2004 Annual Report: Financial Review: Management's Discussion and Analysis: Supplemental Financial Data

Supplemental Financial Data

Table 2 provides a reconciliation of the supplemental financial data mentioned below with GAAP financial measures. Other companies may define or calculate supplemental financial data differently.

Operating Basis Presentation

In managing our business, we may at times look at performance excluding certain non-recurring items.  For example, as an alternative to Net Income, we view results on an operating basis, which represents Net Income excluding Merger and Restructuring Charges.  The operating basis of presentation is not defined by accounting principles generally accepted in the United States (GAAP).  We believe that the exclusion of Merger and Restructuring Charges, which represent events outside our normal operations, provides a meaningful period-to-period comparison and is more reflective of normalized operations.

Net Interest Income - FTE Basis

In addition, we view Net Interest Income and related ratios and analysis (i.e. efficiency ratio, net interest yield and operating leverage) on a FTE basis. Although this is a non-GAAP measure, we believe managing the business with Net Interest Income on a FTE basis provides a more accurate picture of the interest margin for comparative purposes. To derive the FTE basis, Net Interest Income is adjusted to reflect tax-exempt interest income on an equivalent before tax basis with a corresponding increase in Income Tax Expense. For purposes of this calculation, we use the federal statutory tax rate of 35 percent. This measure ensures comparability of Net Interest Income arising from both taxable and tax-exempt sources.

Performance Measures

As mentioned above, certain performance measures including the efficiency ratio, net interest yield, and operating leverage utilize Net Interest Income (and thus Total Revenue) on a FTE basis.  The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many basis points we are earning over the cost of funds.  Operating leverage measures the total percentage revenue growth minus the total percentage expense growth for the corresponding period.  During our annual integrated plan process, we set operating leverage and efficiency targets for the Corporation and each line of business.  Targets vary by year and by business and are based on a variety of factors, including:  maturity of the business, investment appetite, competitive environment, market factors, and other items (i.e. risk appetite). The aforementioned performance measures and ratios, earnings per common share (EPS), return on average assets, return on average common shareholders’ equity and dividend payout ratio, as well as those measures discussed more fully below are presented in Table 2, Supplemental Financial Data and Reconciliations to GAAP Financial Measures.

Return on Average Equity and Shareholder Value Added

We also evaluate our business based upon return on average equity (ROE) and shareholder value added (SVA) measures. ROE and SVA, both utilize non-GAAP allocation methodologies. ROE measures the earnings contribution of a unit as a percentage of the Shareholders’ Equity allocated to that unit. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. For more information, see Basis of Presentation. Both measures are used to evaluate the Corporation’s use of equity (i.e. capital) at the individual unit level and are integral components in the analytics for resource allocation. Using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments.  Investments and initiatives are analyzed using SVA during the annual planning process for maximizing allocation of corporate resources.  In addition, profitability, relationship and investment models all use SVA and ROE as key measures to support our overall growth goal.

Table 2

Supplemental Financial Data and Reconciliations to GAAP Financial Measures

(Dollars in millions, except per share information)	2004		2003		2002		2001		2000
Operating basis (1,2)
Operating earnings	$14,554		$10,810		$ 9,249		$ 8,042		$ 7,863
Operating earnings per common share	3.87		3.63		3.04		2.52		2.39
Diluted operating earnings per common share	3.80		3.57		2.95		2.47		2.36
Shareholder value added	5,983		5,621		3,760		3,087		3,081
Return on average assets	1.39 %		1.44 %		1.41 %		1.25 %		1.17 %
Return on average common shareholders' equity	17.32		21.99		19.44		16.53		16.70
Efficiency ratio (fully taxable-equivalent basis)	53.23		52.27		52.56		55.47		54.38
Dividend payout ratio	44.38		39.58		40.07		45.13		43.04
Fully taxable-equivalent basis data
Net interest income	$29,513		$22,107		$21,511		$20,633		$18,671
Total revenue	49,610		38,557		35,091		34,981		33,253
Net interest yield	3.26 %		3.40 %		3.77 %		3.68 %		3.20 %
Efficiency ratio	54.48		52.27		52.56		59.20		56.03
Reconciliation of net income to operating earnings
Net income	$14,143		$10,810		$ 9,249		$ 6,792		$ 7,517
Merger and restructuring charges	618		-		-		1,700		550
Related income tax benefit	(207)		-		-		(450)		(204)
Operating earnings	$14,554		$10,810		$ 9,249		$ 8,042		$ 7,863
Reconciliation of EPS to operating EPS
Earnings per common share	$  3.76		$  3.63		$  3.04		$  2.13		$  2.28
Effect of merger and restructuring charges, net of tax benefit	0.11		-		-		0.39		0.11
Operating earnings per common share	$  3.87		$  3.63		$  3.04		$  2.52		$  2.39
Reconciliation of diluted EPS to diluted operating EPS
Diluted earnings per common share	$  3.69		$  3.57		$  2.95		$  2.09		$  2.26
Effect of merger and restructuring charges, net of tax benefit	0.11		-		-		0.38		0.10
Diluted operating earnings per common share	$  3.80		$  3.57		$  2.95		$  2.47		$  2.36
Reconciliation of net income to shareholder value added
Net income	$14,143		$10,810		$ 9,249		$ 6,792		$ 7,517
Amortization of intangibles	664		217		218		878		864
Merger and restructuring charges, net of tax benefit	411		-		-		1,250		346
Cash basis earnings on an operating basis	15,218		11,027		9,467		8,920		8,727
Capital charge	(9,235)		(5,406)		(5,707)		(5,833)		(5,646)
Shareholder value added	$ 5,983		$ 5,621		$ 3,760		$ 3,087		$ 3,081
Reconciliation of return on average assets to   operating return on average assets
Return on average assets	1.35 %		1.44 %		1.41 %		1.05 %		1.12 %
Effect of merger and restructuring charges, net of tax benefit	0.04		-		-		0.20		0.05
Operating return on average assets	1.39 %		1.44 %		1.41 %		1.25 %		1.17 %
Reconciliation of return on average common   shareholders' equity to operating return on   average common shareholders' equity
Return on average common shareholders' equity	16.83 %		21.99 %		19.44 %		13.96 %		15.96 %
Effect of merger and restructuring charges, net of tax benefit	0.49		-		-		2.57		0.74
Operating return on average common shareholders' equity	17.32 %		21.99 %		19.44 %		16.53 %		16.70 %
Reconciliation of efficiency ratio to operating   efficiency ratio (fully taxable-equivalent basis)
Efficiency ratio	54.48 %		52.27 %		52.56 %		59.20 %		56.03 %
Effect of merger and restructuring charges, net of tax benefit	(1.25)		-		-		(3.73)		(1.65)
Operating efficiency ratio	53.23 %		52.27 %		52.56 %		55.47 %		54.38 %
Reconciliation of dividend payout ratio to operating dividend payout ratio
Dividend payout ratio	45.67 %		39.58 %		40.07 %		53.44 %		45.02 %
Effect of merger and restructuring charges, net of tax benefit	(1.29)		-		-		(8.31)		(1.98)
Operating dividend payout ratio	44.38 %		39.58 %		40.07 %		45.13 %		43.04 %
(1) Operating basis excludes Merger and Restructuring Charges. Merger and Restructuring Charges were $618 and $550 in 2004 and 2000, respectively. Merger and Restructuring Charges in 2001 represented Provision for Credit Losses of $395 and Noninterest Expense of $1,305, both of which were related to the exit of certain consumer finance businesses. (2) As a result of the adoption of SFAS 142 on January 1, 2002, we no longer amortize Goodwill. Goodwill amortization expense was $662 and $635 in 2001 and 2000, respectively.

Core Net Interest Income

In addition, we review core net interest income which adjusts reported Net Interest Income on a FTE basis for the impact of trading-related activities. As discussed in the Global Capital Markets and Investment Banking business segment section, we evaluate our trading results and strategies based on total trading-related revenue, calculated by combining trading-related Net Interest Income with Trading Account Profits. We also adjust for loans that we originated and sold into revolving credit card, home equity line and commercial loan securitizations.  Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. An analysis of core net interest income, earning assets and yields, which excludes these two non-core items from reported Net Interest Income on a FTE basis, is shown below.

Table 3

Core Net Interest Income

(Dollars in millions)	2004		2003		2002
Net interest income
As reported (fully taxable-equivalent basis)	$  29,513		$  22,107		$  21,511
Trading-related net interest income	(2,039)		(2,239)		(1,977)
Impact of revolving securitizations	931		313		517
Core net interest income	$  28,405		$  20,181		$  20,051
Average earning assets
As reported	$ 905,302		$ 649,548		$ 570,530
Trading-related earning assets	(227,861)		(172,825)		(121,291)
Impact of revolving securitizations	10,181		3,342		5,943
Core average earning assets	$ 687,622		$ 480,065		$ 455,182
Net interest yield on earning assets
As reported (fully taxable-equivalent basis)	3.26 %		3.40 %		3.77 %
Impact of trading-related activities	0.80		0.76		0.58
Impact of revolving securitizations	0.06		0.03		0.05
Core net interest yield on earning assets	4.12 %		4.19 %		4.40 %

Core net interest income increased $8.2 billion for 2004. Approximately half of the increase was due to the Merger. Other activities within the portfolio affecting core net interest income were higher ALM portfolio levels, the impact of higher rates, higher consumer loan levels (primarily credit card loans and home equity lines) and higher core deposit funding levels, partially offset by reductions in the large corporate and foreign loan balances, and lower mortgage warehouse levels.

Core average earning assets increased $207.6 billion primarily due to higher ALM levels, (primarily securities and mortgages) and higher levels of consumer loans (primarily credit card loans and home equity lines). The increases in these assets were due to both the Merger and organic growth.

The core net interest yield decreased seven bps due to the impact of ALM portfolio repositioning, partially offset by the impact of higher levels of consumer loans and core deposits.