risk is defined in terms of "unexpected" losses over the life of the
exposure, measured at a confidence interval consistent with that level of
capitalization necessary to achieve a targeted AA debt rating. Unexpected
losses are in excess of those normally incurred and for which reserves are
maintained.
. Business units are assessed a uniform charge against allotted capital,
representing a target hurdle rate on equity investments. Returns on
capital in excess of the hurdle rate contribute to increases in
shareholder value.
Four forms of risk are measured--credit, market, operational and lease
residual. Credit risk capital is determined through an analysis of both
historical loss experience and market expectations. Market risk capital is set
consistent with exposure limits established by the Corporation's risk oversight
committees. Operational risk capital incorporates event and technology risks,
as well as the general business risks arising from operating leverage. The
operating risk evaluation process involves an examination of various risk
factors that contribute to a greater likelihood of loss due to business failure,
fraud or processing error. Finally, lease residual risk capital covers the
potential for losses arising from the disposition of assets returned at the end
of lease contracts. This price risk is analyzed based upon historical loss
experiences and market factors, as well as by reviewing event-specific
scenarios.
The capital attributions in the "Business Segments" section, beginning on page
2, were developed through this process.
Selected Capital Ratios
The Corporation aims to maintain regulatory capital ratios, including those of
its principal banking subsidiaries, in excess of the well-capitalized guidelines
under federal banking regulations. The Corporation has maintained a well-
capitalized regulatory position over the past five quarters.
The tangible common equity to tangible managed assets ratio is also monitored.
This ratio adds securitized credit card loans to reported total assets and is
calculated net of total intangible assets. The tangible common equity to
tangible managed assets ratio was 5.4% at September 30, 2000, down from 5.7% at
the end of the year-ago quarter, but unchanged from June 30, 2000. Tier 1 and
total capital ratios were 7.5% and 10.9%, respectively, at September 30, 2000,
up from 7.2% and 10.3%, respectively, at June 30, 2000. This increase in
capital ratios reflected the $1.9 billion of new regulatory capital, consisting
of $0.9 billion of trust preferred securities and $1.0 billion of subordinated
debt.
-31-
<PAGE>
Capital ratios that adhere to regulatory guidelines appear in the table below:
<TABLE>
<CAPTION>
Well-
Capitalized
September 30 June 30 March 31 December 31 September 30 Regulatory
2000 2000 2000 1999 1999 Guidelines
--------------------------------- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory leverage (1)(2)....... 7.5% 7.0% 7.7% 7.7% 7.9% 3.0%
Risk-based capital (1)
Tier 1......................... 7.5 7.2 7.7 7.7 7.7 6.0
Total.......................... 10.9 10.3 10.6 10.7 10.8 10.0
Common equity/managed assets..... 5.9 5.9 6.3 6.3 6.4
Tangible common equity/
tangible managed assets......... 5.4 5.4 5.7 5.7 5.7 --
Double leverage ratio (1)........ 109 115 111 112 110 --
Dividend payout ratio............ 42 N/M 70 117 53 --
</TABLE>
------------
(1) Includes trust preferred capital securities.
(2) Minimum regulatory guideline is 3.0%.
N/M - Not meaningful.
The components of the Corporation's regulatory risk-based capital and risk-
weighted assets are as follows:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(In millions) 2000 1999 1999
----------------------------------------- -----------------------------------------------
<S> <C> <C> <C>
Regulatory risk-based capital
Tier 1 capital........................... $ 20,433 $ 20,247 $ 20,128
Tier 2 capital........................... 9,119 7,967 7,991
-------- -------- --------
Total capital........................... $ 29,552 $ 28,214 $ 28,119
======== ======== ========
Total risk-weighted assets............... $272,095 $263,169 $259,747
======== ======== ========
</TABLE>
In deriving Tier 1 and total capital, goodwill and other nonqualifying
intangible assets are deducted as indicated:
<TABLE>
<CAPTION>
September 30 December 31 September 30
(In millions) 2000 1999 1999
----------------------------------------- -----------------------------------------------
<S> <C> <C> <C>
Goodwill................................ $ 876 $ 934 $ 955
Other nonqualifying intangibles......... 405 669 723
------ ------ ------
Subtotal............................... 1,281 1,603 1,678
Qualifying intangibles.................. 235 583 592
------ ------ ------
Total intangibles...................... $1,516 $2,186 $2,270
====== ====== ======
</TABLE>
Dividends
The Corporation's common dividend policy reflects its earnings outlook,
desired payout ratios, the need to maintain an adequate capital level and
alternative investment opportunities. On October 17, 2000, the Corporation
declared a quarterly common cash dividend of 21 cents per share, payable January
1, 2001.
Double Leverage
Double leverage is the extent to which the Corporation's debt is used to
finance investments in subsidiaries. Double leverage was 109% at September 30,
2000, and 112% at December 31, 1999. Trust Preferred Capital Securities of
$2.489 billion and $1.578 billion, at September 30, 2000, and December 31, 1999,
respectively, were included in capital for purposes of this calculation.
-32-
<PAGE>
Stock Repurchase Program and Other Capital Activities
On May 18, 1999, the Corporation's Board of Directors authorized the purchase
of up to 65 million shares of the Corporation's common stock. As of September
30, 2000, the Corporation had purchased 36.6 million shares of common stock at
an average price of $44.95 per share. No shares have been repurchased under the
authorized plan since September 30, 1999.
During the third quarter of 2000, the Corporation strengthened its capital
position through the issuance of $1 billion of subordinated debt.
Also during the third quarter of 2000, the Corporation added to its Tier 1
capital through the sponsorship of three trusts which issued $915 million in
aggregate principal amount of trust preferred securities. These preferred
securities are tax-advantaged issues that qualify for Tier 1 capital treatment.
See Note 8 to the Corporation's consolidated financial statements for a
description of the issuances in the third quarter.
Forward-Looking Statements
Management's discussion and analysis of financial results contains forward-
looking statements about the Corporation, including descriptions of plans or
objectives of its management for future operations, products or services, and
forecasts of its revenues, earnings or other measures of economic performance.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts. They often include the words
"believe," "expect," "anticipate," "intend," "plan," "estimate" or words of
similar meaning, or future or conditional verbs such as "will," "would,"
"should," "could" or "may."
Forward-looking statements, by their nature, are subject to risks and
uncertainties. A number of factors--many of which are beyond the Company's
control--could cause actual conditions, events or results to differ
significantly from those described in the forward-looking statements. These
factors include, but are not limited to, certain credit, market, operational,
liquidity and interest rate risks associated with the Corporation's business and
operations; changes in business and economic conditions, competition, fiscal and
monetary policies; and litigation, including the Gramm-Leach-Bliley Act of 1999.
See page 36 of the Corporation's 1999 Annual Report on Form 10-K, as amended,
for a full discussion of such factors.
Forward-looking statements speak only as of the date they are made. The
Corporation does not undertake to update forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
are made or to reflect the occurrence of unanticipated events, such as further
market deterioration that adversely affects credit quality, auto lease residuals
and/or credit card asset values.
-33-
<PAGE>
Consolidated Balance Sheet
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
September 30 December 31 September 30
(Dollars in millions) 2000 1999 1999
---------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks.................................................. $ 15,388 $ 16,076 $ 15,325
Interest-bearing due from banks.......................................... 9,919 6,645 5,145
Federal funds sold and securities under resale agreements................ 12,666 9,782 13,257
Trading assets........................................................... 7,140 7,952 6,561
Derivative product assets................................................ 3,492 3,372 3,746
Investment securities.................................................... 45,262 47,912 47,971
Loans (net of unearned income--$3,420, $4,075, $3,856, respectively):
Commercial............................................................ 102,819 96,352 93,183
Consumer.............................................................. 68,802 63,488 58,944
Credit card........................................................... 4,798 4,037 6,016
-------- -------- --------
Total loans..................................................... 176,419 163,877 158,143
Allowance for credit losses.............................................. (3,090) (2,285) (2,252)
-------- -------- --------
Loans, net............................................................ 173,329 161,592 155,891
Bank premises and equipment, net......................................... 2,976 3,317 3,279
Customers' acceptance liability.......................................... 511 366 407
Other assets............................................................. 12,690 12,411 12,553
-------- -------- --------
Total assets.................................................... $283,373 $269,425 $264,135
======== ======== ========
Liabilities
Deposits:
Demand................................................................ $ 28,424 $ 31,194 $ 29,979
Savings............................................................... 62,456 64,435 65,906
Time.................................................................. 46,945 36,877 35,136
Foreign offices....................................................... 26,305 29,772 25,879
-------- -------- --------
Total deposits.................................................. 164,130 162,278 156,900
Federal funds purchased and securities under repurchase agreements....... 23,983 18,720 20,493
Other short-term borrowings.............................................. 19,800 21,211 19,405
Long-term debt........................................................... 40,152 33,857 33,157
Guaranteed preferred beneficial interest in the Corporation's junior
subordinated debt....................................................... 2,489 1,578 1,578
Acceptances outstanding.................................................. 511 366 407
Derivative product liabilities........................................... 3,149 3,332 3,902
Other liabilities........................................................ 9,927 7,993 8,243
-------- -------- --------
Total liabilities............................................... 264,141 249,335 244,085
Stockholders' Equity
Preferred stock.......................................................... 190 190 190
Common stock - $0.01 par value........................................... 12 12 12
Number of common shares (in thousands): 9/30/00 12/31/99 9/30/99
------- -------- -------
Authorized........................ 2,500,000 2,500,000 2,500,000
Issued............................ 1,181,386 1,182,121 1,182,009
Outstanding....................... 1,156,290 1,147,343 1,146,671
Surplus.................................................................. 10,584 10,799 10,740
Retained earnings........................................................ 9,819 11,037 11,099
Accumulated other adjustments to stockholders' equity.................... (71) (263) (258)
Deferred compensation.................................................... (157) (118) (128)
Treasury stock at cost, 25,096,000, 34,778,000 and 35,338,000 shares,
respectively........................................................... (1,145) (1,567) (1,605)
-------- -------- --------
Total stockholders' equity...................................... 19,232 20,090 20,050
-------- -------- --------
Total liabilities and stockholders' equity...................... $283,373 $269,425 $264,135
======== ======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
-34-
<PAGE>
Consolidated Income Statement
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(In millions, except per share data) 2000 1999 2000 1999
------------------ -----------------
<S> <C> <C> <C> <C>
Interest Income
Loans, including fees.......................................... $3,919 $3,270 $11,265 $ 9,685
Bank balances.................................................. 138 56 371 155
Federal funds sold and securities under resale agreements...... 168 103 437 308
Trading assets................................................. 139 84 340 233
Investment securities.......................................... 821 801 2,491 2,365
------ ------ ------- -------
Total..................................................... 5,185 4,314 14,904 12,746
Interest Expense
Deposits....................................................... 1,619 1,162 4,495 3,383
Federal funds purchased and securities under repurchase
agreements.................................................... 311 213 858 690
Other short-term borrowings.................................... 319 237 924 645
Long-term debt................................................. 728 460 2,005 1,195
------ ------ ------- -------
Total..................................................... 2,977 2,072 8,282 5,913
Net Interest Income............................................ 2,208 2,242 6,622 6,833
Provision for credit losses.................................... 516 277 1,891 833
------ ------ ------- -------
Net Interest Income after Provision for Credit Losses.......... 1,692 1,965 4,731 6,000
Noninterest Income
Trading profits................................................ 58 30 119 130
Equity securities gains........................................ 31 86 234 315
Investment securities gains (losses)........................... 16 6 (383) 92
------ ------ ------- -------
Market-driven revenue (losses).............................. 105 122 (30) 537
Credit card revenue............................................ 669 897 1,724 2,699
Fiduciary and investment management fees....................... 196 201 591 577
Service charges and commissions................................ 702 671 2,109 2,084
------ ------ ------- -------
Fee-based revenue........................................... 1,567 1,769 4,424 5,360
Other income (loss)............................................ 62 207 (551) 1,013
------ ------ ------- -------
Total..................................................... 1,734 2,098 3,843 6,910
Noninterest Expense
Salaries and employee benefits................................. 1,106 970 3,336 3,190
Net occupancy and equipment expense............................ 207 220 652 666
Depreciation and amortization.................................. 143 167 745 511
Outside service fees and processing............................ 344 458 1,127 1,284
Marketing and development...................................... 200 341 671 958
Communication and transportation............................... 187 205 606 613
Other.......................................................... 408 296 1,416 873
------ ------ ------- -------
Total noninterest expense before merger and restructuring
charges.................................................... 2,595 2,657 8,553 8,095
Merger-related and restructuring charges....................... (2) 56 208 365
------ ------ ------- -------
Total..................................................... 2,593 2,713 8,761 8,460
Income (Loss) Before Income Taxes.............................. 833 1,350 (187) 4,450
Applicable income taxes (benefit).............................. 252 425 (188) 1,382
------ ------ ------- -------
Net Income..................................................... $ 581 $ 925 $ 1 $ 3,068
====== ====== ======= =======
Net Income (Loss) Attributable to Common Stockholders' Equity.. $ 578 $ 922 $ (8) $ 3,059
====== ====== ======= =======
Earnings (Loss) Per Share:
Basic....................................................... $ 0.50 $ 0.79 $ (0.01) $ 2.60
====== ====== ======= =======
Diluted..................................................... $ 0.50 $ 0.79 $ (0.01) $ 2.58
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
-35-
<PAGE>
Consolidated Statement of Stockholders' Equity
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
Accumulated
Other
Adjustments to Deferred Total
Preferred Common Retained Stockholders' Compen- Treasury Stockholders'
(In millions) Stock Stock Surplus Earnings Equity sation Stock Equity
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 $190 $12 $10,769 $ 9,528 $ 239 $ (94) $ (84) $20,560
Net income........................... 3,068 3,068
Change in fair value, investment
securities--available for sale,
net of taxes........................ (482) (482)
Translation gain (loss), net of taxes (15) (15)
------- ------ -------
Net income and changes in accumulated
other adjustments to stockholders'
equity.............................. 3,068 (497) 2,571
Cash dividends declared:
On common stock..................... (1,488) (1,488)
On preferred stock.................. (9) (9)
Issuance of stock.................... (4) 156 152
Purchase of common stock............. (1,677) (1,677)
Awards granted, net of forfeitures
and amortization.................... (34) (34)
Other................................ (25) (25)
---- --- ------- ------- ----- ----- ------- -------
Balance - September 30, 1999 $190 $12 $10,740 $11,099 $(258) $(128) $(1,605) $20,050
==== === ======= ======= ===== ===== ======= =======
Balance - December 31, 1999 $190 $12 $10,799 $11,037 $(263) $(118) $(1,567) $20,090
Net income........................... 1 1
Change in fair value, investment
securities--available for sale,
net of taxes........................ 192 192
------- ----- -------
Net income and changes in
accumulated other adjustments to
stockholders' equity................ 1 192 193
Cash dividends declared:
On common stock..................... (1,210) (1,210)
On preferred stock.................. (9) (9)
Issuance of stock.................... (146) 457 311
Purchase of common stock............. (16) (16)
Cancellation of shares held in
treasury............................ (31) (31)
Employee stock program............... (59) (59)
Awards granted, net of forfeitures
and amortization.................... (70) (70)
Other................................ 21 31 (19) 33
---- --- ------- ------- ----- ----- ------- -------
Balance - September 30, 2000......... $190 $12 $10,584 $ 9,819 $ (71) $(157) $(1,145) $19,232
==== === ======= ======= ===== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
-36-
<PAGE>
Supplemental Consolidated Statement of Cash Flows
BANK ONE CORPORATION and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------
(In millions) 2000 1999
------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income........................................................... $ 1 $ 3,068
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 745 511
Provision for credit losses........................................ 1,891 833
Equity securities gains............................................ (234) (315)
Investment securities (gains) losses............................... 383 (92)
Net increase in net derivative product assets...................... (303) (37)
Net (increase) decrease in trading assets.......................... 7,338 (1,223)
Net (increase) decrease in other assets............................ (439) 375
Net increase (decrease) in other liabilities....................... 1,614 (1,017)
Gains on sale of banking centers................................... -- (249)
Merger-related and restructuring charges.......................... 208 (42)
Other operating adjustments....................................... 65 (178)
-------- --------
Net cash provided by operating activities........................... 11,269 1,634
Cash Flows from Investing Activities
Net increase in federal funds sold and securities under resale
agreements......................................................... (2,884) (3,395)
Securities available for sale:
Purchases......................................................... (49,933) (42,370)
Maturities........................................................ 9,768 9,127
Sales............................................................. 36,805 30,267
Credit card receivables securitized................................. -- 7,279
Net increase in loans............................................... (13,721) (11,827)
Loan recoveries..................................................... 205 240
Net cash and cash equivalents due to mergers, acquisitions and
dispositions....................................................... -- (882)
All other investing activities, net................................. (1,055) (489)
-------- --------
Net cash used in investing activities............................... (20,815) (12,050)
Cash Flows from Financing Activities
Net increase (decrease) in deposits................................. 1,752 (2,668)
Net increase (decrease) in federal funds purchased and securities
under repurchase agreements........................................ 5,263 (2,671)
Net increase (decrease) in other short-term borrowings.............. (1,411) 2,468
Proceeds from issuance of long-term debt............................ 13,348 27,109
Repayment of long-term debt......................................... (6,071) (14,749)
Cash dividends paid................................................. (976) (1,448)
Repurchase of common stock.......................................... -- (1,666)
Proceeds from issuance of common and treasury stock................. 136 106
All other financing activities, net................................. (36) (188)
-------- --------
Net cash provided by financing activities........................... 12,005 6,293
Effect of Exchange Rate Changes on Cash and Cash Equivalents........ 127 73
Net Increase (Decrease) in Cash and Cash Equivalents................ 2,586 (4,050)
Cash and Cash Equivalents at Beginning of Period.................... 22,721 24,520
-------- --------
Cash and Cash Equivalents at End of Period.......................... $ 25,307 $ 20,470
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
-37-
<PAGE>
Notes to Consolidated Financial Statements
BANK ONE CORPORATION and Subsidiaries
Note 1--Summary of Significant Accounting Policies
Consolidated financial statements of the Corporation have been prepared in
conformity with generally accepted accounting principles. Management is
required to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes that could differ from actual
results. Certain prior-year financial statement information has been
reclassified to conform to the current year's financial statement presentation.
Consolidated financial statements for all periods presented have been restated
to include the results of operations, financial position and changes in cash
flows for each acquisition accounted for as a pooling of interests. Adjustments
have been made to conform accounting policies upon integration of each acquired
entity.
Although the interim amounts are unaudited, they do reflect all adjustments
that, in the opinion of management, are necessary for a fair presentation of the
results of operations for the interim periods. All such adjustments are of a
normal, recurring nature. Because the results from commercial banking operations
are so closely related and responsive to changes in economic conditions, fiscal
policy and monetary policy, and because the results for the investment security
and trading portfolios are largely market-driven, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
These financial statements should be read in conjunction with the
Corporation's financial statements and related notes included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1999.
Note 2--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 debentures. Interest on convertible debentures (net of tax) is added
to net income, since this interest would not be paid if the debentures were
converted to common stock.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
------------------ --------------------
(In millions, except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic:
Net income....................................................................... $ 581 $ 925 $ 1 $3,068
Preferred stock dividends........................................................ (3) (3) (9) (9)
------ ------ ------- ------
Net income (loss) attributable to common stockholders' equity.................... $ 578 $ 922 $ (8) $3,059
====== ====== ======= ======
Diluted:
Net income....................................................................... $ 581 $ 925 $ 1 $3,068
Interest on convertible debentures, net of tax (1)............................... 1 2 -- 4
Preferred stock dividends........................................................ (3) (3) (9) (9)
------ ------ ------- ------
Diluted income (loss) available to common stockholders (1)....................... $ 579 $ 924 $ (8) $3,063
====== ====== ======= ======
Average shares outstanding............................................................ 1,156 1,167 1,152 1,175
Dilutive shares:
Stock options (1)................................................................ 8 7 -- 9
Convertible debentures (1)....................................................... 3 3 -- 4
------ ------ ------- ------
Average shares outstanding assuming full dilution (1)................................. 1,167 1,177 1,152 1,188
====== ====== ======= ======
Earnings (Loss) per share:
Basic............................................................................ $ 0.50 $ 0.79 $ (0.01) $ 2.60
====== ====== ======= ======
Diluted (1)...................................................................... $ 0.50 $ 0.79 $ (0.01) $ 2.58
====== ====== ======= ======
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Common equivalent shares and related income have been excluded from the
Computation of diluted loss per share in the nine months ended September
30, 2000 as the effect would be antidilutive.
-38-
<PAGE>
Note 3--New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133")." SFAS No. 133 establishes new accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities on the balance sheet
and measure those derivatives at fair value. The accounting for the gains or
losses resulting from changes in the value of those derivatives will depend on
the intended use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 will significantly change the accounting treatment for
interest rate and foreign exchange derivatives the Corporation uses in its asset
and liability management activities. The transition adjustments resulting from
adopting SFAS No. 133 will be reported in net income or accumulated other
adjustments to stockholders' equity, as appropriate, as the effect of a change
in accounting principle and presented in a manner similar to the cumulative
effect of a change in accounting principle.
The Corporation was originally to adopt SFAS No. 133 on January 1, 2000. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 is an amendment of SFAS No. 133 that delays the effective
date of this Statement to fiscal years beginning after June 15, 2000 (calendar
year 2001 for the Corporation). The Corporation and a large number of other
derivative users had requested such a delay primarily due to a number of key
interpretative issues that had not been resolved, as well as Year 2000 systems
considerations. Although considerable progress has been made in preparing for
this Statement, interpretative guidance continues to be issued by the FASB that
significantly affects certain hedging activities.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133." Several of the issues addressed by the amendment, issued
June 15, 2000, and otherwise considered by the FASB in their effort to provide
interpretative guidance, were resolved in a manner favorable to certain of the
Corporation's hedging activities. As a result, the Corporation is developing and
implementing strategies to adopt SFAS No. 133, as amended, for those hedging
activities for which no further FASB interpretative guidance is expected. For
all other hedging activities, contingency plans are being developed, and FASB
actions are being closely monitored for indications of final interpretations.
The Corporation believes that there will not be any significant transition
adjustment to net income and believes that it would be premature to disclose
potential adjustments to the balance sheet, including stockholders' equity,
given the number of unresolved accounting issues as well as potential market
changes and available corporate hedging strategies.
Accounting for Transfers and Servicing of Financial Assets and Liabilities
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Liabilities ("SFAS No. 140")." SFAS No.
140 revises certain criteria promulgated in previous accounting literature (SFAS
No. 125) for accounting for securitizations and other transfers of financial
assets and collateral, and requires additional disclosures concerning these
activities. The Corporation is currently evaluating the effects of adopting SFAS
No. 140 on its current accounting policies for securitizations and other
transfers of financial assets. The Corporation currently does not believe that
the impact, if any, of adopting SFAS No. 140 will be significant to its
financial position or net income.
-39-
<PAGE>
Revenue Recognition in Financial Statements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements
("SAB No. 101")." SAB No. 101 summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. In June 2000, the SEC issued SAB No. 101B to defer the effective
date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000.
The Corporation is currently reviewing its revenue recognition practices related
to various products and services to determine if there are any conflicts with
respect to SAB No. 101 and recent interpretive guidance issued by the SEC. The
Corporation continues to assess the impact of SAB No. 101 and it is not clear
whether or not this review will result in a material effect on the Corporation's
results of operations.
Note 4 -- Merger-Related and Restructuring Charges
a) Second Quarter 2000 Restructuring Charge
The Corporation recorded restructuring costs of $233 million in the second
quarter of 2000 related to the restructuring of certain of its retail businesses
as well as exit costs associated with specific decisions made to abandon
identified facilities, equipment and application software. The following table
summarizes the details of these restructuring charges (in millions):
<TABLE>
<CAPTION>
Personnel- Asset Contractual
Related Costs Writedowns Obligations Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 2000 Reserve Balance.................. $32 $104 $ 97 $ 233
Amounts Paid/Asset Writedowns............... -- (18) (96) (114)
--- ---- ---- -----
September 30, 2000 Reserve Balance............. $32 $ 86 $ 1 $ 119
=== ==== ==== =====
</TABLE>
Personnel-related items consisted primarily of severance costs related to
identified staff reductions totaling 2,200 positions in the Retail line of
business. It is anticipated that such staff reductions will be implemented when
assets are sold. 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.
Contractual obligations included the estimated costs associated with lease
and other contract termination costs incorporated in the business restructuring
plans.
Actions under this overall restructuring plan are to be completed within a
12-month period. Certain payments associated with these actions, as required,
will extend beyond this 12-month time frame.
The Corporation continues to evaluate its business strategies which could
result in additional charges.
-40-
<PAGE>
b) Fourth Quarter 1999 Restructuring Charge
Restructuring costs recorded in the fourth quarter of 1999 totaled $207
million. Of this initial reserve balance, $143 million related to personnel-
related actions, $24 million related to identified asset write-offs, and $40
million related to contract termination costs. The following table summarizes
the activity related to this restructuring reserve during 2000 (in millions):
<TABLE>
<CAPTION>
Personnel- Asset Contractual
Related Costs Writedowns Obligations Total
--------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999 Reserve Balance... $143 $ 24 $ 40 $207
Reserve Adjustments:
Increases....................... 4 -- -- 4
Decreases....................... (8) -- (8) (16)
Amounts Paid/Asset Writedowns..... (5) (20) (5) (30)
---- ---- ---- ----
March 31, 2000 Reserve Balance...... $134 $ 4 $ 27 $165
Reserve Adjustments:
Increases....................... -- 1 14 15
Decreases....................... -- (2) (2) (4)
Amounts Paid/Asset Writedowns..... (33) -- -- (33)
---- ---- ---- ----
June 30, 2000 Reserve Balance....... $101 $ 3 $ 39 $143
Reserve Adjustments:
Increases....................... -- -- 2 2
Decreases....................... -- -- (5) (5)
Amounts Paid/Asset Writedowns..... (22) (2) (5) (29)
---- ---- ---- ----
September 30, 2000 Reserve Balance.. $ 79 $ 1 $ 31 $111
==== ==== ==== ====
</TABLE>
Personnel-related items consist primarily of severance and benefits costs
for separated employees and executives due to delayering and management
realignment. The net reduction in full-time-equivalent positions is anticipated
to approximate 5,100 personnel. Other charges include identified asset write-
offs and the termination costs associated with lease and other vendor contracts.
For more detail, see Note 4 on pages 40 - 42 of the Corporation's June 30, 2000
Form 10Q.
During the third quarter of 2000, a $5 million reduction in initially
established expense accruals was recorded, primarily reflecting the negotiated
settlement of a leasing obligation at better than contractual terms. Partially
offsetting this reduction was a $2 million increase in estimated contract
termination costs.
Actions under this restructuring plan should be completed by year-end 2000.
Certain payments associated with such actions, as required, could extend beyond
year-end 2000.
c) Banc One/FCN Merger
Actions under this restructuring plan have been completed, with only the
payment of identified obligations remaining. Unpaid amounts totaled $49 million
at September 30, 2000, of which $41 million related to identified staff
reductions.
Note 5-Operating Segments
The information presented on page 2 is consistent with the content of
operating segments data provided to the Corporation's management. The
Corporation's management currently does not use product group revenues to assess
consolidated results. Aside from investment management and insurance products,
product offerings are tailored to specific customer segments. As a result, the
aggregation of product revenues and related profit measures across lines of
business is not available.
-41-
<PAGE>
Aside from the United States, no single country or geographic region
generates a significant portion of the Corporation's revenues or assets. In
addition, there are no single customer concentrations of revenue or
profitability.
See the following "Business Segments" sections for additional disclosure
regarding the Corporation's operating segments:
. Business Segments on pages 2 - 3.
. Tables included in the "Business Segments" section, beginning with
"Retail" through "Corporate/Unallocated" on pages 4 through 10.
Note 6--Fair Value of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of September 30, 2000, have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 1999.
Note 7--Loans Held for Sale
Specific loans or identified pools of loans have been identified as held for
sale. Loans held for sale are included in loans on the Corporation's
consolidated balance sheet and are carried at the lower of cost or market. Loans
held for sale at September 30, 2000, totaled $11.5 billion, compared with $3.0
billion at year-end 1999 and $3.3 billion a year ago. Approximately $8 billion
in consumer vehicle-related loans are included in loans held for sale at
September 30, 2000 and the Corporation continues to evaluate its plans regarding
the disposition of these loans.
Note 8--Guaranteed Preferred Beneficial Interest in the Corporation's Junior
Subordinated Debt
The Corporation has sponsored eight trusts with a total aggregate issuance
of $2.489 billion in trust preferred securities. These trust preferred
securities are tax-advantaged issues that qualify for Tier 1 capital treatment.
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 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. 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.
On August 8, 2000, Bank One Capital II, a Delaware business trust sponsored
by the Corporation, issued $280 million of trust preferred securities. The sole
asset of this trust is $288.7 million principal amount of 8.500% junior
subordinated debt that will mature on August 15, 2030, and is redeemable prior
to maturity at the Corporation's option on or after August 15, 2005.
On August 30, 2000, Bank One Capital III, a Delaware business trust
sponsored by the Corporation, issued $475 million of trust preferred securities.
The sole asset of this trust is $489.7 million principal amount of 8.750% junior
subordinated debt that will mature on September 1, 2030, and is redeemable prior
to maturity at the Corporation's option.
On August 30, 2000, Bank One Capital IV, a Delaware business trust
sponsored by the Corporation, issued $160 million of trust preferred securities.
The sole asset of this trust is $164.9 million principal amount of floating rate
junior subordinated debt, bearing interest at an annual rate equal to three-
month LIBOR plus 1.50%. It will mature on September 1, 2030, and is redeemable
prior to maturity at the Corporation's option on or after September 1, 2005.
-42-
<PAGE>
Note 9--Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges for the nine months ended September
30, 2000, excluding interest on deposits, was 0.9x and, including interest on
deposits, was 1.0x. The ratio has been computed on the basis of the total
enterprise (as defined by the SEC) by dividing income before fixed charges and
income taxes by fixed charges. Fixed charges consist of interest expense on all
long- and short-term borrowings, excluding or including interest on deposits.
Note 10--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 their business or operations. In certain of
these proceedings, which are based on alleged violations of consumer protection,
securities, banking and other laws, 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 is and will be, from time to time, normally
engaged in various disagreements with regulators, related primarily to banking
matters. The Corporation also has received certain tax-deficiency assessments.
Management does not believe that liabilities arising from these matters, if any,
will have a material adverse effect on the consolidated financial position,
liquidity or results of operations of the Corporation.
SELECTED STATISTICAL INFORMATION
BANK ONE CORPORATION and Subsidiaries
Investment Securities - Available for Sale
The following table is a summary of the available for sale investment
portfolio:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Fair Value
September 30, 2000 (In millions) Amortized Cost Gains Losses (Book Value)
---------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury..................... $ 2,759 $ 1 $ (80) $ 2,680
U.S. government agencies.......... 12,723 4 (107) 12,620
States and political subdivisions. 1,309 18 (25) 1,302
Retained interest in securitized
receivables..................... 20,012 98 (205) 19,905
Other debt securities............. 4,567 9 (49) 4,527
Equity securities (1)(2).......... 3,960 315 (47) 4,228
-------- ------ ------ -------
Total........................... $ 45,330 $ 445 $ (513) $45,262
======== ====== ====== =======
</TABLE>
_________
(1) The fair values of certain securities for which market quotations were not
available were estimated. In addition, the fair values of certain
securities reflect liquidity and other market-related factors.
(2) Includes investments accounted for at fair value consistent with
specialized industry practice.
-43-
<PAGE>
Average Balances/Net Interest Margin/Rates
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2000 June 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short-term investments..................................... $ 18,673 $ 306 6.52% $ 17,356 $ 276 6.40%
Trading assets............................................. 8,252 138 6.65 6,442 100 6.24
Investment securities:
U.S. government and federal agencies..................... 12,163 212 6.93 15,074 260 6.94
States and political subdivisions........................ 1,308 25 7.60 1,398 27 7.77
Other.................................................... 28,861 603 8.31 29,813 575 7.76
-------- ------ ----- -------- ------ -----
Total investment securities............................ 42,332 840 7.89 46,285 862 7.49
Loans: (1)
Commercial............................................... 101,224 2,196 8.63 100,146 2,097 8.42
Consumer................................................. 67,331 1,544 9.12 65,527 1,455 8.93
Credit card.............................................. 4,704 195 16.49 5,070 212 16.82
-------- ------ ----- -------- ------ -----
Total loans............................................ 173,259 3,935 9.04 170,743 3,764 8.87
-------- ------ ----- -------- ------ -----
Total earning assets (2)............................... 242,516 5,219 8.56 240,826 5,002 8.35
Allowance for credit losses................................ (3,036) (2,531)
Other assets............................................... 33,534 34,528
-------- --------
Total assets........................................... $273,014 $272,823
======== ========
-----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing:
Savings.................................................. $ 16,287 $ 62 1.51% $ 16,973 $ 60 1.42%
Money market............................................. 47,080 419 3.54 48,450 410 3.40
Time..................................................... 45,906 728 6.31 41,946 609 5.84
Foreign offices (3)...................................... 26,228 410 6.22 28,848 408 5.69
-------- ------ ----- -------- ------ -----
Total deposits--interest-bearing........................ 135,501 1,619 4.75 136,217 1,487 4.39
Federal funds purchased and securities under repurchase
agreements............................................... 19,331 311 6.40 18,632 281 6.07
Other short-term borrowings................................ 18,933 319 6.70 19,248 307 6.41
Long-term debt (4)......................................... 41,018 728 7.06 38,642 670 6.97
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities..................... 214,783 2,977 5.51 212,739 2,745 5.19
Demand deposits............................................ 26,456 27,692
Other liabilities.......................................... 12,706 12,503
Preferred stock............................................ 190 190
Common stockholders' equity................................ 18,879 19,699
-------- --------
Total liabilities and stockholders' equity............. $273,014 $272,823
======== ========
-----------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets (2)......................... $5,219 8.56% $5,002 8.35%
Interest expense/earning assets............................ 2,977 4.88 2,745 4.58
------ ----- ------ -----
Net interest margin........................................ $2,242 3.68% $2,257 3.77%
====== ===== ====== =====
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans are included in average balances used to determine the
average rate.
(2) Includes tax-equivalent adjustments based on federal income tax rate of
35%.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
(4) Includes trust preferred capital securities.
-44-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999 September 30, 1999
--------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,451 $ 226 5.88% $ 15,985 $ 215 5.34% $ 13,164 $ 159 4.79%
6,909 100 5.82 6,614 99 5.94 6,185 84 5.39
15,641 258 6.63 15,046 257 6.78 15,111 247 6.48
1,483 28 7.59 1,646 30 7.23 1,765 32 7.19
30,406 564 7.46 32,495 600 7.33 29,013 541 7.40
-------- ------ ----- -------- ------ ----- -------- ------ -----
47,530 850 7.19 49,187 887 7.15 45,889 820 7.09
97,973 1,941 7.97 93,491 1,862 7.90 91,186 1,719 7.48
65,118 1,493 9.22 62,577 1,334 8.46 59,876 1,285 8.51
4,332 178 16.53 4,526 184 16.13 6,905 276 15.86
-------- ------ ----- -------- ------ ----- -------- ------ -----
167,423 3,612 8.68 160,594 3,380 8.35 157,967 3,280 8.24
-------- ------ ----- -------- ------ ----- -------- ------ -----
237,313 4,788 8.11 232,380 4,581 7.82 223,205 4,343 7.72
(2,367) (2,294) (2,283)
33,772 34,939 33,721
-------- -------- --------
$268,718 $265,025 $254,643
======== ======== ========
--------------------------------------------------------------------------------------------
$ 16,942 $ 61 1.45% $ 18,955 $ 70 1.47% $ 19,705 $ 74 1.49%
47,606 400 3.38 46,066 379 3.26 46,526 367 3.13
38,818 550 5.70 36,083 481 5.29 34,842 425 4.84
29,443 378 5.16 27,292 338 4.91 25,350 296 4.63
-------- ------ ----- -------- ------ ----- -------- ------ -----
132,809 1,389 4.21 128,396 1,268 3.92 126,423 1,162 3.65
19,316 266 5.54 19,126 245 5.08 17,557 213 4.81
19,912 298 6.02 19,550 297 6.03 17,337 237 5.42
36,484 607 6.69 35,672 550 6.12 31,326 460 5.83
-------- ------ ----- -------- ------ ----- -------- ------ -----
208,521 2,560 4.94 202,744 2,360 4.62 192,643 2,072 4.27
27,921 29,223 29,189
12,305 13,051 12,479
190 190 190
19,781 19,817 20,142
-------- -------- --------
$268,718 $265,025 $254,643
======== ======== ========
--------------------------------------------------------------------------------------------
$4,788 8.11% $4,581 7.82% $4,343 7.72%
2,560 4.33 2,360 4.03 2,072 3.68
------ ----- ------ ----- ------ -----
$2,228 3.78% $2,221 3.79% $2,271 4.04%
====== ===== ====== ===== ====== =====
--------------------------------------------------------------------------------------------
</TABLE>
-45-
<PAGE>
Average Balances/Net Interest Margin/Rates
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2000 September 30, 1999
----------------------------------------------------------- ---------------------------------------------------------------------
(Income and rates on tax-equivalent basis) Average Average Average Average
(Dollars in millions) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Short-term investments......................................... $ 17,166 $ 808 6.29% $ 13,299 $ 463 4.65%
Trading assets................................................. 7,205 338 6.27 5,964 234 5.25
Investment securities:
U.S. government and federal agencies........................ 14,285 730 6.83 15,290 751 6.57
States and political subdivisions........................... 1,396 80 7.65 1,898 105 7.40
Other....................................................... 29,690 1,742 7.84 28,513 1,568 7.35
-------- ------- ----- -------- ------- -----
Total investment securities............................... 45,371 2,552 7.51 45,701 2,424 7.09
Loans: (1)
Commercial.................................................. 99,786 6,234 8.35 89,067 4,950 7.43
Consumer.................................................... 65,997 4,492 9.09 58,382 3,808 8.72
Credit card................................................. 4,702 585 16.62 8,146 955 15.67
-------- ------- ----- -------- ------- -----
Total loans............................................... 170,485 11,311 8.86 155,595 9,713 8.35
-------- ------- ----- -------- ------- -----
Total earning assets (2).................................. 240,227 15,009 8.35 220,559 12,834 7.78
Allowance for credit losses.................................... (2,646) (2,289)
Other assets................................................... 33,943 35,346
-------- --------
Total assets.............................................. $271,524 $253,616
======== ========
----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits--interest-bearing:
Savings..................................................... $ 16,732 $ 183 1.46% $ 20,173 $ 240 1.59%
Money market................................................ 47,710 1,229 3.44 44,280 1,066 3.21
Time........................................................ 42,237 1,887 5.97 34,905 1,303 4.99
Foreign offices (3)......................................... 28,166 1,196 5.67 23,100 774 4.48
-------- ------ ----- -------- ------ -----
Total deposits--interest-bearing........................... 134,845 4,495 4.45 122,458 3,383 3.69
Federal funds purchased and securities
under repurchase agreements................................... 19,094 858 6.00 19,909 690 4.63
Other short-term borrowings.................................... 19,363 924 6.37 17,286 645 4.99
Long-term debt (4)............................................. 38,723 2,005 6.92 27,243 1,195 5.86
-------- ------ ----- -------- ------ -----
Total interest--bearing liabilities....................... 212,025 8,282 5.22 186,896 5,913 4.23
Demand deposits................................................ 27,353 31,905
Other liabilities.............................................. 12,505 14,210
Preferred stock................................................ 190 190
Common stockholders' equity.................................... 19,451 20,415
-------- --------
Total liabilities and stockholders' equity................ $271,524 $253,616
======== ========
----------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets (2)............................. $15,009 8.35% $12,834 7.78%
Interest expense/earning assets................................ 8,282 4.61 5,913 3.58
------- ----- ------- -----
Net interest margin............................................ $ 6,727 3.74% $ 6,921 4.20%
======= ===== ======= =====
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Nonperforming loans are included in average balances used to determine the
average rate.
(2) Includes tax-equivalent adjustments based on federal income tax rate of 35%.
(3) Includes international banking facilities' deposit balances in domestic
offices and balances of Edge Act and overseas offices.
(4) Includes trust preferred capital securities.
-46-
<PAGE>
<TABLE>
<CAPTION>
Five-Quarter Consolidated Income Statement
BANK ONE CORPORATION and Subsidiaries Three Months Ended
September 30 June 30 March 31 December 31 September 30
(In millions, except per share data) 2000 2000 2000 1999 1999
----------------------------------------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans, including fees...................................... $3,919 $ 3,750 $3,596 $3,366 $3,270
Bank balances.............................................. 138 131 102 78 56
Federal funds sold and securities under resale agreements.. 168 145 124 137 103
Trading assets............................................. 139 100 101 99 84
Investment securities...................................... 821 840 830 868 801
------ ------- ------ ------ ------
Total.............................................. 5,185 4,966 4,753 4,548 4,314
Interest Expense
Deposits................................................... 1,619 1,487 1,389 1,269 1,162
Federal funds purchased and securities under
repurchase agreements.................................... 311 281 266 245 213
Other short-term borrowings................................ 319 307 298 296 237
Long-term debt............................................. 728 670 607 550 460
------ ------- ------ ------ ------
Total.............................................. 2,977 2,745 2,560 2,360 2,072
Net Interest Income........................................ 2,208 2,221 2,193 2,188 2,242
Provision for credit losses................................ 516 1,013 362 416 277
------ ------- ------ ------ ------
Net Interest Income After Provision for Credit Losses...... 1,692 1,208 1,831 1,772 1,965
Noninterest Income
Trading profits (losses)................................... 58 (3) 64 17 30
Equity securities gains.................................... 31 60 143 100 86
Investment securities gains (losses)....................... 16 (414) 15 2 6
------ ------- ------ ------ ------
Market-driven revenue (loss)........................... 105 (357) 222 119 122
Credit card revenue........................................ 669 477 578 714 897
Fiduciary and investment management fees................... 196 200 195 216 201
Service charges and commissions............................ 702 694 713 701 671
------ ------- ------ ------ ------
Fee-based revenue...................................... 1,567 1,371 1,486 1,631 1,769
Other income (loss)........................................ 62 (726) 113 32 207
------ ------- ------ ------ ------
Total noninterest income........................... 1,734 288 1,821 1,782 2,098
Noninterest Expense
Salaries and employee benefits............................. 1,106 1,132 1,098 1,081 970
Net occupancy and equipment expense........................ 207 223 222 244 220
Depreciation and amortization.............................. 143 439 163 186 167
Outside service fees and processing........................ 344 375 408 459 458
Marketing and development.................................. 200 245 226 230 341
Communication and transportation........................... 187 207 212 216 205
Other expense.............................................. 408 657 351 425 296
------ ------- ------ ------ ------
Total noninterest expense before merger and
restructuring charges............................ 2,595 3,278 2,680 2,841 2,657
Merger-related and restructuring charges................... (2) 229 (19) 189 56
------ ------- ------ ------ ------
Total noninterest expense.......................... 2,593 3,507 2,661 3,030 2,713
Income (Loss) Before Income Taxes.......................... 833 (2,011) 991 524 1,350
Applicable income taxes (benefit).......................... 252 (742) 302 113 425
------ ------- ------ ------ ------
Net Income (Loss).......................................... $ 581 $(1,269) $ 689 $ 411 $ 925
====== ======= ====== ====== ======
Net Income (Loss) Attributable to Common
Stockholders' Equity..................................... $ 578 $(1,272) $ 686 $ 408 $ 922
====== ======= ====== ====== ======
Earnings (Loss) Per Share:
Basic................................................... $0.50 $(1.11) $0.60 $0.36 $0.79
===== ====== ===== ===== =====
Diluted................................................. $0.50 $(1.11) $0.60 $0.36 $0.79
===== ====== ===== ===== =====
</TABLE>
-47-
<PAGE>
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, 2000
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, 2000.
Class Number of Shares Outstanding
---------------------------- ----------------------------
Common Stock $0.01 par value 1,156,919,765
-48-
<PAGE>
Form 10-Q Cross-Reference Index
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
-----------------------------
Page
----
Consolidated Balance Sheet--
September 30, 2000 and 1999, and December 31, 1999 34
Consolidated Income Statement--
Three months ended September 30, 2000 and 1999
Nine months ended September 30, 2000 and 1999 35
Consolidated Statement of Stockholders' Equity--
Nine months ended September 30, 2000 and 1999 36
Consolidated Statement of Cash Flows--
Nine months ended September 30, 2000 and 1999 37
Notes to Consolidated Financial Statements 38-43
Selected Statistical Information 1, 22-32,
43-47
ITEM 2. Management's Discussion and Analysis of Financial
----------------------------------------------------------
Condition and Results of Operations 2-33
-----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings 50
--------------------------
ITEM 2. Changes in Securities 50
------------------------------
ITEM 3. Defaults Upon Senior Securities 50
----------------------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders 50
------------------------------------------------------------
ITEM 5. Other Information 50
--------------------------
ITEM 6. Exhibits and Reports on Form 8-K 50
-----------------------------------------
Signatures 51
-49-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings
--------------------------
None
ITEM 2. Changes in Securities
------------------------------
None
ITEM 3. Defaults Upon Senior Securities
----------------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
ITEM 5. Other Information
--------------------------
None
ITEM 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibit 10(a) - Retirement Agreement dated August 22, 2000,
between Registrant and Verne G. Istock.
Exhibit 12 - Statement re computation of ratio.
Exhibit 27 - Financial Data Schedule.
(b) The Registrant filed the following Current Reports on Form 8-K
during the quarter ended September 30, 2000.
Date Item Reported
------- -------------
7/19/00 The Registrant's press release regarding second-quarter 2000
net loss of $1.269 billion, a 50% reduction in its common
dividend and other items.
8/14/00 The Registrant's filing of documents in connection with the
sale by Bank One Capital II of $280 million in aggregate
liquidation amount of trust preferred securities.
8/22/00 The Registrant's press releases announcing the retirement of
its President and changes in its Board of Directors.
9/6/00 The Registrant's filing of documents in connection with the
sale by Bank One Capital III of $475 million in aggregate
liquidation amount of trust preferred securities.
9/6/00 The Registrant's filing of documents in connection with the
sale by Bank One Capital IV of $160 million in aggregate
liquidation amount of trust preferred securities.
-50-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK ONE CORPORATION
--------------------
Date November 14, 2000 /s/ James Dimon
--------------------------- -----------------------------------
James Dimon
Principal Executive Officer
Date November 14, 2000 /s/ Charles W. Scharf
--------------------------- -----------------------------------
Charles W. Scharf
Principal Financial Officer
Date November 14, 2000 /s/ William J. Roberts
--------------------------- -----------------------------------
William J. Roberts
Principal Accounting Officer
-51-
<PAGE>
BANK ONE CORPORATION
EXHIBIT INDEX
-------------
Exhibit Number Description of Exhibit
-------------- ----------------------
10(a) - Retirement Agreement dated August 22, 2000, between Registrant and
Verne G. Istock.
12 - Statement re computation of ratio.
27 - Financial Data Schedule.
