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BANK ONE CORPORATION
INDEX TO FINANCIAL REVIEW
1 Five Quarter Summary of Selected Financial Information
2 Application of Critical Accounting Policies
2 Summary of Results
4 Business Segment Results
4 Business Segment Results and Other Data
21 Balance Sheet Analysis
21 Risk Management
22 Liquidity Risk Management
22 Market Risk Management
24 Credit Portfolio Composition
28 Asset Quality
31 Allowance for Credit Losses
34 Derivative Financial Instruments
35 Loan Securitizations and Off-Balance Sheet Activities
38 Capital Management
40 Forward-Looking Statements
41 Consolidated Financial Statements
45 Notes to Consolidated Financial Statements
55 Selected Statistical Information
56 Report of Management
57 Review Report of Independent Public Accountants
58 Form 10-Q
62 Management's Certification of Periodic Report
Five Quarter Summary of Selected Financial Information
Bank One Corporation and Subsidiaries
(In millions, except per share data, ratios, March 31 December 31 September 30 June 30 March 31
and headcount) 2003 2002 2002 2002 2002
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INCOME STATEMENT DATA:
Total revenue, net of interest expense(1) $ 3,977 $ 4,232 $ 4,185 $ 4,280 $ 4,169
Net interest income 1,992 2,156 2,197 2,042 2,200
Net interest income--
fully taxable-equivalent basis ("FTE")(2) 2,029 2,192 2,235 2,078 2,235
Noninterest income(1) 1,985 2,076 1,988 2,238 1,969
Provision for credit losses 496 628 587 607 665
Noninterest expense(1) 2,320 2,390 2,420 2,444 2,362
Net income 818 842 823 843 787
PER COMMON SHARE DATA:
Net income:
Basic $ 0.71 $ 0.73 $ 0.71 $ 0.72 $ 0.67
Diluted 0.71 0.72 0.70 0.71 0.67
Cash dividends declared 0.21 0.21 0.21 0.21 0.21
Book value 19.44 19.28 18.79 18.37 17.81
BALANCE SHEET DATA-ENDING BALANCES:
Loans $144,747 $148,125 $150,389 $147,728 $152,126
Total assets 287,864 277,383 274,187 270,343 262,947
Deposits 167,075 170,008 164,036 157,518 158,803
Long-term debt(3) 44,950 43,234 42,481 43,756 44,194
Common stockholders' equity 22,316 22,440 21,925 21,563 20,913
Total stockholders' equity 22,316 22,440 21,925 21,563 20,913
CREDIT QUALITY RATIOS:
Annualized net charge-offs to average loans 1.35% 1.65% 1.55% 1.62% 1.71%
Allowance to period end loans 3.31 3.20 3.17 3.19 3.06
Nonperforming assets to related assets(4) 2.38 2.38 2.48 2.65 2.58
FINANCIAL PERFORMANCE:
Return on average assets 1.22% 1.24% 1.24% 1.32% 1.21%
Return on average common equity 14.7 15.0 14.8 15.7 15.3
Net interest margin 3.46 3.67 3.84 3.69 3.91
Efficiency ratio 57.8 56.0 57.3 56.6 56.2
CAPITAL RATIOS:
Risk-based capital:
Tier 1 10.0% 9.9% 9.5% 9.4% 9.0%
Total 13.8 13.7 13.0 13.0 12.7
Leverage 8.9 8.9 9.0 9.1 8.6
COMMON STOCK DATA:
Average shares outstanding:
Basic 1,148 1,157 1,162 1,174 1,170
Diluted 1,156 1,166 1,171 1,184 1,179
Stock price, quarter-end $ 34.62 $ 36.55 $ 37.40 $ 38.48 $ 41.78
Headcount- full-time 74,077 73,685 73,535 73,579 73,864
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(1) Prior period amounts have been reclassified to conform with the current
period presentation.
(2) Net interest income-FTE includes tax equivalent adjustments of $37
million, $36 million, $38 million, $36 million and $35 million for the
quarters ended March 31, 2003, December 31, 2002, September 30, 2002,
June 30, 2002 and March 31, 2002, respectively.
(3) Includes trust preferred capital securities.
(4) Related assets consist of loans outstanding, including loans held for
sale, and other real estate owned.
1
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management to
apply significant judgments to various accounting, reporting and disclosure
matters. Management of Bank One Corporation and its Subsidiaries (the
"Corporation") must use assumptions and estimates to apply these principles
where actual measurement is not possible or practical.
For a complete discussion of the Corporation's significant accounting
policies, see "Notes to the Consolidated Financial Statements" in the
Corporation's 2002 Annual Report on pages 84-108. Certain policies are
considered critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Management has reviewed the
application of these policies with the Audit and Risk Management Committee of
the Corporation's Board of Directors. For a discussion of applying critical
accounting policies, see "Application of Critical Accounting Policies" beginning
on page 35 in the Corporation's 2002 Annual Report.
SUMMARY OF RESULTS
(All comparisons are to the same period in the prior year unless otherwise
specified.)
Net income was $818 million, or $0.71 per diluted share. This compares to
net income of $787 million, or $0.67 per diluted share.
Net interest income represents the spread on interest earning assets over
interest bearing liabilities, as well 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 income was $2.0
billion, a decrease of $208 million, or 9%. Net interest margin decreased to
3.46% from 3.91%. Approximately half of these declines resulted from actions
taken by the Corporation to position itself for rising interest rates. Also
contributing to the decreases were the intentional reductions in the Commercial
Banking and certain Retail loan portfolios, with a modest impact due to yield
compression in Card Services.
Noninterest income of $2.0 billion increased $16 million, and as a
percentage of total revenue increased to 49.9% from 47.2%. This increase was
primarily due to net gains in the investment portfolio offset by reduced credit
card revenue and banking fees and commissions. The components of noninterest
income for the periods indicated are:
Change
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Three Months Ended March 31, 2003 2002 Amount Percent
- -----------------------------------------------------------------------------
(Dollars in millions)
Banking fees and commissions $ 440 $ 458 $(18) (4)%
Credit card revenue 851 909 (58) (6)
Service charges on deposits 383 393 (10) (3)
Fiduciary and investment management fees 186 189 (3) (2)
Investment securities gains (losses) 69 (18) 87 N/M
Trading 4 17 (13) (76)
Other income 52 21 31 N/M
- -------------------------------------------------------------------
Total noninterest income $1,985 $1,969 $ 16 1
Noninterest income to total revenue 49.9% 47.2% 2.7%
- -----------------------------------------------------------------------------
Banking fees and commissions of $440 million decreased $18 million, or 4%.
This net decrease was the result of several offsetting items. Lower premiums and
commissions on accident and health insurance, lower investment advisory fees and
lower fees resulting from the intentional reduction of non-branded ATM machines
were the primary drivers of this decrease. Partially offsetting the decrease was
an increase in asset-backed, syndication and tax-exempt underwriting fees.
Credit card revenue of $851 million decreased $58 million, or 6%. This
decrease was primarily driven by lower income earned on securitized loans and
yield compression. Partially offsetting this decrease was higher interchange
fees from increased card usage by our customers and increased securitization
activity.
Net investment securities gains were $69 million compared to losses of $18
million. Net securities gains arose primarily from treasury's investment
portfolio as a result of further interest rate repositioning.
2
Trading produced gains of $4 million, a decrease of $13 million, or 76%.
This decrease was primarily the result of a decrease in the fair value of credit
derivatives used to hedge the commercial loan portfolio and limit exposures for
specific credits, partially offset by improved foreign exchange trading income.
Other income increased $31 million. This increase was primarily driven by
an increase in new securitization deals and gains on the sales of investments
and other assets.
Total noninterest expense of $2.3 billion decreased by $42 million, or 2%.
The components of noninterest expense for the periods indicated are:
Change
- ---------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002 Amount Percent
- ---------------------------------------------------------------------------------
(Dollars in millions)
Salaries and employee benefits:
Salaries $ 992 $ 920 $ 72 8%
Employee benefits 191 176 15 9
- -----------------------------------------------------------------------
Total salaries and employee benefits 1,183 1,096 87 8
Occupancy 165 158 7 4
Equipment 111 103 8 8
Outside service fees and processing 277 300 (23) (8)
Marketing and development 226 271 (45) (17)
Telecommunication 48 101 (53) (52)
Other intangible amortization 32 33 (1) (3)
Other expense 278 300 (22) (7)
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Total noninterest expense $ 2,320 $ 2,362 $(42) (2)
- -----------------------------------------------------------------------
Headcount-full-time 74,077 73,864 213 --
Efficiency ratio 57.8% 56.2% 1.6%
- ---------------------------------------------------------------------------------
Salaries and employee benefits of $1.2 billion increased $87 million, or
8%. This increase was due to higher salary expense partially related to
increased headcount, the prior year adoption of the fair value method of
accounting for stock options and increased incentive compensation.
Outside service fees and processing expense of $277 million decreased $23
million, or 8%. The prior year period included higher expenses related to
terminating and renegotiating certain vendor contracts and higher servicing and
contract programming charges resulting from the Corporation's systems conversion
efforts.
Marketing and development expense of $226 million decreased $45 million, or
17%, primarily due to decreased advertising expenditures for Card Services.
Telecommunication expense of $48 million decreased $53 million, or 52%. The
prior year period included higher servicing expenses resulting from terminating
and renegotiating certain vendor contracts during that period.
Other expense decreased $22 million, or 7%, primarily due to lower
operating and fraud costs associated with Card Services.
Provision for credit losses was $496 million, a decrease of $169 million,
or 25%. At March 31, 2003, the related allowance for credit losses was $4.5
billion. The overall loan portfolio decreased from $152.1 billion to $144.7
billion. As a percentage of period end loans, the allowance increased to 3.31%
from 3.06%.
3
Applicable Income Taxes
The Corporation's income before income taxes, as well as applicable income tax
expense and effective tax rate for each of the periods indicated are:
- ------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002
- ------------------------------------------------------------------------------
(Dollars in millions)
Income before income taxes $1,161 $1,142
Applicable income taxes 343 355
Effective tax rate 30% 31%
- ------------------------------------------------------------------------------
Applicable income tax expense for all periods included benefits for
tax-exempt income, tax-advantaged investments and general business tax credits,
offset by the effect of nondeductible expenses.
BUSINESS SEGMENT RESULTS
The Corporation is managed on a line of business basis. The business segments'
financial results presented reflect the current organization of the Corporation.
For a detailed discussion of the various business activities of the
Corporation's business segments, see pages 38-51 of the Corporation's 2002
Annual Report.
The following table summarizes net income (loss) by line of business for
the periods indicated:
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Three Months Ended March 31, 2003 2002
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(In millions)
Retail $ 381 $353
Commercial Banking 217 143
Card Services 248 239
Investment Management 80 101
Corporate (108) (49)
- ------------------------------------------------------------------------------
Net income $ 818 $787
- ------------------------------------------------------------------------------
BUSINESS SEGMENT RESULTS AND OTHER DATA
The information provided in the line of business tables beginning with the
caption entitled "Financial Performance" is included herein for analytical
purposes only and is based on management information systems, assumptions and
methodologies that are under continual review by management.
4
Retail
Retail provides a broad range of financial products and services, including
deposits, investments, loans, insurance, and on-line banking to consumers and
small business customers.
Three Months Ended March 31
----------------------------------------
Change
----------------
(Dollars in millions) 2003 2002(1) Amount Percent
- ----------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(2)(3) $ 1,236 $ 1,258 $ (22) (2)%
Banking fees and commissions(4) 189 205 (16) (8)
Credit card revenue(5) 53 43 l0 23
Service charges on deposits(6) 204 201 3 1
Other income 13 11 2 18
- ------------------------------------------------------------------------------------------
Total noninterest income 459 460 (1) --
- ------------------------------------------------------------------------------------------
Total revenue, net of interest expense 1,695 1,718 (23) (1)
Provision for credit losses 205 267 (62) (23)
Salaries and employee benefits 391 389 2 1
Other expense 499 502 (3) (1)
- ------------------------------------------------------------------------------------------
Total noninterest expense 890 891 (1) --
- ------------------------------------------------------------------------------------------
Income before income taxes 600 560 40 7
Applicable income taxes 219 207 12 6
- ------------------------------------------------------------------------------------------
Net income $ 381 $ 353 $ 28 8
- ----------------------------------------------------------------------------------------------------
Memo-Revenue by source:
Core businesses $ 1,626 $ 1,614 $ 12 1%
Brokered home equity discontinued /vehicle leases 69 104 (35) (34)
FINANCIAL PERFORMANCE:
Return on average common equity 25% 23% 2%
Efficiency ratio 53 52 1
Headcount-full-time 33,400 33,631 (231) (1)%
- ------------------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Small business commercial $ 9.7 $ 9.9 $(0.2) (2)%
Home equity 28.9 25.3 3.6 14
Vehicle 13.6 13.7 (0.1) (1)
Other personal 7.9 8.6 (0.7) (8)
- ------------------------------------------------------------------------------------------
Core businesses 60.1 57.5 2.6 5
Brokered home equity discontinued 2.8 4.6 (1.8) (39)
Vehicle leases 3.0 5.4 (2.4) (44)
- ------------------------------------------------------------------------------------------
Brokered home equity discontinued/vehicle leases 5.8 10.0 (4.2) (42)
- ------------------------------------------------------------------------------------------
Total loans(7) 65.9 67.5 (1.6) (2)
Assets 69.1 71.0 (1.9) (3)
Demand deposits 28.5 26.0 2.5 10
Savings 40.2 37.9 2.3 6
Time 20.6 24.9 (4.3) (17)
- ------------------------------------------------------------------------------------------
Total deposits 89.3 88.8 0.5 1
Equity 6.2 6.2 -- --
- ----------------------------------------------------------------------------------------------------
5
Retail - continued
Three Months Ended March 31
--------------------------------------
Change
----------------
2003 2002(1) Amount Percent
--------------------------------------
AVERAGE BALANCES (in billions):
Small business commercial $ 9.8 $ 9.9 $ (0.1) (1)%
Home equity 28.5 25.2 3.3 13
Vehicle 13.8 13.5 0.3 2
Other personal loans 8.6 9.9 (1.3) (13)
- -----------------------------------------------------------------------------------------
Core businesses 60.7 58.5 2.2 4
Brokered home equity discontinued 3.0 4.9 (1.9) (39)
Vehicle leases 3.3 5.7 (2.4) (42)
- -----------------------------------------------------------------------------------------
Brokered home equity discontinued/vehicle leases 6.3 10.6 (4.3) (41)
- -----------------------------------------------------------------------------------------
Total loans 67.0 69.1 (2.1) (3)
Assets $70.2 $72.6 $ (2.4) (3)
Demand deposits 27.6 25.1 2.5 10
Savings 39.6 37.1 2.5 7
Time 21.2 25.4 (4.2) (17)
- -----------------------------------------------------------------------------------------
Total deposits 88.4 87.6 0.8 1
Equity 6.2 6.2 -- --
- -----------------------------------------------------------------------------------------
CREDIT QUALITY
Net charge-offs:
Small business commercial $ 24 $ 14 $ 10 71%
Home equity 70 82 (12) (15)
Vehicle 47 65 (18) (28)
Other personal loans 18 26 (8) (31)
- -----------------------------------------------------------------------------------------
Core businesses 159 187 (28) (15)
Brokered home equity discontinued 29 48 (19) (40)
Vehicle leases 16 30 (14) (47)
- -----------------------------------------------------------------------------------------
Brokered home equity discontinued/vehicle leases 45 78 (33) (42)
- -----------------------------------------------------------------------------------------
Total consumer 180 251 (71) (28)
- -----------------------------------------------------------------------------------------
Total net charge-offs 204 265 (61) (23)
- -----------------------------------------------------------------------------------------
Annualized net charge-off ratios:
Small business commercial 0.98% 0.57% 0.41%
Home equity 0.98 1.30 (0.32)
Vehicle 1.36 1.93 (0.57)
Other personal loans 0.84 1.05 (0.21)
Core businesses 1.05 1.28 (0.23)
Brokered home equity discontinued 3.87 3.92 (0.05)
Vehicle leases 1.94 2.11 (0.17)
Brokered home equity discontinued/vehicle leases 2.86 2.94 (0.09)
Total consumer 1.26 1.70 (0.44)
Total net charge-offs 1.22 1.53 (0.31)
- ----------------------------------------------------------------------------------------------------
6
Retail - continued
Three Months Ended March 31
----------------------------------------
Change
-----------------
2003 2002(1) Amount Percent
----------------------------------------
Nonperforming assets:
Commercial $ 345 $ 318 $ 27 8%
Consumer(8) 1,005 1,080 (75) (7)
- -------------------------------------------------------------------------------------------
Total nonperforming loans(9) 1,350 1,398 (48) (3)
Other, including other real estate owned ("OREO") 231 159 72 45
- -------------------------------------------------------------------------------------------
Total nonperforming assets 1,581 1,557 24 2
Allowance for credit losses $1,015 $1,024 $ (9) (1)
Allowance to period end loans(7) 1.60% 1.56% 0.04%
Allowance to nonperforming loans(9) 75 73 2
Nonperforming assets to related assets 2.39 2.30 0.09
DISTRIBUTION:
Number of:
Banking centers 1,798 1,776 22 1
ATMs 4,009 5,109 (1,100) (22)
Relationship bankers 2,893 2,295 598 26
On-line customers (in thousands) 1,701 1,248 453 36
Personal demand accounts (in thousands) 4,438 4,316 122 3
Business demand accounts (in thousands) 496 496 -- --
Debit cards issued (in thousands) 4,818 4,404 414 9
RETAIL BROKERAGE:
Mutual fund sales $ 577 $ 580 $ (3) (1)
Annuity sales 766 797 (31) (4)
- -------------------------------------------------------------------------------------------
Total investment sales volume 1,343 1,377 (34) (2)
Market value customer assets - end of period
(in billions) $ 28.6 $ 26.8 $ 1.8 7%
Number of customers - end of period (in thousands) 693 663 30 5
Number of dedicated investment sales representatives 870 737 133 18
- ----------------------------------------------------------------------------------------------------
N/M-Not meaningful.
(1) Prior period data has been adjusted for the transfer of Retail brokerage
from the Investment Management line of business and the transfer of the
community development business to the Corporate line of business.
(2) Net interest income-FTE includes tax equivalent adjustments of $5 million
for the three months ended March 31, 2003 and 2002.
(3) Net interest income is presented rather than gross interest income and
gross interest expense because the Corporation relies primarily on net
interest revenue to assess the performance of the segment and make
resource allocations.
(4) Banking fees and commissions include insurance fees, documentary fees,
commitment fees, annuity and mutual fund commissions, leasing fees, safe
deposit fees, official checks fees, ATM interchange and miscellaneous
other fee revenue.
(5) Credit card revenue includes credit card fees, debit card fees, merchant
fees and interchange fees.
(6) Service charges on deposits include deficient balance fees, non-sufficient
funds/overdraft fees and other service related fees.
(7) Loans include loans held for sale of $2.4 billion and $1.8 billion at
March 31, 2003 and 2002, respectively. These amounts are not included in
allowance coverage statistics.
(8) Includes consumer balances that are placed on nonaccrual status when the
collection of contractual principal or interest becomes 90 days past due.
(9) Nonperforming loans includes loans held for sale of $5 million and
$4 million at March 31, 2003 and 2002, respectively. These amounts are
not included in allowance coverage statistics.
Quarterly Results
- -----------------
Retail net income totaled $381 million, an increase of $28 million, or 8%,
primarily resulting from lower provision expense.
Total revenue decreased 1% to $1.7 billion. Excluding revenue associated
with the portfolios being intentionally reduced, revenue increased $12 million.
Net interest income was $1.2 billion, down 2%, primarily from the intentional
reduction of the vehicle lease and discontinued brokered home equity portfolios,
where average balances declined $4.3 billion. This revenue decline was partially
offset by higher direct home equity loans and core demand deposits.
Noninterest income of $459 million was relatively unchanged, as lower fees
related to the intentional reduction of non-branded ATM machines were offset by
higher debit card revenue.
7
Noninterest expense of $890 million was also relatively unchanged, as
improved efficiencies in operating expenses were offset by increased collection,
marketing, benefits and branch expansion costs.
The provision for credit losses was $205 million, a decline of $62 million,
or 23%, reflecting lower net charge-offs primarily in the intentionally reduced
portfolios as well as the on-going real estate portfolio. As a percent of
average loans, net charge-offs were 1.22%, down from 1.53%.
The allowance for credit losses of $1.0 billion represented 1.60% of
period-end loans, compared to 1.56%. Nonperforming assets were $1.6 billion, up
2% from the prior year.
In April 2003, VISA reached an agreement to settle merchant litigation
regarding debit card interchange reimbursement fees. The Corporation currently
estimates that Retail debit card revenue would decline by approximately $60
million pre-tax on an annualized basis beginning in August 2003. Conditions of
the settlement permit VISA to renegotiate debit card interchange rates as of
January 1, 2004 which will affect this estimate.
8
Commercial Banking
Commercial Banking offers a broad array of products, including global cash
management, treasury services, capital markets, commercial cards, lending and
other noncredit products and services to corporate banking and middle market
banking customers.
Three Months Ended March 31
------------------------------------
Change
----------------
(Dollars in millions) 2003 2002 Amount Percent
- ------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest income-FTE(3)(10) $ 569 $ 655 $ (86) (13)%
Banking fees and commissions 191 175 16 9
Credit card revenue 23 14 9 64
Service charges on deposits 175 184 (9) (5)
Fiduciary and investment
management fees(11) 1 (1) 2 N/M
Trading(12) 17 26 (9) (35)
Other income (loss) 10 (27) 37 N/M
- --------------------------------------------------------------------------------
Total noninterest income 417 371 46 12
- --------------------------------------------------------------------------------
Total revenue, net of interest expense 986 1,026 (40) (4)
Provision for credit losses 128 281 (153) (54)
Salaries and employee benefits 277 259 18 7
Other expense 290 301 (11) (4)
- --------------------------------------------------------------------------------
Total noninterest expense 567 560 7 1
- --------------------------------------------------------------------------------
Income before income taxes 291 185 106 57
Applicable income taxes 74 42 32 76
- --------------------------------------------------------------------------------
Net income $ 217 $ 143 $ 74 52
- ------------------------------------------------------------------------------------------
Memo-Revenue by activity
Lending-related revenue $ 430 $ 445 $ (15) (3)
Credit derivative hedge portfolio (54) (33) (21) (64)
Global treasury services 390 429 (39) (9)
Capital markets(13) 201 168 33 20
Other 19 17 2 12
FINANCIAL PERFORMANCE:
Return on average common equity 12% 8% 4%
Efficiency ratio 58 55 3
Efficiency ratio excluding credit hedge portfolio 55 53 2
Headcount-full-time
Corporate banking
(including capital markets) 2,491 2,306 185 8%
Middle market 2,677 3,064 (387) (13)
Global treasury services 3,203 3,306 (103) (3)
Operations, technology, and other administration 2,023 2,203 (180) (8)
- --------------------------------------------------------------------------------
Total headcount-full-time 10,394 10,879 (485) (4)
- --------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Loans(14) $ 59.5 $ 69.0 $(9.5) (14)%
Assets 96.6 96.3 0.3 --
Demand deposits 27.7 22.4 5.3 24
Savings 3.3 2.9 0.4 14
Time 13.7 11.1 2.6 23
Foreign offices 9.2 7.0 2.2 31
- --------------------------------------------------------------------------------
Total deposits 53.9 43.4 10.5 24
Equity 7.4 7.4 -- --
- ------------------------------------------------------------------------------------------
9
Commercial Banking - continued
Three Months Ended March 31
----------------------------------
Change
----------------
2003 2002 Amount Percent
----------------------------------
AVERAGE BALANCES (in billions):
Loans $ 60.0 $ 71.1 $(11.1) (16)%
Assets 93.0 99.3 (6.3) (6)
Demand deposits 22.6 22.7 (0.1) --
Savings 3.3 3.0 0.3 10
Time 14.1 17.2 (3.1) (18)
Foreign offices 9.0 8.2 0.8 10
- -------------------------------------------------------------------------------
Total deposits 49.0 51.1 (2.1) (4)
Equity 7.4 7.4 -- --
CREDIT QUALITY
Net charge-offs $ 128 $ 281 $ (153) (54)%
Annualized net charge-off ratio 0.85% 1.58% (0.73)%
Nonperforming assets:
Nonperforming loans(15) $1,761 $2,257 $ (496) (22)
Other, including 0REO 19 33 (14) (42)
- -------------------------------------------------------------------------------
Total nonperforming assets 1,780 2,290 (510) (22)
Allowance for credit losses 3,071 3,071 -- --
Allowance to period end loans(14) 5.18% 4.46% 0.72%
Allowance to nonperforming loans(15) 176 140 36
Nonperforming assets to related assets 2.99 3.32 (0.33)
CORPORATE BANKING (in billions):
Loans-ending balance $ 29.9 $ 34.7 $ (4.8) (14)%
-average balance 30.4 36.0 (5.6) (16)
Deposits-ending balance 29.8 21.5 8.3 39
-average balance 26.8 29.1 (2.3) (8)
Credit quality (dollars in millions)
Net charge-offs 81 163 (82) (50)
Annualized net charge-off ratio 1.07% 1.81% (0.74)%
Nonperforming loans $ 814 $1,170 $ (356) (30)
Nonperforming loans to total loans 2.72% 3.37% (0.65)%
SYNDICATIONS:
Lead arranger deals:
Volume (in billions) $ 14.8 14.9 $ (0.1) (1)%
Number of transactions 46 45 1 2
League table standing-rank 4 4 -- --
League table standing-market share 9% 9% --
- ----------------------------------------------------------------------------------------
10
Commercial Banking - continued
Three Months Ended March 31
---------------------------------
Change
----------------
2003 2002 Amount Percent
---------------------------------
MIDDLE MARKET BANKING (in billions):
Loans-ending balance $29.6 $ 34.3 $ (4.7) (14)%
-average balance 29.6 35.1 (5.5) (16)
Deposits-ending balance 24.1 21.9 2.2 10
-average balance 22.2 22.0 0.2 1
Credit quality (dollars in millions):
Net charge-offs 47 118 (71) (60)
Annualized net charge-off ratio 0.64% 1.34% (0.70)%
Nonperforming loans $ 947 $1,087 $ (140) (13)
Nonperforming loans to total loans 3.20% 3.17% 0.03%
- ---------------------------------------------------------------------------------------
For additional footnote detail see page 7.
(10) Net interest income-FTE includes tax equivalent adjustments of $23 million
and $21 million for the three months ended March 31, 2003 and 2002,
respectively.
(11) Fiduciary and investment management fees include asset management fees,
personal trust fees, other trust fees and advisory fees.
(12) Trading income primarily includes realized and unrealized mark-to-market
changes from trading assets, derivative financial instruments and foreign
exchange products.
(13) Capital markets includes trading income and underwriting, syndicated
lending and advisory fees.
(14) Loans includes loans held for sale of $0.2 billion and $0.1 billion at
March 31, 2003 and 2002, respectively. These amounts are not included in
allowance coverage statistics.
(15) Nonperforming loans includes loans held for sale of $17 million and $66
million at March 31, 2003 and 2002, respectively. These amounts are not
included in allowance coverage statistics.
Quarterly Results
- -----------------
Commercial Banking net income increased $74 million, or 52%, to $217 million,
primarily reflecting improved credit performance and capital markets revenue,
partially offset by weak loan demand and deposit margin compression.
Net interest income decreased 13% to $569 million, reflecting a 16%
reduction in average loan volume and compression in deposit spreads, partially
offset by an improvement in corporate banking and middle market loan spreads.
Mark-to-market adjustments on the $7.7 billion notional credit derivatives
hedge portfolio negatively impacted trading income by $54 million versus $33
million in the prior year.
Noninterest income (excluding the impact of the credit derivative hedge
portfolio) increased $67 million, primarily driven by gains in tax-oriented
investments, increased asset-backed, syndication and tax-exempt underwriting
fees, and improved foreign exchange trading income.
Continued expense management held noninterest expense relatively stable at
$567 million despite higher compensation costs resulting from the expensing of
stock options and increased benefits expense.
Credit quality continued to improve as reflected by the decline of $153
million, or 54%, in the provision for credit losses.
The allowance for credit losses of $3.1 billion represented 5.18% of
period-end loans, an increase from 4.46% in the prior year. Nonperforming loans
declined 22% to $1.8 billion, reflecting declines of 30% in corporate banking
and 13% in middle market banking.
11
Card Services
Card Services offers customers more than 1,200 co-brand, affinity and other
cards. These cards include some of the leading corporations, financial
institutions, universities, sports franchises and affinity organizations. All of
these cards carry the respective VISA(R) or MasterCard(R) brand names.
With 51.0 million cards in circulation, Card Services is the third largest
credit card provider in the United States and the largest Visa credit card
issuer in the world. Card Services is also a leader in online card marketing and
customer service, with more than 3.8 million registered users of its website.
Three Months Ended March 31
------------------------------------
Change
----------------
(Dollars in millions) 2003 2002 Amount Percent
- ----------------------------------------------------------------------------------------
INC0ME STATEMENT DATA:
Net interest income-FTE(3)(16) $ 309 $ 251 $ 58 23%
Banking fees and commissions 11 25 (14) (56)
Credit card revenue 774 853 (79) (9)
Other loss (4) (18) 14 78
- ------------------------------------------------------------------------------
Total noninterest income 781 860 (79) (9)
- ------------------------------------------------------------------------------
Total revenue, net of interest expense 1,090 1,111 (21) (2)
Provision for credit losses 161 97 64 66
Salaries and employee benefits 153 146 7 5
Other expense 374 475 (101) (21)
- ------------------------------------------------------------------------------
Total noninterest expense 527 621 (94) (15)
- ------------------------------------------------------------------------------
Income before income taxes 402 393 9 2
Applicable income taxes 154 154 -- --
- ------------------------------------------------------------------------------
Net income $ 248 239 $ 9 4
- ----------------------------------------------------------------------------------------
Memo-Net securitization gains
(amortization) $ 1 $ (31) $ 32 N/M
FINANCIAL PERFORMANCE:
Return on average common equity 16% 15% 1%
Efficiency ratio 48 56 (8)
Headcount-full-time 10,778 10,718 60 1%
ENDING BALANCES (in billions):
Owned loans:
Held in portfolio $ 7.1 $ 4.8 $ 2.3 48%
Held for sale(17) 5.2 2.6 2.6 N/M
- ------------------------------------------------------------------------------
Total owned loans 12.3 7.4 4.9 66
Seller's interest and accrued interest receivable 25.2 22.3 2.9 13
- ------------------------------------------------------------------------------
Total receivables 37.5 29.7 7.8 26
Assets 42.8 34.9 7.9 23
Equity 6.4 6.4 -- --
- ----------------------------------------------------------------------------------------
AVERAGE BALANCES (in billions):
Owned loans:
Held in portfolio $ 7.7 $ 5.0 $ 2.7 54%
Held for sale 4.6 2.2 2.4 N/M
- ------------------------------------------------------------------------------
Total owned loans 12.3 7.2 5.1 71
Seller's interest and accrued interest receivable 26.5 22.5 4.0 18
- ------------------------------------------------------------------------------
Total receivables 38.8 29.7 9.1 31
Assets 44.2 34.8 9.4 27
Equity 6.4 6.4 -- --
- ----------------------------------------------------------------------------------------
12
Card Services - continued
Three Months Ended March 31
------------------------------------
Change
----------------
CREDIT QUALITY (dollars in millions): 2003 2002 Amount Percent
- ----------------------------------------------------------------------------------------
Net charge-offs $ 161 $ 97 $ 64 66%
Annualized net charge-off ratio 5.24% 5.38% (0.14)%
Delinquency ratio:
30+ days 2.81 2.99 (0.18)
90+ days 1.30 1.36 (0.06)
Allowance for credit losses $ 396 $ 396 -- --
Allowance to period end loans held in portfolio 5.58% 8.29% (2.71)%
OTHER DATA:
Charge volume (in billions) $ 38.3 $ 34.0 $ 4.3 13%
New accounts opened (in thousands) 1,037 941 96 10
Credit cards issued (in thousands) 50,978 49,407 1,571 3
Number of CardmemberServices.com
customers (in millions) 3.8 2.3 1.5 65
Paymentech (in millions):
Bank card volume $34,444 $27,961 $6,483 23
Total transactions 1,218 940 278 30
- ----------------------------------------------------------------------------------------
Through securitization, the Corporation transforms a substantial portion of its
credit card receivables into securities, which are sold to investors.
Securitization impacts the Corporation's consolidated balance sheet by removing
those credit card receivables that have been sold and by reclassifying those
credit card receivables whose ownership has been transformed into certificate
form (referred to as "seller's interest") from loans to investments. Gain or
loss on the sale of credit card receivables, net of amortization of transaction
costs and amortization from securitization repayments, is reported as
securitization income in other income. Securitization also impacts the
Corporation's consolidated income statement by reclassifying interest income and
fees, interchange income, credit losses and recoveries related to securitized
receivables as securitization income. Credit card interest income and fees,
interchange income, credit losses and recoveries related to credit card
receivables that have been converted to certificate form are reclassified as
investment income in net interest income.
The Corporation evaluates its Card Services line of business trends on a
managed basis, which treats the securitization as a secured financing
transaction and assumes that receivables have not been sold and are still on the
balance sheet. The Corporation manages its Card Services operations on a managed
basis because the receivables that are securitized are subject to underwriting
standards comparable to the owned portfolio and are serviced by operating
personnel without regard to ownership. The Corporation believes that investors
should be informed, and often request information, about the credit performance
of the entire managed portfolio in order to understand the quality of the Card
Services originations and the related credit risks inherent in the owned
portfolio and retained interests in securitizations. In addition, the
Corporation funds its Card Services operations, reviews operating results and
makes decisions about allocating resources, such as employees and capital, on a
managed basis. See "Loan Securitizations" on page 35 and Note 9, "Credit Card
Securitizations," of the Corporation's 2002 Annual Report on pages 94-95 for
additional information related to the Corporation's securitization activity.
13
Card Services - continued
The following table presents certain Card Services information on a managed
basis. See page 13 for a description of the managed presentation.
Three Months Ended March 31
--------------------------------
Change
----------------
Card Services - Managed Basis 2003 2002 Amount Percent
- ------------------------------------------------------------------------------------
ENDING BALANCES (in billions):
Owned loans:
Held in portfolio $ 7.1 $ 4.8 $ 2.3 48%
Held for sale(17) 5.2 2.6 2.6 N/M
Seller's interest and accrued interest receivable 25.2 22.3 2.9 13
- --------------------------------------------------------------------------
Loans on balance sheet 37.5 29.7 7.8 26
Securitized 35.3 35.1 0.2 1
- --------------------------------------------------------------------------
Total loans 72.8 64.8 8.0 12
Managed assets 78.1 70.0 8.1 12
AVERAGE MANAGED
ASSETS (in billions): 78.8 71.4 7.4 10
CREDIT QUALITY (dollars in millions):
Managed net charge-offs $ 971 $ 943 $ 28 3%
Annualized managed net charge-off ratios:
For the period 5.29% 5.69% (0.40)%
12-month lagged(18) 5.86 5.77 0.09
Managed delinquency ratio:
30+ days 4.08 4.27 (0.19)
90+ days 1.88 1.96 (0.08)
- ------------------------------------------------------------------------------------
For additional footnote detail see pages 7 and 11.
(16) Net interest income-FTE did not have tax equivalent adjustments for the
three months ended March 31, 2003 and 2002.
(17) These amounts are not included in allowance coverage statistics.
(18) 2002 ratio includes Wachovia net charge-offs but excludes Wachovia loans.
Quarterly Results
- -----------------
Card Services net income increased 4% to $248 million. Expense management and
higher loan balances were partially offset by margin compression associated with
continued competitive pricing necessary to retain and attract customers.
Total revenue decreased 2% to $1.1 billion. Net interest income increased
23% to $309 million, reflecting higher owned loan balances, partially offset by
the impact of lower, more competitive yields. Noninterest income declined 9% to
$781 million, primarily driven by lower income earned on securitized loans, also
the result of lower yields. This decline was partially offset by higher
interchange fees from increased card usage by our customers and increased
securitization activity. Paymentech, Inc., the Corporation's merchant card
processor, reported an increase in total revenue of 13% to $134 million,
resulting from a 23% increase in bank card volume and a 30% increase in total
transactions, driven primarily by the purchase of the Scotia Bank merchant
acquirer business.
Noninterest expense decreased 15% to $527 million, resulting from reduced
marketing expense and operational efficiencies.
Period-end owned loans were $12.3 billion, an increase of $4.9 billion, or
66%, due to a lower percentage of securitized loans to managed loans in the
current period. Net charge-offs were $161 million, an increase of $64 million,
or 66%, primarily driven by higher owned loan balances. Net charge-offs as a
percentage of average loans were 5.24%, down from 5.38%, resulting from improved
portfolio credit quality.
The 30-day delinquency ratio was 2.81%, down from 2.99%, resulting from
improved portfolio credit quality. Delinquency rates, on a reported basis,
continued to be lower than on a managed basis as new originations represented a
larger percentage of the on-balance sheet portfolio.
14
Managed Basis
- -------------
Period-end managed loans were $72.8 billion, an increase of $8.0 billion,
or 12%. Reflecting the increase in loan balances, the provision for credit
losses increased $28 million, or 3%, to $971 million. Net charge-offs as a
percentage of average managed loans, however, declined to 5.29% from 5.69%,
reflecting underwriting discipline and focus on the prime and super-prime
markets.
The 30-day delinquency ratio was 4.08%, compared to 4.27%, resulting from
improved portfolio credit quality. Delinquency rates, on a reported basis,
continued to be lower than on a managed basis as new originations represented a
larger percentage of the on-balance sheet portfolio.
15
Investment Management
The Investment Management Group (IMG) provides investment, insurance, trust and
private banking services to individuals. IMG also provides investment and
investment related services, including retirement and custody services,
securities lending and corporate trust to institutions.
Three Months Ended March 31
----------------------------------------
Change
----------------
(Dollars in millions) 2003 2002(19) Amount Percent
- ------------------------------------------------------------------------------------------
INC0ME STATEMENT DATA:
Net interest income-FTE(3)(20) $ 98 $ 114 $ (16) (14)%
Banking fees and commissions 66 60 6 10
Service charges on deposits 5 5 -- --
Fiduciary and investment
management fees 177 188 (11) (6)
Other income -- 1 (1) N/M
- --------------------------------------------------------------------------------
Total noninterest income 248 254 (6) (2)
- --------------------------------------------------------------------------------
Total revenue, net of interest expense 346 368 (22) (6)
Provision for credit losses 2 5 (3) (60)
Salaries and employee benefits 117 116 1 1
Other expense 99 87 12 14
- --------------------------------------------------------------------------------
Total noninterest expense 216 203 13 6
- --------------------------------------------------------------------------------
Income before income taxes 128 160 (32) (20)
Applicable income taxes 48 59 (11) (19)
- --------------------------------------------------------------------------------
Net income $ 80 $ 101 $ (21) (21)
- ------------------------------------------------------------------------------------------
Memo-Insurance revenues $ 107 $ 123 $ (16) (13)
FINANCIAL PERFORMANCE:
Return on equity 32% 41% (9)%
Efficiency ratio 62 55 7
Headcount-full-time 4,703 5,009 (306) (6)%
ENDING BALANCES (in billions):
Loans $ 6.7 $ 7.2 $(0.5) (7)%
Assets 8.5 8.6 (0.1) (1)
Demand deposits 2.3 3.0 (0.7) (23)
Savings 5.2 3.9 1.3 33
Time 3.8 3.6 0.2 6
Foreign offices 0.2 0.2 -- --
- --------------------------------------------------------------------------------
Total deposits 11.5 10.7 0.8 7
Equity 1.0 1.0 -- --
AVERAGE BALANCES (in billions):
Loans $ 6.8 $ 7.0 $(0.2) (3)%
Assets 8.4 8.3 0.1 1
Demand deposits 2.0 2.1 (0.1) (5)
Savings 4.9 3.7 1.2 32
Time 3.5 3.3 0.2 6
Foreign offices 0.2 0.2 -- --
- --------------------------------------------------------------------------------
Total deposits 10.6 9.3 1.3 14
Equity 1.0 1.0 -- --
- ------------------------------------------------------------------------------------------
16
Investment Management - continued
Three Months Ended March 31
-----------------------------------------
Change
-----------------
2003 2002(19) Amount Percent
-----------------------------------------
CREDIT QUALITY (dollars in millions)
Net charge-offs:
Commercial $ 1 $ 2 $ (1) (50)%
Consumer 1 3 (2) (67)
- --------------------------------------------------------------------------------
Total net charge-offs 2 5 (3) (60)
Annualized net charge-off ratios:
Commercial 0.13% 0.27% (0.14)%
Consumer 0.11 0.29 (0.18)
Total net charge-off ratio 0.12 0.29 (0.17)
Nonperforming assets:
Commercial $ 68 $ 30 $ 38 N/M
Consumer 13 7 6 86
- --------------------------------------------------------------------------------
Total nonperforming loans 81 37 44 N/M
Other, including 0REO 1 -- 1 --
- --------------------------------------------------------------------------------
Total nonperforming assets 82 37 45 N/M
Allowance for credit losses 40 25 15 60
Allowance to period end loans 0.60% 0.35% 0.25%
Allowance to nonperforming loans 49 68 (19)
Nonperforming assets to related assets 1.22 0.51 0.71
ASSETS UNDER MANAGEMENT
ENDING BALANCES (in billions):
Mutual funds $ 97.5 $ 89.9 $ 7.6 8%
Other 60.8 58.4 2.4 4
- --------------------------------------------------------------------------------
Total assets 158.3 148.3 10.0 7
By type:
Money market 73.9 62.7 11.2 18
Equity 35.4 47.9 (12.5) (26)
Fixed income 49.0 37.7 11.3 30
- --------------------------------------------------------------------------------
Total assets 158.3 148.3 10.0 7
By channel:
Private client services 41.2 50.1 (8.9) (18)
Retail brokerage 7.1 7.7 (0.6) (8)
Institutional 80.3 64.4 15.9 25
Commercial cash sweep 7.7 10.1 (2.4) (24)
Capital markets 3.4 2.6 0.8 31
External(21) 9.8 6.7 3.1 46
All other direct(22) 8.8 6.7 2.1 31
- --------------------------------------------------------------------------------
Total assets 158.3 148.3 10.0 7
Morningstar(R) Rankings:(23)
% of 4 and 5 ranked funds 54% 55% (1)%
% of 3+ ranked funds 88 89 (1)
- -------------------------------------------------------------------------------------------
17
Investment Management - continued
Three Months Ended March 31
------------------------------------------
Change
----------------
2003 2002(19) Amount Percent
------------------------------------------
CORPORATE TRUST SECURITIES
ENDING BALANCES: (in billions)
Corporate trust securities
under administration(24) $1,003.9 $958.4 $ 45.5 5%
PRIVATE CLIENT SERVICES:
Number of private client advisors 649 660 (11) (2)%
Number of private client offices(25) 90 97 (7) (7)
Total client assets-end of
period (in billions) $ 60.6 $ 72.0 $(11.4) (16)
Ending balances (in billions):
Loans 6.6 6.9 (0.3) (4)
Deposits 9.9 8.2 1.7 21
Average balances (in billions):
Loans 6.7 6.9 (0.2) (3)
Deposits 9.3 8.1 1.2 15
- --------------------------------------------------------------------------------------------
For additional footnote detail see pages 7, 11 and 14.
(19) Prior period data has been adjusted for the transfer of retail brokerage to
the Retail line of business.
(20) Net interest income-FTE did not have tax equivalent adjustments for the
three months ended March 31, 2003 and 2002.
(21) Includes broker/dealers, trust companies, and registered investment
advisors that sell, or offer, One Group funds.
(22) One Group funds invested in other One Group funds and other mutual funds
sub-advised.
(23) Morningstar changed the rating process effective June 30, 2002 with no
prior period restatements.
(24) Certain adjustments, primarily definitional in nature, were made to prior
periods to conform to the current period presentation. Ending balances are
estimated.
(25) During 2002, PCS offices that were in close proximity were consolidated to
realize operational efficiencies.
Quarterly Results
- -----------------
Investment Management net income totaled $80 million, a decline of $21 million,
or 21%, reflecting weak market conditions.
Assets under management were $158 billion, an increase of $10 billion, or
7%, as a result of strong money market and fixed income asset growth, partially
offset by a decline in equity assets. During this same period, the S&P 500
declined 26%. Institutional and external assets under management increased $19
billion, or 27%, partially offset by a decline in Private Client Services assets
under management of $9 billion, or 18%. One Group mutual funds assets increased
8% to $98 billion.
Net interest income decreased 14% to $98 million. Despite continued strong
average deposit growth of $1.3 billion, or 14%, net interest income declined due
to deposit spread compression.
Noninterest income declined 2% to $248 million. Despite positive net fund
inflows, noninterest income was negatively impacted by a shift in asset mix from
equities to money market and fixed income, mostly caused by continuing market
decline.
Noninterest expense increased 6% to $216 million, reflecting higher legal
and other operating expenses. Salaries and benefits remained fairly flat despite
an overall decline in headcount, because of increased benefits expenses and a
change in the skill mix of the employee base.
The provision for credit losses was $2 million, down $3 million from a year
ago. Provision decreased $26 million from the prior quarter, which had reflected
the deterioration in credit quality of certain large loans.
Subsequent to March 31, 2003, the Corporation announced that it is
exploring strategic options with the Global Corporate Trust business, which may
include possible sale. No decision has been made pending managements' review.
18
Corporate
Corporate includes treasury, fixed income and principal investment portfolios,
mortgage-servicing assets, unallocated corporate expenses, and any gains or
losses from corporate transactions. The treasury group within the Corporate line
of business risk manages mortgage-servicing assets on behalf of the Corporation.
Three Months Ended March 31
- ----------------------------------------------------------------------------------------------
Change
----------------
(Dollars in millions) 2003 2002(26) Amount Percent
- ----------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net interest expense-FTE(3)(27)(28) $ (183) $ (43) $ (140) N/M
Banking fees and commissions (17) (7) (10) N/M
Credit card revenue 1 (1) 2 N/M
Service charges on deposits (1) 3 (4) N/M
Fiduciary and investment management fees 8 2 6 N/M
Investment securities gains (losses) 69 (18) 87 N/M
Trading losses (13) (9) (4) (44)%
Other income 33 54 (21) (39)
- ------------------------------------------------------------------------------------
Total noninterest income(29) 80 24 56 N/M
- ------------------------------------------------------------------------------------
Total loss, net of interest expense (103) (19) (84) N/M
Provision for credit losses -- 15 (15) N/M
Salaries and employee benefits 245 186 59 32
Other expense (125) (99) (26) (26)
- ------------------------------------------------------------------------------------
Total noninterest expense(30) 120 87 33 38
- ------------------------------------------------------------------------------------
Loss before income tax benefit (223) (121) (102) (84)
Applicable income tax benefit (115) (72) (43) (60)
- ------------------------------------------------------------------------------------
Net loss $ (108) $ (49) $ (59) N/M
- ----------------------------------------------------------------------------------------------
FINANCIAL PERFORMANCE:
Headcount-full-time 14,802 13,627 1,175 9%
ENDING BALANCES (in billions):
Loans $ 0.3 $ 1.0 $ (0.7) (70)%
Assets 70.9 52.1 18.8 36
Memo-
Treasury investments(31) 41.6 30.4 11.2 37
Principal investments(32) 2.2 2.5 (0.3) (12)
Deposits 12.4 15.9 (3.5) (22)
Equity 1.3 (0.1) 1.4 N/M
AVERAGE BALANCES (in billions):
Loans $ 0.3 $ 0.5 $ (0.2) (40)%
Assets 56.1 48.3 7.8 16
Deposits 12.9 15.7 (2.8) (18)
Equity 1.6 (0.1) 1.7 N/M
CREDIT QUALITY (in millions):
Net charge-offs $ -- $ 15 $ (15) N/M
Nonperforming assets:
Nonperforming loans 7 45 (38) (84)%
Other including OREO 3 5 (2) (40)
- ----------------------------------------------------------------------------------------------
Total nonperforming assets 10 50 (40) (80)
Allowance for credit losses 4 4 --
Allowance to period end loans 1.33% 0.40% 0.93%
Allowance to nonperforming loans 57 9 48
Nonperforming assets to related assets 3.30 4.98 (1.68)
- ----------------------------------------------------------------------------------------------
19
For additional footnote detail see pages 7, 11, 14 and 18.
(26) Prior period data has been adjusted for the transfer of the community
development business from the Retail line of business.
(27) Net interest expense-FTE includes tax equivalent adjustments of $8 million
for the three months ended March 31, 2003 and 2002.
(28) Net interest expense-FTE primarily includes treasury results and interest
spread on investment related activities.
(29) Noninterest income primarily includes the gains and losses from investment
activities and other corporate transactions.
(30) Noninterest expense primarily includes corporate expenses not allocated to
the lines of business.
(31) Treasury investments may include U.S. government and agency debt
securities, mortgage and other asset backed securities and other fixed
income investments.
(32) Principal investments include primarily private equity investments and
venture capital fund investments.
Quarterly Results
- -----------------
Corporate net loss totaled $108 million, compared with a net loss of $49
million. During the quarter, more than 20 million shares were repurchased at an
average price of $35.72.
During 2002, actions were taken to position the balance sheet more
defensively for a potential increase in interest rates. The Corporation extended
funding duration by fixing rates, and better positioned treasury's investment
portfolio for rising rates. As a result, net interest expense of $183 million in
the current quarter reflects an increase of $140 million from the prior year.
Noninterest income was $80 million, an increase of $56 million, driven by
net investment gains. Net securities gains of $69 million consisted primarily of
net gains from treasury's investment portfolio as a result of further
repositioning. In addition, other income decreased $21 million from the previous
year primarily due to asset sales and valuation adjustments related to other
investments.
Corporate noninterest expenses were $120 million, an increase of $33
million over the prior year.
20
BALANCE SHEET ANALYSIS
(All comparisons are to December 31, 2002, unless otherwise specified.)
The Corporation's loan portfolio was $144.7 billion compared with $148.1
billion, a decrease of $3.4 billion, or 2%. Commercial Banking loans totaled
$59.5 billion compared to $61.9 billion, a decrease of $2.4 billion, or 4%.
Reductions of $2.0 billion in the commercial and industrial portfolio were the
result of on going risk management initiatives and weak loan demand. Card
Services loans totaled $12.3 billion compared to $11.6 billion, an increase of
$0.7 billion, or 7%. During the quarter, 1.0 million credit card accounts were
opened. Retail loans totaled $65.9 billion compared with $67.6 billion, a
decrease of $1.7 billion, or 3%, due primarily to the intentional reduction of
the discontinued brokered home equity and vehicle lease portfolios partially
offset by growth in home equity loans.
Investment securities totaled $71.3 billion compared with $67.6 billion.
This increase of $3.7 billion, or 5%, was driven by an increase of $7.7 billion,
or 29%, in U.S. government agencies and an increase of $605 million, or 45%, in
U.S. Treasuries. Partially offsetting these increases was a decrease of $3.4
billion, or 12%, in retained interests in securitized credit card receivables, a
decrease of $836 million, or 18%, in other debt securities and a decrease of
$510 million, or 15%, in equity securities.
Total deposits were $167.1 billion compared to $170.0 billion, a decrease
of $2.9 billion, or 2%. Time deposits totaled $28.1 billion compared to $30.5
billion, a decrease of $2.4 billion or 8%. Foreign offices' deposits totaled
$15.0 billion compared to $16.2 billion, a decrease of $1.2 billion, or 7%.
Offsetting this decrease was an increase in demand deposits of $1.7 billion, or
5%, to $36.0 billion from $34.3 billion. As a result of the current interest
rate environment, customer deposits are migrating from time deposits to demand
deposits.
RISK MANAGEMENT
Risk is an inherent part of the Corporation's business activity. The
Corporation's ability to properly and effectively identify, measure, monitor,
and report risk in its business activities is critical to its soundness and
profitability. The diversity of the Corporation's lines of business helps reduce
the impact that volatility in any particular area has on its operating results
as a whole.
Risk Types
There are seven major risk types identified by the Corporation:
. Credit risk is the risk to earnings or capital arising from an
obligor's failure to meet the terms of any contract with the lender or
otherwise fail to perform as agreed.
. Liquidity risk is the risk of loss arising from an institution's
inability to meet its obligations when they come due without incurring
unacceptable losses.
. Market risk is the risk that changes in future market rates or prices
will make the Corporation's positions less valuable.
. Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people or systems or from external events.
. Reputation risk is the risk to earnings or capital arising from
negative public opinion. This affects the institution's ability to
establish new relationships or services, or continue servicing
existing relationships.
. Strategic risk is the risk to earnings or capital arising from adverse
business decisions or improper implementation of those decisions.
. Compliance risk is the risk to earnings or capital arising from
violations of, or non-conformance with, laws, rules, regulations,
prescribed practices, or ethical standards.
The following discussion of the Corporation's risk management process focuses
primarily on developments since December 31, 2002. The Corporation's risk
management processes for credit, liquidity, market and operational risks have
not substantially changed from year-end and are described in detail in the
Corporation's 2002 Annual Report, beginning on page 56.
21
LIQUIDITY RISK MANAGEMENT
At March 31, 2003, the Corporation and its principal banks had the
following long- and short-term debt ratings:
Short-Term Debt Senior Long-Term Debt
- ----------------------------------------------------------------------------
S & P Moody's Fitch S & P Moody's Fitch
- ----------------------------------------------------------------------------
The Corporation (parent) A-1 P-1 F-1 A Aa3 A+
Principal banks A-1 P-1 F-1+ A+ Aa2 AA-
- ----------------------------------------------------------------------------
MARKET RISK MANAGEMENT
Market risk refers to potential losses arising from changes in interest rates,
foreign exchange rates, equity prices, commodity prices and credit spreads in
market risk sensitive instruments. Market risk arises in both trading and
non-trading portfolios. The section on "Market Risk Management-Nontrading
Activities" in the Corporation's 2002 Annual Report on pages 61-62 provides an
overview of our approach to managing market risks arising from non-trading
portfolios. In these asset and liability management activities, policies are in
place to closely manage structural interest rate risk. Disclosures about the
fair value of financial instruments, which reflect changes in market prices and
rates, can be found in Note 23 "Fair Value of Financial Instruments" in the
Corporation's 2002 Annual Report on pages 103-105.
Market Risk Management - Trading Activities
Through its trading activities, the Corporation strives to take advantage of
profit opportunities due to changes in interest rates, exchange rates, equity
prices, commodity prices and credit spreads. The Corporation's trading
activities are primarily customer-oriented. For example, cash instruments are
bought and sold to satisfy customers' investment needs. Derivative contracts are
initially entered into to meet the risk management needs of customers. The
Corporation enters into subsequent transactions to manage the level of risk in
accordance with approved limits. In order to accommodate customers, an inventory
of capital markets instruments is carried, and access to market liquidity is
maintained by providing 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. Activity is focused in OECD (Organisation
for Economic Cooperation and Development) markets, with very little activity in
emerging markets.
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 carried at estimated fair value, with realized and unrealized gains and
losses included in noninterest income as trading income.
Value-At-Risk
For trading portfolios, value-at-risk measures the maximum fair value the
Corporation could be reasonably expected to lose on a trading position, given a
specified confidence level and time horizon. Value-at-risk limits and exposure
are monitored daily for each significant trading portfolio. Value-at-risk is not
calculated for credit derivatives used to hedge specific credits in the loan
portfolio. However, stress testing is regularly performed for these credit
derivative positions. See discussion of credit derivatives under the "Trading
Derivative Instruments" section in the Corporation's 2002 Annual Report on page
72. Likewise, value-at-risk calculations do not include the principal
investments portfolio, which is carried at fair value with realized and
unrealized gains and losses reported currently in income.
The Corporation applies a statistical model to its portfolios of cash and
derivative positions, including options, to calculate value-at-risk. The
variance-covariance model estimates the volatility of returns on individual
assets, as well as the correlation of changes of asset price pairs. These
volatility and correlation estimates are made on the basis of one-year,
equally-weighted historical observations of market variables. The model then
computes the volatility of changes in the market values of the portfolios (i.e.,
the value-at-risk results) by applying each portfolio's statistical
sensitivities to the correlations.
The Corporation's value-at-risk calculation measures potential losses in
fair value using a 99% confidence level and a one-day time horizon. This equates
to 2.33 standard deviations from the mean under a normal distribution. This
means that, on average, daily profits and losses are expected to exceed
value-at-risk one out of every 100 overnight trading days.
22
The value-at-risk in the Corporation's trading portfolio was as follows:
(excluding credit derivatives used to hedge specific credits in the loan
portfolio with a notional amount of $7.7 billion and $7.3 billion at March 31,
2003 and December 31, 2002, respectively).
First Quarter 2003
- ---------------------------------------------------------------------------------------------------
(In millions) March 31, 2003 Average High Low December 31, 2002
- ---------------------------------------------------------------------------------------------------
High Volume Capital Markets Trading
Portfolios and Mortgage Pipeline (1)
Risk type:
Interest rate $ 6 $ 6 $ 7 $ 4 $ 6
Currency exchange rate -- -- 1 -- --
Equity -- -- -- -- 1
Diversification benefit -- -- -- -- --
- ------------------------------------------------------------------ -----------------
Total 6 6 7 5 7
Other Trading Portfolios
Risk type:
Interest rate 4 5 6 4 7
- ------------------------------------------------------------------ -----------------
Aggregate trading portfolio market risk $10 $11 $12 $ 9 $14
- ---------------------------------------------------------------------------------------------------
(1) Subject to backtesting.
Interest rate risk was the predominant type of market risk incurred during
the first quarter of 2003. At March 31, 2003, approximately 96% of primary
market risk exposures were related to interest rate risk. Currency exchange
rate, equity and commodity risks accounted for 1%, 2% and 1%, respectively, of
primary market risk exposures.
At March 31, 2003, aggregate portfolio market risk exposures were 25% lower
than at year-end 2002.
Value-at-risk levels are regularly backtested to validate the model by
comparing predictions with actual results. For the three months ended March 31,
2003, backtesting results for the high volume capital markets portfolios and the
mortgage pipeline appear in the following graph:
[GRAPHIC APPEARS HERE]
23
These backtesting results reflect only the higher-volume trading portfolios
that are actively managed and marked-to-market on a daily basis (i.e., the
capital markets trading portfolios and the mortgage pipeline in the consumer
lending business). Based on a 99% confidence interval in predicting actual
profit or loss, the Corporation would expect actual profit or loss to exceed
value-at-risk one day for every one hundred days. As shown in the graph above,
there were no days during the first quarter where the actual loss exceeded the
calculated value-at-risk. The Corporation's value-at-risk measure provides a
conservative measure of the level of market risk.
Market Risk Management - Non-Trading Activities
Interest rate risk exposure in the Corporation's core non-trading business
activities, (i.e., asset/liability management ("ALM") position), is a result of
reprice, option, and basis risks associated with on- and off-balance sheet
positions. Reprice risk represents timing mismatches in the Corporation's
ability to alter contractual rates earned on financial assets or paid on
liabilities in response to changes in market interest rates. Basis risk refers
to the potential for change in the underlying relationship between market rates
or indices, which subsequently result in a narrowing of the spread earned on a
loan or investment relative to its cost of funds. Option risk arises from
"embedded options" present in many financial instruments such as interest rate
options, loan prepayment options and deposit early withdrawal options. These
provide customers and investors opportunities to take advantage of directional
changes in rates, which could have an adverse impact on the Corporation's margin
performance. Embedded options are complex risk positions that are difficult to
predict and offset, and are a significant component of the interest rate risk
exposure for the Corporation.
Based on immediate parallel shocks, the Corporation's earnings at-risk to
rising interest rates, versus base-case, has improved. The Corporation's
12-month pretax earnings sensitivity profile is as follows:
Immediate Change in Rates
- ------------------------------------------------------------------------------
(In millions) +200 bp +100 bp -50 bp -100 bp
- ------------------------------------------------------------------------------
March 31, 2003 $281 $242 $(227) $(450)
- ------------------------------------------------------------------------------
December 3l, 2002 $165 $100 $ (89) $(177)
- ------------------------------------------------------------------------------
The increase in measured exposure to falling interest rates, and
corresponding increase in benefit derived from rising rates, reflects
management's decision to position the balance sheet more defensively for a
potential increase in interest rates. The change in risk position effected over
the past year included a more defensive investment portfolio and a longer
duration wholesale funding posture. In the table above, the Corporation has
provided disclosure of the immediate parallel shock of a -100 basis point rate
movement in accordance with the risk monitoring policy even though management
believes that the probability of rates declining by 100 basis points in a
parallel shift is low.
CREDIT PORTFOLIO COMPOSITION
Selected Statistical Information
The significant components of credit risk and the related ratios for the periods
indicated are as follows:
March 31 December 31 September 30 June 30 March 31
2003 2002 2002 2002 2002
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Loans outstanding $144,747 $148,125 $150,389 $147,728 $152,126
Average loans 146,419 150,531 148,152 149,674 154,942
Nonperforming loans(1) 3,199 3,276 3,521 3,720 3,737
Other, including other real estate owned 254 251 214 204 197
- -----------------------------------------------------------------------------------------------------------
Nonperforming assets 3,453 3,527 3,735 3,924 3,934
Allowance for credit losses 4,526 4,525 4,518 4,521 4,520
Net charge-offs 495 622 573 607 663
Nonperforming assets to related assets(2) 2.38% 2.38% 2.48% 2.65% 2.58%
Allowance to period end loans 3.31 3.20 3.17 3.19 3.06
Allowance to nonperforming loans 142 139 132 125 123
Annualized net charge-offs to average loans 1.35 1.65 1.55 1.62 1.71
Allowance to annualized net charge-offs 229 182 197 186 170
- -----------------------------------------------------------------------------------------------------------
(1) Includes loans held for sale of $22 million, $22 million, $93 million,
$107 million and $69 million at March 31, 2003, December 31, 2002,
September 30, 2002, June 30, 2002 and March 31, 2002, respectively. These
amounts are not included in allowance coverage statistics.
(2) Related assets consist of loans outstanding, including loans held for
sale, and other real estate owned.
24
Loan Composition
The Corporation's loan portfolios at the periods indicated are as follows:
March 31, 2003 December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Retail:
Smallbusinesss commercial $ 9,739 7% $ 9,795 7% $ 9,821 6% $ 9,958 7% 9,905 6%
Home equity 28,842 20 28,469 19 26,757 18 25,579 17 25,272 17
Vehicle 13,627 9 14,012 9 14,296 10 13,584 9 13,644 9
Other persona1 7,898 5 8,486 6 8,861 6 8,229 6 8,600 6
- ----------------------------------------------------------------------------------------------------------------------------
Core businesses 60,106 41 60,762 41 59,735 40 57,350 39 57,421 38
Brokered home equity
discontinued 2,806 2 3,242 2 3,648 2 4,120 3 4,619 3
Vehicle leases 2,955 2 3,596 2 4,204 3 4,722 3 5,431 4
- ----------------------------------------------------------------------------------------------------------------------------
Home equity discontinued/
vehicle leases 5,761 4 6,838 4 7,852 5 8,842 6 10,050 7
- ----------------------------------------------------------------------------------------------------------------------------
Total Retail 65,867 45 67,600 45 67,587 45 66,192 45 67,471 45
Commercial Banking:
Corporate banking:
Commercial and
industrial 16,679 12 17,866 12 17,388 12 17,912 12 20,226 13
Commercial real estate 8,414 6 8,321 6 8,557 6 8,433 6 8,731 6
Lease financing 4,250 3 4,358 3 4,693 3 4,758 3 4,774 3
Other 553 -- 1,014 -- 514 -- 670 -- 975 --
- ----------------------------------------------------------------------------------------------------------------------------
Total corporate
banking 29,896 21 31,559 21 31,152 21 31,773 21 34,706 22
Middle market:
Commercial and
industrial 26,199 18 26,983 18 28,086 18 29,337 20 29,515 19
Commercial real estate 2,150 1 2,318 2 2,353 2 2,421 2 3,516 2
Lease financing 943 1 1,008 1 1,039 1 1,092 1 1,156 1
Other 269 -- 27 -- 361 -- 251 -- 141 --
- ----------------------------------------------------------------------------------------------------------------------------
Total middle market 29,561 20 30,336 21 31,839 21 33,101 23 34,328 22
- ----------------------------------------------------------------------------------------------------------------------------
Total Commercial
Banking 59,457 41 61,895 42 62,991 42 64,874 44 69,034 44
Card Services 12,387 9 11,581 8 11,924 8 9,115 6 7,396 5
IMG 6,718 5 6,946 5 7,131 5 7,088 5 7,175 5
Corporate 318 -- 103 -- 756 -- 459 -- 1,050 1
- ----------------------------------------------------------------------------------------------------------------------------
Total loans $144,747 100% $148,125 100% $150,389 100% $147,728 100% $152,126 100%
- ----------------------------------------------------------------------------------------------------------------------------
Loans held for sale, which are classified as loans, are carried at lower of
cost or fair value, totaled $7.9 billion and $6.9 billion at March 31, 2003 and
December 31, 2002, respectively. At March 31, 2003, loans held for sale included
Commercial Banking loans of $0.2 billion, of which approximately $17 million
were included in nonperforming loans, and Card Services and other consumer loans
of $7.7 billion.
25
Commercial and Industrial Loans
At March 31, 2003, commercial and industrial loans totaled $42.9 billion, which
represents 72% of the Commercial Banking portfolio.
The more significant borrower industry concentrations of the Commercial
Banking commercial and industrial portfolio for the periods indicated are as
follows:
March 31, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------------------
(Dollars in millions) Outstanding Percent(1) Outstanding Percent(1)
- ---------------------------------------------------------------------------------------------------
Motor vehicles and parts/auto related $ 4,025 9.4% $ 3,990 8.9%
Wholesale trade 3,499 8.2 3,558 7.9
Oil and gas 2,738 6.4 3,069 6.8
Industrial materials 2,338 5.4 2,471 5.5
Business finance and leasing 2,132 5.0 2,222 5.0
Other(2) 28,146 65.6 29,539 65.9
- ---------------------------------------------------------------------------------------------------
Tota1 $42,878 100% $44,849 100%
- ---------------------------------------------------------------------------------------------------
(1) Total outstanding by industry concentration as a percentage of total
commercial and industrial loans.
(2) Presented for informational purposes and includes 36 industry
concentrations.
26
Commercial Real Estate
Commercial real estate loans represent credit extended for real estate related
purposes to borrowers or counterparties who are primarily in the real estate
development or investment business and for which the primary source of repayment
of the loan is from the sale, lease, rental, management, operations or
refinancing of the property. At March 31, 2003, commercial real estate loans
totaled $10.6 billion, which represented 18% of the Commercial Banking
portfolio.
Commercial real estate lending is conducted in several lines of business
with the majority of these loans originated by corporate banking primarily
through its specialized National Commercial Real Estate Group. This group's
focus is lending to targeted regional and national real estate developers and
homebuilders. As of March 31, 2003, National Commercial Real Estate Group's loan
outstandings totaled $8.4 billion, or 80% of the commercial real estate
portfolio.
The commercial real estate loan portfolio by both collateral location and
property type for the periods indicated are as follows:
(Dollars in millions) March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------- ---------- ------- ----------
By Collateral Location:
Michigan $ 1,147 11% $ 1,118 11%
California 1,047 10 1,109 10
Illinois 943 9 1,088 10
Texas 845 8 824 8
Ohio 839 8 848 8
Arizona 709 7 741 7
Louisiana 363 3 376 3
Indiana 349 3 363 3
Kentucky 347 3 369 3
Colorado 260 3 288 3
Other areas 1,530 14 1,563 15
Unsecured 1,363 13 1,341 13
Secured by other than
commercial real estate 822 8 611 6
- --------------------------------------------------------------------------------
Total commercial real estate $10,564 100% $10,639 100%
- --------------------------------------------------------------------------------
By Property Type:
Apartment $ 1,845 18% $ 1,854 17%
Retail 1,798 17 1,762 17
Office 1,658 16 1,738 16
Industrial/warehouse 1,192 11 1,161 11
Single family residential
development 1,184 11 1,137 11
Residential lots 539 5 543 5
Hotels 517 5 560 5
Other commercial
income producing 1,696 16 1,758 17
Other residential
developments 135 1 126 1
- --------------------------------------------------------------------------------
Total commercial real estate $10,564 100% $10,639 100%
- --------------------------------------------------------------------------------
27
ASSET QUALITY
Nonperforming Assets
The Corporation places loans on nonaccrual status as follows:
.. Retail consumer loans are placed on nonaccrual status when the collection
of contractual principal or interest becomes 90 days past due.
.. Commercial Banking and Retail small business commercial loans are placed on
nonaccrual status when the collection of contractual principal or interest
is deemed doubtful, or the loan becomes 90 days or more past due and is not
both well-secured and in the process of collection.
.. Credit card receivables are charged-off rather than placed on nonaccrual
status.
The Corporation's nonperforming assets for the quarterly periods indicated
are as follows:
March 31 December 31 September 30 June 30 March 31
(Dollars in millions) 2003 2002 2002 2002 2002
- ------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Retail $1,350 $1,325 $1,426 $1,343 $1,398
Commercial Banking:
Corporate banking 814 873 1,010 1,161 1,170
Middle market banking 947 1,001 1,030 1,136 1,087
- ------------------------------------------------------------------------------------------------------------
Total Commercial Banking 1,761 1,874 2,040 2,297 2,257
IMG 81 71 47 38 37
Corporate 7 6 8 42 45
- ------------------------------------------------------------------------------------------------------------
Total nonperforming loans(1)(2) 3,199 3,276 3,521 3,720 3,737
Other, including other real estate owned 254 251 214 204 197
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets $3,453 $3,527 $3,735 $3,924 $3,934
- ------------------------------------------------------------------------------------------------------------
Nonperforming assets to related assets 2.38% 2.38% 2.48% 2.65% 2.58%
Loans 90-days or more past due and
accruing interest:
Card Services $ 161 $ 160 $ 132 $ 112 $ 100
Other -- 1 -- -- 2
- ------------------------------------------------------------------------------------------------------------
Total loans $ 161 $ 161 $ 132 $ 112 $ 102
- ------------------------------------------------------------------------------------------------------------
(1) Nonperforming loans at March 31, 2003, include $22 million of loans held for
sale.
(2) Related assets consist of loans outstanding, including loans held for sale,
and other real estate owned.
Credit quality improved during the first quarter as nonperforming assets
declined $74 million from the prior quarter. In Commercial Banking,
nonperforming loans declined $113 million from the prior quarter. These declines
were a result of risk management actions, including loan sales and ongoing
review of individual credits. The Corporation has established processes for
identifying potential problem areas of the portfolio, which currently include
exposure to energy/utilities, auto-related and airlines. The Corporation will
continue to monitor and manage these potential risks; however, concerns remain
due to the uncertain economic environment and the potential effect it may have
on future credit quality.
Nonperforming loans within Retail at March 31, 2003, were $1.3 billion, an
increase of $25 million from the prior quarter. This increase was primarily
driven by increases in small business commercial loans partially offset by
discontinued brokered home equity and vehicle loan decreases. Small business
nonperforming loans are modestly higher, reflecting continued general economic
weakness. Overall residential real estate nonperforming loans continue to
improve as foreclosure inventories continue to decline. Home equity loans are
written down to net realizable value once a loan reaches 120 days delinquency.
Due to the time necessary to complete foreclosure and acquire title, real estate
loans remain in nonperforming status for an extended period.
28
Charge-offs
The Corporation records charge-offs as follows:
.. Commercial loans are charged-off in the reporting period in which either an
event occurs that confirms the existence of a loss or it is determined that
a loan or a portion of a loan is uncollectible.
.. A credit card loan is charged-off in the month it becomes contractually 180
days past due and remains unpaid at the end of that month, or 60 days after
receipt of bankruptcy notification.
.. Retail loans are generally charged-off following a delinquency period of
120 days, or within 60 days for unsecured Retail loans after receipt of
notification of bankruptcy. Closed-end consumer loans, such as auto loans
and leases and home mortgage loans, are typically written down to the
extent of loss after considering the net realizable value of the
collateral.
The timing and amount of the charge-off on consumer loans will depend on
the type of loan, giving consideration to available collateral, as well as the
circumstances giving rise to the delinquency. The Corporation adheres to uniform
guidelines published by the FFIEC in charging off consumer loans.
The Corporation's net charge-offs for the quarterly periods indicated are
as follows:
March 31, 2003 December 31, 2002 September 30, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Net Annualized Net Annualized Net Annualized
charge- Average net charge- charge- Average net charge- charge- Average net charge-
(Dollars in millions) offs balance off rate offs balance off rate offs balance off rate
- ---------------------------------------------------------------------------------------------------------------------------------
Retail $204 $ 67,026 1.22% $237 $ 67,753 1.40% $201 $ 66,754 1.21%
Commercial Banking:
Corporate banking 81 30,405 1.07 148 31,508 1.88 160 31,600 2.03
Middle market banking 47 29,551 0.64 54 30,693 0.70 77 32,084 0.96
- ---------------------------------------