Edgar Filing: BANK ONE CORP

Form 10-Q

BANK ONE CORPORATION

INDEX TO FINANCIAL REVIEW



1		Five Quarter Summary of Selected Financial Information

2		Forward-Looking Statements

2		Overview of Management’s Discussion and Analysis

3		Application of Critical Accounting Policies

3		Summary of Consolidated Results

7		Business Segment Results and Other Data

27		Balance Sheet Analysis

27		Risk Management

28		Liquidity Risk Management

28		Market Risk Management

31		Credit Portfolio Composition

34		Asset Quality

37		Allowance for Loan and Credit Losses

39		Derivative Financial Instruments

42		Loan Securitizations and Off-Balance Sheet Activities

45		Capital Management

47		Consolidated Financial Statements

51		Notes to Consolidated Financial Statements

62		Selected Statistical Information

64		Report of Management

65		Review Report of Independent Public Accountants

66		Form 10-Q

FIVE QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION

Bank One Corporation and Subsidiaries


	Three Months Ended
*(In millions, except per share data, ratios, and headcount)*	March 31 2004			December 31 2003			September 30 2003			June 30 2003			March 31 2003
Income Statement Data:
Total revenue, net of interest expense	$	4,565		$	4,113		$	4,084		$	4,072		$	3,943
Net interest income		2,204			2,109			2,086			1,970			1,984
Net interest income–fully taxable-equivalent (“FTE”) basis ₍₁₎		2,249			2,154			2,127			2,009			2,021
Noninterest income		2,361			2,004			1,998			2,102			1,959
Provision for credit losses		141			672			416			461			496
Noninterest expense		2,663			2,656			2,421			2,403			2,297
Income from continuing operations, net of taxes		1,232			593			874			847			811
Income from discontinued operations, net of taxes		1			385			9			9			7

Net Income		1,233			978			883			856			818

Per Common Share Data:
Basic earnings per share:
Income from continuing operations, net of taxes	$	1.11		$	0.53		$	0.78		$	0.75		$	0.70
Income from discontinued operations, net of taxes		—			0.35			0.01			0.01			0.01

Net income		1.11			0.88			0.79			0.76			0.71
Diluted earnings per share:
Income from continuing operations, net of taxes	$	1.09		$	0.53		$	0.78		$	0.74		$	0.70
Income from discontinued operations, net of taxes		—			0.34			0.01			0.01			0.01

Net income		1.09			0.87			0.79			0.75			0.71
Cash dividends declared		0.45			0.25			0.25			0.21			0.21
Book value		21.86			20.92			20.05			19.70			19.44

Balance Sheet Data - Ending Balances:
Loans	$	137,529		$	138,147		$	141,710		$	144,583		$	144,747
Total assets		319,590			326,563			290,473			299,999			288,464
Deposits		165,940			164,621			163,411			172,015			167,075
Long-term debt ₍₂₎		45,312			46,764			44,225			46,070			44,950
Common stockholders’ equity		24,598			23,419			22,411			22,257			22,316
Total stockholders’ equity		24,598			23,419			22,411			22,257			22,316

Credit Quality Ratios:
Annualized net charge-offs to average loans		0.78	%		3.11	%		1.50	%		1.35	%		1.35	%
Total net charge-offs	$	272		$	1,084		$	540		$	489		$	495
Allowance for loan losses to period-end loans		2.63			2.75			2.98			2.95			2.87
Allowance for credit losses to period-end loans ₍₃₎		3.03			3.14			3.34			3.35			3.31
Nonperforming assets to related assets ₍₄₎		1.42			1.73			2.06			2.28			2.38

Financial Performance:
Return on average assets		1.56	%		1.38	%		1.23	%		1.24	%		1.22	%
Return on average common equity		20.5			16.8			15.8			15.3			14.7
Net interest margin		3.25			3.50			3.45			3.37			3.45
Efficiency ratio		57.8			63.9			58.7			58.5			57.7

Capital Ratios:
Risk-based capital:
Tier 1		10.2	%		10.0	%		9.8	%		9.7	%		10.0	%
Total		13.8			13.7			13.5			13.6			13.8
Leverage		8.1			8.8			8.4			8.7			8.9

Common Stock Data:
Average shares outstanding:
Basic		1,115			1,109			1,115			1,132			1,148
Diluted		1,135			1,122			1,124			1,140			1,156
Stock price, quarter-end	$	54.52		$	45.59		$	38.65		$	37.18		$	34.62

Headcount		71,039			71,196			71,240			72,323			74,077

₍₁₎

Net interest income-FTE includes tax equivalent adjustments of $45 million, $45 million, $41 million, $39 million and $37 million for the quarters ended March 31, 2004, December 31, 2003, September 30, 2003, June 30, 2003 and March 31, 2003, respectively. Net interest income is presented rather than gross interest income and gross interest expense because the Corporation relies primarily on net interest income to assess performance.

₍₂₎	Includes trust preferred capital securities.

₍₃₎

The allowance for credit losses includes the allowance for loan losses of $3,323 million, $3,472 million, $3,907 million, $3,962 million and $3,926 million and the reserve for unfunded lending commitments and standby letters of credit which is included in other liabilities of $508 million, $490 million, $467 million, $536 million and $600 million each for the periods ended March 31, 2004, December 31, 2003, September 30, 2003, June 30, 2003 and March 31, 2003, respectively.

₍₄₎	Related assets consist of loans outstanding, including loans held for sale, and other real estate owned.

FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis included herein contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, Bank One Corporation and its subsidiaries (the “Corporation”) may make or approve certain statements in future filings with the Securities and Exchange Commission (the “Commission”), in press releases, and in oral and written statements made by or with the Corporation’s approval that are not statements of historical fact and may constitute forward-looking statements. Forward-looking statements may relate to, without limitation, the Corporation’s financial condition, results of operations, plans, objectives, future performance or business.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs such as “will,” “would,” “should,” “could,” or “may,” are intended to identify forward-looking statements but are not the only means to identify these statements.

Forward-looking statements involve risks and uncertainties. Actual conditions, events or results may differ materially from those contemplated by a forward-looking statement. Factors that could cause this difference–many of which are beyond the Corporation’s control–include the following, without limitation:

•

Local, regional and international business or economic conditions may differ from those expected.

•

The effects of and changes in trade, monetary and fiscal policies and laws, including the Federal Reserve Board’s interest rate policies, may adversely affect the Corporation’s business.

•

The timely development and acceptance of new products and services may be different than anticipated.

•

Technological changes instituted by the Corporation and by persons who may affect the Corporation’s business may be more difficult to accomplish or more expensive than anticipated or may have unforeseen consequences.

•

Acquisitions and integration of acquired businesses may be more difficult or expensive than expected.

•

The ability to increase market share and control expenses may be more difficult than anticipated.

•

Competitive pressures among financial services companies may increase significantly.

•

Changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) may adversely affect the Corporation or its business.

•

Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board and the Financial Accounting Standards Board, may affect expected financial reporting.

•

The costs, effects and outcomes of litigation may adversely affect the Corporation or its business.

•

The Corporation may not manage the risks involved in the foregoing as well as anticipated.

Forward-looking statements speak only as of the date they are made. The Corporation undertakes no obligation to update any forward-looking statement to reflect subsequent circumstances or events.

OVERVIEW OF MANAGEMENT’S DISCUSSION AND ANALYSIS

This overview of management’s discussion and analysis highlights selected information in this document and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire document. Each of these items could have an impact on the Corporation’s financial condition and results of operations.

The Corporation relies equally on net interest income and noninterest income as sources of earnings. For the three months ended March 31, 2004, net interest income and noninterest income provided 48% and 52% of total revenue, respectively. Changes in interest rates, credit quality and the capital markets are therefore primary factors that drive the performance of the Corporation. As described on pages 27-31 and pages 54-61 of the Corporation’s 2003 Annual Report, risk identification, measurement, monitoring and reporting are important to management of risk and maintenance of strong performance and capital position of the Corporation.

Net interest income is derived from the excess of interest collected from borrowers and interest bearing investments over interest paid to depositors and on interest bearing liabilities. Generally, the rates of interest the Corporation earns on its assets and owes on its liabilities are established contractually for a period of time. Market interest rates change over time, thereby exposing the Corporation to interest-rate risk, and potentially lower margins (or losses) if it cannot adapt to these changes. The Corporation manages this risk by continually analyzing and adjusting assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates.

The Corporation is also exposed to the risk of losses as a result of losing expected cash flows caused by loan defaults, inadequate collateral and changes in prepayment rates.

Noninterest income is derived primarily from banking fees and service charges; credit card revenue; fiduciary and investment management fees; and investment security and trading gains. The Corporation manages the market risk and credit risk by monitoring and reacting to changes that may impact revenue.

Net income for the first quarter of 2004 was $1.2 billion, or $1.09 per diluted share, an increase of $415 million, or 51%, compared to $818 million, or $0.71 per diluted share. The Corporation experienced growth across many of its operating businesses with growth in deposit accounts, core deposits, consumer lending, investment sales, credit card charge volume and assets under management. In addition, middle market saw modest growth in loan balances and the Corporation continued to benefit from improvements in Commercial Banking credit quality.

Income from continuing operations, net of taxes, was $1.2 billion, or $1.09 per diluted share, compared to $811 million, or $0.70 per diluted share. The current quarter included several significant after-tax items including a $115 million benefit related to the release of Commercial Banking reserves, $77 million of net securities gains, and a $55 million benefit from actions taken related to the portfolio of non-core home equity loans held for sale. Income from discontinued operations, net of taxes, for the first quarter of 2003 was $7 million, or $0.01 per diluted share. Net income from discontinued operations in the current quarter was nominal.

The Corporation continued to reinvest by expanding and upgrading its branch and ATM networks and growing customer-facing staff. Overall headcount was down 4%, despite an expanded Retail sales force and the addition of staff related to the Zurich Life acquisition. During the quarter substantial progress was made in preparing to integrate Bank One and JPMorgan Chase upon closing the pending merger, including announcing anticipated management teams throughout the organization, establishing new financial and risk policies and reporting frameworks, and addressing many technology and integration issues.

The Corporation grew consumer loans, especially home equity and managed credit card balances; however, it continued to face challenges in growing the Commercial Banking loan portfolio due to both weak market demand and tightened credit processes.

The Corporation’s capital and reserve ratios are among the strongest of any banking organization, with Tier 1 Capital of 10.2% and allowance for loan losses to period end loans of 2.63%. Strong capital position and sound liquidity management remain important factors in maintaining the Corporation’s credit ratings.

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 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 2003 Annual Report on pages 82-87. 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 consolidated 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 28 in the Corporation’s 2003 Annual Report.

SUMMARY OF CONSOLIDATED RESULTS

(All comparisons are to the same period in the prior year unless otherwise specified.)

Net income was $1.2 billion, or $1.09 per diluted share. This compares to net income of $818 million, or $0.71 per diluted share.

Interest Income and Interest Expense

The components of net interest income on a FTE basis for the periods indicated were as follows:


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Interest income–fully taxable-equivalent (“FTE”) basis ₍₁₎	$	3,342		$	3,224		$	118		4	%
Interest expense		1,093			1,203			(110	)	(9	)

Net interest income–fully taxable-equivalent (“FTE”) basis ₍₁₎		2,249			2,021			228		11
Average earning assets		278,342			237,555			40,787		17
Net interest margin		3.25	%		3.45	%		(0.20	)%

Interest Income

Interest income, on a fully taxable-equivalent basis, was $3.3 billion, an increase of $118 million, or 4%. A significant driver of the increase in interest income was the interest earned on conduit business assets consolidated as a result of the implementation of Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), on December 31, 2003. The yield on interest earning assets decreased from 5.50% to 4.83%, a result of lower loan interest rates, primarily on installment loans, and the low yield on the conduit business assets.

Total average earning assets increased $40.8 billion. This increase was primarily the result of consolidating $38.3 billion of average earning assets related to the conduit business as noted above. Average investment securities increased $19.3 billion, composed of $10.8 billion of other securities, including insurance-related, asset-backed, and other equity securities, and $8.5 billion of U.S. Government and Federal Agency securities. Offsetting these increases were reductions of $7.8 billion in the total average loan portfolio consisting of decreases of $9.1 billion in other loans, including the non-core portfolio and a $4.7 billion decrease in commercial loans, partially offset by increased installment loan balances of $6.0 billion.

Interest Expense

Interest expense was $1.1 billion, a decrease of $110 million, or 9%. Interest expense as a percentage of average earning assets decreased to 1.58% from 2.05%. Interest expense decreased as a result of the lower cost of long-term debt, which was partially offset by the additional interest paid on short-term borrowings related to the conduit business as part of the FIN No. 46 implementation discussed above. The cost of long-term debt decreased as a result of actions taken throughout 2003 to defensively reposition the balance sheet against rising interest rates.

Net Interest Income

Net interest income represents the spread on interest earning assets over interest-bearing liabilities as well as items such as loan fees, cash interest collections on problem loans, dividend income, interest reversals, and income or expense on derivatives used to manage interest rate risk. Net interest income was $2.2 billion, an increase of $228 million, or 11%. Net interest margin decreased to 3.25% from 3.45% as a result of the activity discussed above in the interest income and interest expense sections.

Noninterest Income

The components of noninterest income for the periods indicated were:


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Banking fees and commissions	$	486		$	440		$	46		10	%
Credit card revenue		900			851			49		6
Service charges on deposits		421			383			38		10
Fiduciary and investment management fees		192			160			32		20
Investment securities gains		129			69			60		87
Trading gains		56			4			52		N/M
Other income		177			52			125		N/M

Total noninterest income	$	2,361		$	1,959		$	402		21

Noninterest income to total revenue		51.7	%		49.7	%		2.0	%

Quarterly Results

Banking fees and commissions of $486 million increased $46 million, or 10%. Increased premiums and commissions on insurance products primarily from Zurich, mutual fund and annuity commissions from improved investment sales in the Retail line of business and increased syndication fees were the primary drivers of this increase. Partially offsetting these were lower mortgage loan origination fees.

Credit card revenue of $900 million increased $49 million, or 6%. This increase was primarily from higher average securitized loans, spread improvements and commercial card fees. This increase was partially offset by the impact of lower debit card interchange rates, which Visa^® negotiated with its customers in 2003. In April 2003, Visa reached an agreement to settle merchant litigation (the Corporation was not a party to the litigation) regarding debit card interchange reimbursement fees. In February 2004, Visa established new debit card interchange rates as permitted under the settlement agreement. The Corporation now estimates that Retail debit card revenue will decline approximately $36 million pretax on an annualized basis versus the rates that were in effect prior to the settlement, rather than the $60 million previously estimated.

Service charges on deposits of $421 million increased $38 million, or 10%, resulting from higher Retail and Commercial deposit service charges.

Fiduciary and investment management fees increased $32 million, or 20%, due to improved market conditions, a more favorable mix towards long-term assets under management and positive overall net inflows.

Net securities gains from the investment portfolios were $129 million, compared to $69 million, an increase of $60 million, or 87%. These were the result of net gains in both the treasury investment and the principal investments portfolios.

In the first quarter, trading produced gains of $56 million, an increase of $52 million. This change resulted from an increase in the fair value of the credit derivatives portfolio, which is used to hedge the commercial loan portfolio and limit exposures to specific credits, as well as strength in foreign exchange trading revenue.

Other income increased $125 million during the first quarter to $177 million. This increase was primarily driven by gains on the sale of non-core home equity loans as well as a small gain from a credit card portfolio sale. During the quarter, $651 million of non-core home equity loans were sold. In addition, write-downs were taken to reflect the estimated market value of certain non-core home equity loans.

Noninterest Expense

Total noninterest expense of $2.7 billion increased $366 million. The components of noninterest expense for the periods indicated were:


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Salaries and employee benefits:
Salaries	$	1,074		$	983		$	91		9	%
Employee benefits		206			190			16		8

Total salaries and employee benefits		1,280			1,173			107		9
Occupancy		178			164			14		9
Equipment		117			111			6		5
Outside service fees and processing		322			266			56		21
Marketing and development		290			226			64		28
Telecommunication		55			48			7		15
Intangible amortization		33			32			1		3
Other expense		388			277			111		40

Total noninterest expense	$	2,663		$	2,297		$	366		16

Headcount		71,039			74,077			(3,038	)	(4	)
Efficiency ratio		57.8	%		57.7	%		0.1	%

Quarterly Results

Salaries and employee benefits of $1.3 billion reflected an increase of $107 million, or 9%. Despite a reduction in overall headcount, base and incentive compensation levels and benefits expense were impacted by the acquisition of Zurich and rising benefit costs. The expense related to the fair value method of accounting for stock option and stock purchase plans for the three months ended March 31, 2004 and 2003 amounted to $26 million and $16 million, respectively.

Occupancy expense increased $14 million, or 9%, to $178 million primarily due to rising rental expenses and branch expansion costs.

Equipment expense of $117 million reflected an increase of $6 million, or 5%, fueled by a rise in depreciation costs incurred on assets acquired in the Corporation’s systems conversion efforts.

Outside service fees and processing expense grew $56 million, or 21%, to $322 million. This increase resulted from higher contract programming fees as well as the addition of Zurich expenses.

Marketing and development expense increased $64 million, or 28%, to $290 million primarily due to increased marketing spend in Card Services.

Other expense increased $111 million, or 40%, to $388 million. This increase was primarily the result of insurance benefits and operational expenses for Zurich Life. Increased real estate expenses and legal expense accruals also contributed to the increase. These increases were partially offset by insurance recoveries and reduced costs related to other real estate owned. Other expense includes freight and postage expense of $63 million and $62 million for the first three months of 2004 and 2003, respectively.

Provision for Credit Losses

Provision for credit losses was $141 million for the first quarter of 2004, compared to $496 million for 2003. This decrease was mainly a result of improving credit quality which drove significant decreases in gross charge-offs and continued strength in recoveries and a smaller commercial loan portfolio. This improving credit quality led to the decision to release $180 million of corporate banking loan loss reserves through the provision for credit losses. The provision for credit losses includes a provision for loan losses of $123 million and $498 million, and a provision for unfunded commitments of $18 million and $(2) million for the three months ended March 31, 2004 and 2003, respectively.

Reserve for unfunded lending commitments was $508 million at March 31, 2004, compared to $490 million at December 31, 2003 and $600 million at March 31, 2003. The decrease from the prior year was mainly a result of improving credit quality.

Applicable Income Taxes

The Corporation’s income before income taxes, applicable income tax expense and effective tax rate for each of the periods indicated were:


	Three Months Ended March 31
*(Dollars in millions)*	2004			2003
Income from continuing operations before income taxes	$	1,761		$	1,150
Applicable income taxes		529			339
Effective tax rate		30	%		29	%

Income from discontinued operations before income taxes	$	1		$	11
Applicable income taxes		—			4
Effective tax rate		36	%		36	%

Income before income taxes	$	1,762		$	1,161
Applicable income taxes		529			343
Effective tax rate		30	%		30	%

Applicable income tax expense for all periods included the benefit from tax-exempt income, tax-advantaged investments and general business tax credits, partially offset by the effect of nondeductible expenses.

BUSINESS SEGMENT RESULTS AND OTHER DATA

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 35-53 of the Corporation’s 2003 Annual Report.

During the quarter, the Corporation transferred certain community development activities from the Corporate line of business to the Commercial Banking line of business. All prior period data for the Commercial Banking and Corporate lines of business have been adjusted to reflect this transfer.

The following table summarizes income (loss) from continuing operations by line of business for the periods indicated:


	Three Months Ended March 31
*(In millions)*	2004			2003
Retail	$	482		$	395
Commercial Banking ₍₁₎		425			220
Card Services		319			248
Investment Management Group		133			73
Corporate ₍₁₎		(127	)		(125	)

Income from continuing operations, net of taxes	$	1,232		$	811

⁽¹⁾	Prior period data has been adjusted for the transfer of community development activities from the Corporate line of business to the Commercial Banking line of business.

The information provided in each of the line of business tables is based on management information systems, assumptions and methodologies that are under continual review by management. Information provided beginning with the caption entitled “Financial Performance” is included herein for analytical purposes only.

Retail

Retail provides a broad range of financial products and services, including deposits, investments, loans, insurance, and online banking to consumers and small business customers.


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Income Statement Data:
Net interest income-FTE _{(1) (2)}	$	1,241		$	1,122		$	119		11	%
Banking fees and commissions ₍₃₎		189			189			—		—
Credit card revenue ₍₄₎		56			53			3		6
Service charges on deposits ₍₅₎		232			204			28		14
Other income		10			13			(3	)	(23	)

Total noninterest income		487			459			28		6

Total revenue, net of interest expense		1,728			1,581			147		9
Provision for credit losses		114			116			(2	)	(2	)
Salaries and employee benefits ₍₆₎		404			386			18		5
Other expense ₍₆₎		450			457			(7	)	(2	)

Total noninterest expense		854			843			11		1

Income before income taxes		760			622			138		22
Applicable income taxes		278			227			51		22

Net income ₍₆₎	$	482		$	395		$	87		22	%

Financial Performance:
Return on average common equity		41	%		34	%		7	%
Efficiency ratio		49			53			(4	)

Headcount ₍₆₎		31,468			33,135			(1,667	)	(5	)%

Ending Balances:
Small business commercial	$	10,387		$	9,946		$	441		4	%
Home equity		27,685			21,688			5,997		28
Vehicle		13,548			14,223			(675	)	(5	)
Other personal loans		6,006			6,378			(372	)	(6	)

Total loans ₍₇₎		57,626			52,235			5,391		10
Assets		60,109			55,739			4,370		8
Demand deposits		31,509			28,534			2,975		10
Savings		42,893			40,155			2,738		7

Core deposits		74,402			68,689			5,713		8
Time		17,140			20,617			(3,477	)	(17	)

Total deposits		91,542			89,306			2,236		3
Equity		4,774			4,774			—		—

Average Balances:
Small business commercial	$	10,347		$	9,955		$	392		4	%
Home equity		26,957			21,199			5,758		27
Vehicle		13,606			14,436			(830	)	(6	)
Other personal loans		6,350			7,020			(670	)	(10	)

Total loans		57,260			52,610			4,650		9
Assets		59,725			56,075			3,650		7
Demand deposits		30,928			27,597			3,331		12
Savings		41,887			39,575			2,312		6

Core deposits		72,815			67,172			5,643		8
Time		17,506			21,181			(3,675	)	(17	)

Total deposits		90,321			88,353			1,968		2
Equity		4,774			4,774			—		—

Retail – continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Credit Quality:
Net charge-offs:
Small business commercial	$	9		$	11			(2	)	(18	)%
Home equity		20			26			(6	)	(23	)
Vehicle		53			47			6		13
Other personal loans		13			18			(5	)	(28	)

Total net charge-offs		95			102			(7	)	(7	)

Annualized net charge-off ratios:
Small business commercial		0.35	%		0.44	%		(0.09	)%
Home equity		0.30			0.49			(0.19	)
Vehicle		1.56			1.30			0.26
Other personal loans		0.82			1.03			(0.21	)
Total net charge-off ratio		0.66			0.78			(0.12	)

Nonperforming assets:
Commercial	$	239		$	254		$	(15	)	(6	)%
Consumer ₍₈₎		265			304			(39	)	(13	)

Total nonperforming loans ₍₉₎		504			558			(54	)	(10	)
Other, including other real estate owned (“OREO”)		57			231			(174	)	(75	)

Total nonperforming assets		561			789			(228	)	(29	)
Allowance for loan losses	$	690		$	693		$	(3	)	0	%
Allowance for loan losses to period-end loans ₍₇₎		1.26	%		1.39	%		(0.13	)%
Allowance for loan losses to nonperforming loans ₍₉₎		137			125			12
Nonperforming assets to related assets ₍₁₀₎		0.97			1.50			(0.53	)

Distribution:
Number of:
Banking centers		1,845			1,798			47		3	%
ATMs		4,569			4,009			560		14
Relationship bankers		3,614			2,893			721		25
Online customers (in thousands)		2,693			1,701			992		58
Personal demand accounts (in thousands)		4,908			4,438			470		11
Business demand accounts (in thousands)		520			496			24		5
Debit cards issued (in thousands)		5,447			4,818			629		13

Retail Brokerage:
Mutual fund sales	$	896		$	577		$	319		55	%
Annuity sales		821			766			55		7

Total investment sales volume		1,717			1,343			374		28
Market value customer assets - end of period (in billions)	$	34.6		$	28.6		$	6.0		21	%
Number of customers - end of period (in thousands)		734			693			41		6
Number of dedicated investment sales representatives		1,063			870			193		22

N/M–Not meaningful.

⁽¹⁾	Net interest income is presented rather than gross interest income and gross interest expense because the Corporation relies primarily on net interest income to assess the performance of the segment and make resource allocations.

⁽²⁾	Net interest income-FTE includes tax equivalent adjustments of $6 million and $5 million for the three months ended March 31, 2004 and 2003, respectively.

⁽³⁾	Banking fees and commissions include insurance fees, documentary fees, commitment fees, annuity and mutual fund commissions, loan and lease fees, investment banking fees, safe deposit fees, official check fees, ATM interchange and miscellaneous other fee revenue.

⁽⁴⁾	Credit card revenue includes credit card fees, debit card fees, merchant fees and interchange fees.

⁽⁵⁾	Service charges on deposits include deficient balance fees, non-sufficient funds/overdraft fees and other service related fees.

⁽⁶⁾	Reflects the transfer of broker dealer services operations from the Investment Management Group during the first quarter of 2004.

⁽⁷⁾	Loans include loans held for sale of $2,686 million and $2,390 million at March 31, 2004 and 2003, 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 $2 million at March 31, 2004 and 2003. These amounts are not included in allowance coverage statistics.

⁽¹⁰⁾	Related assets consist of loans outstanding, including loans held for sale, and other real estate owned.

Retail – continued

Quarterly Results

Retail net income was $482 million, up $87 million, or 22%, driven by growth in deposits, loans and investment sales, partially offset by higher sales related expenses.

Total revenue increased $147 million, or 9%, to $1.7 billion. Net interest income was $1.2 billion, up $119 million, or 11%, due primarily to the growth in core deposits and home equity loan balances, slightly offset by lower time deposits.

Noninterest income was $487 million, up $28 million, or 6%, driven by higher deposit service charges, debit card volume, and investment sales revenue. This increase was partially offset by the impact of the lower debit card interchange rates, which Visa negotiated with its customers in 2003, and lower mortgage loan origination fees.

Noninterest expense was $854 million, an increase of $11 million, or 1%, primarily due to higher commissions, incentive payments, benefits and marketing expense. These increases were partially offset by lower collections-related expenses as well as lower fraud and operating expenses.

Provision for credit losses was $114 million, down $2 million, or 2%. This decrease reflects improved credit quality in most portfolios, partially offset by growth in loan portfolios. The net charge-off ratio, as a percentage of average loans, was 0.66%, an improvement from 0.78% in the prior year.

The allowance for loan losses of $690 million represented 1.26% of period-end loans. Nonperforming assets were $561 million, down $228 million, or 29%, from the prior year.

Commercial Banking

Commercial Banking offers a broad array of products, including global cash management, treasury services, capital markets, tax-oriented investments, commercial cards, lending and other noncredit products and services to corporate banking and middle market banking customers.

Corporate banking serves primarily large corporations, financial institutions and commercial real estate entities. The Corporation’s capital markets business is engaged in the origination, trading, and distribution of asset-backed securities, investment grade, tax-exempt and high yield securities, derivatives, foreign exchange and government bonds. Capital markets is also actively engaged in loan syndications, market research, advisory services, and private placements.

Middle market banking serves the customer segment with annual revenues from approximately $10 million to $500 million, which includes corporations, municipalities and not-for-profit entities. These customers use a wide variety of services, with a significant portion using the Corporation exclusively for financial needs. The loan portfolio is diversified across a broad range of industries and geographic locations. In addition to credit, this customer segment actively uses the Corporation’s cash management, international, capital markets, and investment management products and services.


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003₍₂₀₎			Amount			Percent
Income Statement Data:
Net interest income-FTE _{(1) (11)}	$	570		$	568		$	2		0	%
Banking fees and commissions ₍₃₎		182			191			(9	)	(5	)
Credit card revenue ₍₄₎		31			23			8		35
Service charges on deposits ₍₅₎		185			175			10		6
Fiduciary and investment management fees ₍₁₂₎		1			1			—		—
Investment securities gains		7			—			7		N/M
Trading gains ₍₁₃₎		53			17			36		N/M
Other (loss)		(28	)		(3	)		(25	)	N/M

Total noninterest income		431			404			27		7

Total revenue, net of interest expense		1,001			972			29		3
Provision (benefit) for credit losses		(188	)		128			(316	)	N/M
Salaries and employee benefits ₍₁₄₎		314			278			36		13
Other expense ₍₁₄₎		291			290			1		—

Total noninterest expense		605			568			37		7

Income before income taxes		584			276			308		N/M
Applicable income taxes		159			56			103		N/M

Net income	$	425		$	220		$	205		93	%

Memo–Revenue by activity:
Lending-related revenue	$	415		$	430		$	(15	)	(3	)%
Credit derivative hedge portfolio		8			(54	)		62		N/M
Global treasury services		394			390			4		1
Capital markets ₍₁₅₎		202			201			1		—
Other		(18	)		5			(23	)	N/M

Financial Performance:
Return on average common equity		23	%		12	%		11	%
Efficiency ratio		60			58			2
Efficiency ratio excluding credit hedge portfolio		61			55			6

Headcount:
Corporate banking (including capital markets)		2,630			2,514			116		5	%
Middle market		2,426			2,677			(251	)	(9	)
Global treasury services ₍₁₄₎		2,795			3,203			(408	)	(13	)
Operations, technology, and other administration		2,002			2,023			(21	)	(1	)

Total headcount		9,853			10,417			(564	)	(5	)

Commercial Banking - continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003₍₂₀₎			Amount			Percent
Ending Balances:
Loans _(16)(17)	$	52,661		$	59,484		$	(6,823	)	(11	)%
Interests in purchased receivables₍₁₇₎		28,912			—			28,912		N/M
Investment securities ₍₁₇₎		10,884			1,708			9,176		N/M
Assets		126,501			97,646			28,855		30
Demand deposits		26,150			27,668			(1,518	)	(5	)
Savings		13,622			9,670			3,952		41
Time		843			7,390			(6,547	)	(89	)
Foreign offices		11,222			9,221			2,001		22

Total deposits		51,837			53,949			(2,112	)	(4	)
Short-term borrowings ₍₁₇₎		36,772			4,440			32,332		N/M
Equity		7,451			7,451			—		—

Average Balances:
Loans ₍₁₇₎	$	53,321		$	59,983		$	(6,662	)	(11	)%
Interests in purchased receivables ₍₁₇₎		31,145			—			31,145		N/M
Investment securities ₍₁₇₎		9,873			1,845			8,028		N/M
Assets		130,946			94,076			36,870		39
Demand deposits		24,973			22,579			2,394		11
Savings		12,982			9,311			3,671		39
Time		915			8,062			(7,147	)	(89	)
Foreign offices		11,445			9,006			2,439		27

Total deposits		50,315			48,958			1,357		3
Short-term borrowings ₍₁₇₎		39,036			2,619			36,417		N/M
Equity		7,451			7,451			—		—

Credit Quality:
Net charge-offs	$	(8	)	$	128		$	(136	)	N/M
Annualized net charge-off ratio		(0.06	)%		0.85	%		(0.91	)%
Nonperforming assets:
Nonperforming loans ₍₁₈₎	$	820		$	1,761		$	(941	)	(53	)%
Other, including other real estate owned (“OREO”)		16			19			(3	)	(16	)%

Total nonperforming assets		836			1,780			(944	)	(53	)%
Allowance for Loan Losses:
Allowance for loan losses		1,971			2,472			(501	)	(20	)%
Allowance for loan losses to period-end loans₍₁₆₎		3.78	%		4.17	%		(0.39	)%
Allowance for loan losses to nonperforming loans ₍₁₈₎		240			142			98
Allowance for Credit Losses: ₍₁₉₎
Allowance for credit losses		2,471			3,072			(601	)	(20	)%
Allowance for credit losses to period-end loans ₍₁₆₎		4.74	%		5.18	%		(0.44	)%
Allowance for credit losses to nonperforming loans ₍₁₈₎		301			176			125
Nonperforming assets to related assets ₍₁₀₎		1.59			2.99			(1.40	)

Commercial Banking - continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003₍₂₀₎			Amount			Percent
Corporate Banking:
Ending Balances:
Loans ₍₁₇₎	$	25,835		$	29,923		$	(4,088	)	(14	)%
Interests in purchased receivables ₍₁₇₎		28,912			—			28,912		N/M
Investment securities ₍₁₇₎		10,839			1,676			9,163		N/M
Deposits		22,855			29,824			(6,969	)	(23	)
Short-term borrowings ₍₁₇₎		36,772			4,440			32,332		N/M
Average Balances:
Loans ₍₁₇₎	$	26,756		$	30,432		$	(3,676	)	(12	)%
Interests in purchased receivables ₍₁₇₎		31,145			—			31,145		N/M
Investment securities ₍₁₇₎		9,813			1,608			8,205		N/M
Deposits		22,913			26,791			(3,878	)	(14	)%
Short-term borrowings ₍₁₇₎		39,036			2,619			36,417		N/M
Credit Quality:
Net charge-offs (recoveries)	$	(19	)	$	81		$	(100	)	N/M
Net charge-off (recovery) ratio		(0.28	)%		1.06	%		(1.34	)%
Nonperforming loans ₍₁₈₎	$	236		$	814		$	(578	)	71
Nonperforming loans to total loans		0.91	%		2.72	%		(1.81	)%
Syndications:
Lead arranger deals:
Volume (in billions)	$	16.8		$	14.8		$	2.0		14	%
Number of transactions		72			46			26		57
League table standing–rank		4			4			—
League table standing–market share		9	%		9	%		—	%

Middle Market Banking:
Loans –ending balance	$	26,826		$	29,561		$	(2,735	)	(9	)%
–average balance		26,565			29,551			(2,986	)	(10	)
Deposits –ending balance		28,982			24,125			4,857		20
–average balance		27,402			22,167			5,235		24
Credit Quality:
Net charge-offs ($ millions)	$	11		$	47		$	(36	)	(77	)%
Net charge-off ratio		0.17	%		0.64	%		(0.47	)%
Nonperforming loans ($ millions)	$	584		$	947		$	(363	)	(38	)%
Nonperforming loans to total loans		2.18	%		3.20	%		(1.02	)%

For additional footnote detail see page 9.

⁽¹¹⁾	Net interest income-FTE includes tax equivalent adjustments of $32 million and $23 million for the three months ended March 31, 2004 and 2003, respectively.

⁽¹²⁾	Fiduciary and investment management fees include asset management fees, personal trust fees, other trust fees and advisory fees.

⁽¹³⁾	Trading gains primarily include realized and unrealized mark-to-market changes from trading assets, derivative financial instruments and foreign exchange products.

⁽¹⁴⁾	Reflects the transfer of lockbox operations to the Corporate line of business during the first quarter of 2004.

⁽¹⁵⁾	Capital markets includes trading income and underwriting, syndicated lending and advisory fees.

⁽¹⁶⁾	Loans include loans held for sale of $497 million and $226 million at March 31, 2004 and 2003, respectively. These amounts are not included in allowance coverage statistics.

⁽¹⁷⁾	Impacted by the adoption of FIN No. 46.

⁽¹⁸⁾	Nonperforming loans include loans held for sale of $17 million at March 31, 2003. This amount is not included in allowance coverage statistics.

⁽¹⁹⁾

The allowance for credit losses includes the allowance for loan losses of $1,971 million and $2,472 million, and reserve for unfunded lending commitments and standby letters of credit, which is included in other liabilities, of $500 million and $600 million, each at March 31, 2004 and 2003, respectively.

⁽²⁰⁾	Prior period data has been adjusted for the transfer of community development activities from the Corporate line of business.

Quarterly Results

Commercial Banking net income increased $205 million to $425 million, which included a $115 million after-tax reduction in the allowance for loan losses. Excluding the impact of the net allowance release, net income was $310 million, an increase of $90 million, or 41%, as a result of the continued improvement in credit quality.

Effective December 31, 2003, assets and liabilities related to the asset-backed conduit business were consolidated, as the Corporation adopted FIN No. 46. Net revenue related to these assets was previously reported primarily as noninterest income. In the current quarter, the consolidation had relatively no impact to net income, however net

interest income increased $14 million and noninterest income decreased $10 million. See the “Asset-Backed Finance Programs” on pages 43-44 for additional information.

Net interest income was essentially flat at $570 million, and reflected the impact of an 11% reduction in average loan volume, partially offset by improved collections on nonperforming loans and improvements in capital markets activities such as equity derivatives. While loan balances increased only slightly during the quarter, it represented the first increase in more than two years.

Noninterest income was $431 million, up $27 million, or 7%, largely due to higher service charges on deposits, strong foreign exchange trading revenues, higher commercial card fees and increased syndication fees. Partially offsetting these improvements were lower gains on sales of tax-oriented investments and lower investment grade origination fees. Trading gains, reported in noninterest income, included gains of $8 million on the credit derivatives hedge portfolio, compared to losses of $54 million in the prior year. The fair value of purchased credit derivatives will generally increase as loan credit quality deteriorates and decrease as loan credit quality improves.

Noninterest expense increased 7% to $605 million, primarily due to increased compensation expense.

Credit quality continued to improve, as indicated by a $136 million decline in net charge-offs. The reduced size of the Corporate Banking loan portfolio and the continued improvement in credit quality led to a $180 million reduction in the allowance for loan losses, related to both corporate banking and middle market. The allowance for loan losses represented 3.78% of period-end loans, a decrease from 4.17% in the prior year. Nonperforming loans declined $941 million, or 53%, to $820 million, reflecting declines of $578 million, or 71%, in corporate banking and $363 million, or 38%, in middle market.

During the second half of 2003, the U.S. Treasury began to compensate the Corporation for services provided using special issue securities resulting in reduced corporate banking deposits.

Card Services

Card Services offers customers co-brand, affinity and other credit cards, including cards associated with leading corporations, financial institutions, universities, sports franchises and affinity organizations. All of these cards carry the respective Visa^® or MasterCard^® brand names. Affinity organizations and co-brand partners provide their endorsement of credit card programs, provide mailing lists, and may also conduct marketing activities and provide awards under award programs. The terms of these agreements generally range from 3 to 10 years. No single co-branded or affinity relationship represents more than 10% of total managed revenue, net of interest expense.

With approximately 52 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 approximately 6 million registered users of its website.

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 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 credit card revenue. Credit card interest income and fees, credit losses and recoveries related to seller’s interest are reclassified as investment income in net interest income.

Reported Basis


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Income Statement Data:
Net interest income-FTE _{(1) (21) (22)}	$	483		$	309		$	174		56	%
Banking fees and commissions ₍₃₎		5			11			(6	)	(55	)
Credit card revenue _{(4) (22)}		813			774			39		5
Other income/(loss)		24			(4	)		28		N/M

Total noninterest income		842			781			61		8

Total revenue, net of interest expense		1,325			1,090			235		22
Provision for credit losses		171			161			10		6
Salaries and employee benefits		167			153			14		9
Other expense		474			374			100		27

Total noninterest expense		641			527			114		22

Income before income taxes		513			402			111		28
Applicable income taxes		194			154			40		26

Net income	$	319		$	248		$	71		29	%

Memo–Net securitization gains	$	1		$	1		$	—		0	%

Financial Performance:
Return on average common equity		20	%		16	%		4	%
Efficiency ratio		48			48			—

Headcount		10,591			10,778			(187	)	(2	)%

Ending Balances:
Owned loans:
Held in portfolio	$	7,069		$	7,147		$	(78	)	(1	)%
Held for sale ₍₂₃₎		5,395			5,240			155		3

Total owned loans		12,464			12,387			77		1
Seller’s interest and accrued interest receivable		27,485			25,156			2,329		9

Total receivables		39,949			37,543			2,406		6
Memo: Securitized loans		34,269			35,305			(1,036	)	(3	)
Assets		45,421			42,814			2,607		6
Equity		6,361			6,361			—		—

Card Services – continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Average Balances:
Owned loans:
Held in portfolio	$	6,757		$	7,791		$	(1,034	)	(13	)%
Held for sale ₍₂₃₎		5,596			4,573			1,023		22

Total owned loans		12,353			12,364			(11	)	—
Seller’s interest and accrued interest receivable		26,652			26,459			193		1

Total receivables		39,005			38,823			182		—
Memo: Securitized loans		35,629			34,561			1,068		3
Assets		44,500			44,191			309		1
Equity		6,361			6,361			—		—

Credit Quality:
Net charge-offs	$	131		$	161		$	(30	)	(19	)%
Net charge-off ratio		4.24	%		5.24	%		(1.00	)%
Delinquency ratios:
30+ days		3.05			2.81			0.24
90+ days		1.46			1.30			0.16
Allowance for loan losses	$	486		$	396		$	90		23	%
Allowance for loan losses to period-end loans held in portfolio		6.88	%		5.58	%		1.30	%

Other Data:
Charge volume (in billions)	$	42.0		$	38.3		$	3.7		10	%
Net accounts opened (in thousands) ₍₂₄₎		985			975			10		1
Credit cards issued (in thousands)		51,775			50,978			797		2
Number of cardmemberservices.com customers (in millions)		5.8			3.8			2.0		53
Paymentech, Inc.: ₍₂₅₎
Bank card volume (in billions)	$	45.0		$	35.8		$	9.2		26	%
Total transactions (in millions)		1,957			1,586			371		23

For additional footnote detail see pages 9 and 13.

⁽²¹⁾	Net interest income-FTE did not have tax equivalent adjustments for the three months ended March 31, 2004 and 2003, respectively.

⁽²²⁾

On a reported basis, income earned on securitized loans is reported in credit card revenue and income earned on Seller’s Interest is reported in net interest income. On a managed basis, net interest income, noninterest income and provision for credit losses are reported in their respective income statement lines.

⁽²³⁾	Held for sale amounts are not included in allowance coverage statistics.

⁽²⁴⁾	Net accounts opened includes originations, purchases and sales.

⁽²⁵⁾	Paymentech statistics have been restated to include all volumes and items processed.

Quarterly Results – Reported Basis

Card Services net income was $319 million, up $71 million, or 29%, as spread improvements and higher securitized receivable balances were partially offset by higher marketing expenses and increased provision for credit losses as a result of an increase in allowance for loan losses.

Total revenue increased $235 million, or 22%, to $1.3 billion as net interest income increased $174 million, or 56%, to $483 million and noninterest income increased $61 million, or 8%, to $842 million. The increase in net interest income was primarily the result of spread improvement, as average total receivables of $39 billion were relatively flat. The increase in noninterest income was primarily the result of higher securitized loans and spread improvements, as well as a small gain from a portfolio sale. Paymentech Inc., the Corporation’s merchant card processor, reported a 23% increase in total transactions and a 26% increase in volume.

Noninterest expense was $641 million, an increase of $114 million, or 22%, from the prior year due primarily to higher marketing expenses.

Provision for credit losses increased $10 million, or 6%, to $171 million over the prior year. The net charge-off ratio was 4.24%, down from 5.24% in the prior year. The 30-day delinquency ratio increased to 3.05% from 2.81% in the prior year.

Card Services – continued

Managed (Non-GAAP) Basis

The Corporation evaluates its Card Services line of business performance on a “managed basis.” The managed basis presentation is a common industry convention that presents securitized loans, for balance sheet purposes only, in total managed loan balances. The reported allowance for loan losses is not adjusted for managed loans. The industry convention continues to include the gain or loss on securitization in the managed financial information.

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 pages 42-44 of this report and Note 11, “Credit Card Securitizations,” on pages 92-94 of the Corporation’s 2003 Annual Report for additional information related to the Corporation’s securitization activity.

Card Services – continued

The following table presents Card Services information on a managed (Non-GAAP) basis.


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Managed Income Statement Data:
Managed net interest income-FTE _{(1) (21) (22)}	$	1,757		$	1,477		$	280		19	%
Managed banking fees and commissions ₍₃₎		5			11			(6	)	(55	)
Managed credit card revenue _(4)(22)		407			416			(9	)	(2	)
Managed other income/(loss)		24			(4	)		28		N/M

Total managed noninterest income		436			423			13		3

Total managed revenue, net of interest expense		2,193			1,900			293		15
Managed provision for credit losses ₍₂₂₎		1,039			971			68		7
Managed salaries and employee benefits		167			153			14		9
Managed other expense		474			374			100		27

Total managed noninterest expense		641			527			114		22

Managed income, net of expense, before taxes	$	513		$	402		$	111		28

Memo–Net managed securitization gains	$	1		$	1		$	—		—

Financial Performance on a Managed Basis:
Percentage of average managed outstandings:
Managed net interest income - FTE		9.47	%		8.16	%		1.31	%
Managed provision for credit losses		5.60			5.37			0.23
Managed noninterest income		2.35			2.34			0.01
Managed risk adjusted margin		6.22			5.13			1.09
Managed noninterest expense		3.46			2.91			0.55
Managed income, net of expense before taxes - FTE		2.76			2.22			0.54
Managed return on average common equity		20			16			4
Managed efficiency ratio		29			28			1

Managed headcount		10,591			10,778			(187	)	(2	)%

Ending Managed Balances:
Held in portfolio	$	7,069		$	7,147		$	(78	)	(1	)%
Held for sale ₍₂₃₎		5,395			5,240			155		3
Securitized		34,269			35,305			(1,036	)	(3	)
Seller’s interest and accrued interest receivable		27,485			25,156			2,329		9

Total managed loans		74,218			72,848			1,370		2
Managed assets		79,690			78,119			1,571		2
Managed equity		6,361			6,361			—		—

Average Managed Balances:
Held in portfolio	$	6,757		$	7,791		$	(1,034	)	(13	)%
Held for sale ₍₂₃₎		5,596			4,573			1,023		22
Securitized		35,629			34,561			1,068		3
Seller’s interest and accrued interest receivable		26,652			26,459			193		1

Total managed loans		74,634			73,384			1,250		2
Managed assets		80,129			78,752			1,377		2
Managed equity		6,361			6,361			—		—

Card Services – continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			2004			Percent
Managed Credit Quality:
Managed net charge-offs	$	999		$	971		$	28		3	%
Managed net charge-off ratio		5.35	%		5.29	%		0.06	%
Managed 12 month lagged		5.45			5.86			(0.41	)
Managed delinquency ratios:
30+ days		3.75			4.08			(0.33	)
90+ days		1.82			1.88			(0.06	)
Managed allowance for loan losses	$	486		$	396		$	90		23
Managed allowance for loan losses to period-end loans held in portfolio		6.88	%		5.58	%		1.30	%

Reported Other Data:
Charge volume (in billions)	$	42.0		$	38.3		$	3.7		10	%
Net accounts opened (in thousands) ₍₂₄₎		985			975			10		1
Credit cards issued (in thousands)		51,775			50,978			797		2
Number of cardmemberservices.com customers (in millions)		5.8			3.8			2.0		53
Paymentech, Inc.: ₍₂₅₎
Bank card volume (in billions)	$	45.0		$	35.8		$	9.2		26	%
Total transactions (in millions)		1,957			1,586			371		23

For additional footnote detail see pages 9, 13 and 16.

Quarterly Results – Managed (Non-GAAP) Basis

The Corporation believes that it is more meaningful to review performance on a managed basis as the on-balance sheet portfolio has a greater percentage of new originations and, therefore, is less seasoned. The following is a discussion of items affecting the managed portfolio.

Total managed revenue increased $293 million, or 15%, to $2.2 billion as managed net interest income increased $280 million, or 19%, to $1.8 billion and managed noninterest income increased $13 million, or 3%, to $436 million. The increase in managed net interest income was primarily the result of spread improvements and higher average managed receivables. Average managed loans were $74.6 billion, an increase of $1.3 billion, or 2%. Managed margin increased to 9.47% from 8.16% in the prior year. The increase in managed noninterest income was primarily the result of a $3.7 billion, or 10%, increase in charge volume, which generated higher interchange income and a small gain from a portfolio sale, partially offset by higher volume-driven payments to partners and rewards expense. Paymentech Inc., the Corporation’s merchant card processor, reported a 23% increase in total transactions and a 26% increase in total volume.

Managed noninterest expense was $641 million, an increase of $114 million, or 22%, from the prior year due primarily to higher marketing expenses.

The managed provision for credit losses increased $68 million, or 7%, to $1.0 billion, primarily driven by higher managed loan balances, higher non-bankruptcy losses and a $40 million increase in the allowance for loan losses in the quarter. Managed credit ratios remain strong. The managed net charge-off ratio increased slightly to 5.35% from 5.29% in the prior year. The 30-day managed delinquency ratio decreased to 3.75% from 4.08% in the prior year.

Card Services – continued

The following table reconciles line items presented on a reported basis with those presented on a managed (Non-GAAP) basis:


	Three Months Ended March 31
*(in millions):*	2004			2003
Income Statement Data:
Net interest income - FTE _{(1) (22)}
Reported data for the period	$	483		$	309
Securitization adjustments ₍₂₆₎		1,274			1,168

Managed net interest income - FTE (Non-GAAP)		1,757			1,477
Credit card revenue: ₍₂₂₎
Reported data for the period	$	813		$	774
Securitization adjustments ₍₂₇₎		(406	)		(358	)

Managed credit card revenue (Non-GAAP)		407			416
Noninterest income:
Reported data for the period	$	842		$	781
Securitization adjustments ₍₂₈₎		(406	)		(358	)

Managed noninterest income (Non-GAAP)		436			423
Total revenue, net of interest expense:
Reported data for the period	$	1,325		$	1,090
Securitization adjustments ₍₂₉₎		868			810

Total managed revenue, net of interest expense (Non-GAAP)		2,193			1,900
Provision for credit losses: ₍₂₂₎
Reported data for the period	$	171		$	161
Securitization adjustments ₍₃₀₎		868			810

Managed provision for credit losses (Non-GAAP)		1,039			971

Ending Balances:
Owned loans:
Held in portfolio	$	7,069		$	7,147
Held for sale		5,395			5,240

Total owned loans		12,464			12,387
Seller’s interest and accrued interest receivable		27,485			25,156

Total on balance sheet loans		39,949			37,543
Securitized loans		34,269			35,305

Total managed loans (Non-GAAP)		74,218			72,848
Assets:
Reported	$	45,421		$	42,814
Securitization adjustments ₍₃₁₎		34,269			35,305

Managed assets (Non-GAAP)		79,690			78,119

Card Services – continued


	Three Months Ended March 31
*(in millions):*	2004		2003
Average Balances:
Owned loans:
Held in portfolio	$	6,757	$	7,791
Held for sale		5,596		4,573

Total owned loans		12,353		12,364
Seller’s interest and accrued interest receivable		26,652		26,459

Total on balance sheet loans		39,005		38,823
Securitized loans		35,629		34,561

Total managed loans (Non-GAAP)		74,634		73,384
Total assets:
Reported	$	44,500	$	44,191
Securitization adjustments ₍₃₁₎		35,629		34,561

Managed assets (Non-GAAP)		80,129		78,752

Credit Quality:
Net charge-offs:
Reported	$	131	$	161
Securitization adjustments ₍₃₂₎		868		810

Managed net charge-offs (Non-GAAP)		999		971

For additional footnote detail see pages 9, 13 and 16.

⁽²⁶⁾

The securitization adjustment related to Net Interest Income-FTE represents interest income and fees earned in excess of the interest paid to investors related to the Corporation’s securitized loans, combined with interest income and fees earned in excess of net credit losses incurred on seller’s interest and accrued interest receivable.

⁽²⁷⁾

The securitization adjustment related to Credit Card Revenue represents the reversal of the servicing fee income earned servicing the securitized loans by the Corporation, offset by the addition of interchange revenue net of volume driven payments made to partners. This adjustment is the combined net impact of reclassifying interest income, yield-related and other fees, and interchange revenue, in excess of net credit losses, contractual servicing fees, and interest paid to investors on the securitized loans.

⁽²⁸⁾	The securitization adjustment related to Noninterest Income is the subtotal that includes the Credit Card Revenue securitization adjustment.

⁽²⁹⁾	The securitization adjustment related to Total Revenue, Net of Interest Expense is the subtotal that includes both the Net Interest Income-FTE securitization adjustment and the Credit Card Revenue securitization adjustment.

⁽³⁰⁾	The securitization adjustment related to Provision for Credit Losses represents net credit losses incurred on the Corporation’s securitized loans and seller’s interest.

⁽³¹⁾	The securitization adjustment related to Total Managed Assets represents securitized loans which have been derecognized from the Corporation’s consolidated balance sheet, on both an ending and average basis.

⁽³²⁾	The securitization adjustment related to Net Charge-offs represents net credit losses incurred on the Corporation’s securitized loans and seller’s interest.

Investment Management Group

The Investment Management Group (IMG) provides investment, insurance, personal trust and private banking services to individuals. IMG also provides investment and investment-related services, including retirement, custody and securities lending to institutions.


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Income Statement Data:
Net interest income-FTE _{(1) (33)}	$	169		$	89		$	80		90	%
Banking fees and commissions ₍₃₎		124			66			58		88
Service charges on deposits ₍₅₎		5			6			(1	)	(17	)
Fiduciary and investment management fees ₍₁₂₎		185			151			34		23
Other income		29			—			29		N/M

Total noninterest income		343			223			120		54

Total revenue, net of interest expense		512			312			200		64
Provision for credit losses		(2	)		2			(4	)	N/M
Salaries and employee benefits ₍₃₄₎		110			107			3		3
Other expense ₍₃₄₎		193			86			107		N/M

Total noninterest expense		303			193			110		57

Income before income taxes		211			117			94		80
Applicable income taxes		78			44			34		77

Net income	$	133		$	73		$	60		82	%

Financial Performance:
Return on average common equity		34	%		31	%		3	%
Efficiency ratio		59			62			(3	)

Headcount ₍₃₄₎		4,046			4,161			(115	)	(3	)%

Ending Balances:
Commercial		3,348			3,110			238		8	%
Consumer		4,258			3,553			705		20

Total loans	$	7,606		$	6,663		$	943		14	%
Assets		16,256			8,345			7,911		95
Demand deposits		1,608			1,853			(245	)	(13	)
Savings		10,033			7,814			2,219		28
Time		592			721			(129	)	(18	)
Foreign offices		226			215			11		5

Total deposits		12,459			10,603			1,856		18
Insurance policy and claims reserves		6,783			223			6,560		N/M
Equity		1,554			954			600		63

Average Balances:
Commercial		3,283			3,139			144		5	%
Consumer		4,118			3,605			513		14
Total loans	$	7,401		$	6,744		$	657		10	%
Assets		15,567			8,370			7,197		86
Demand deposits		1,716			1,742			(26	)	(1	)
Savings		9,569			7,274			2,295		32
Time		586			741			(155	)	(21	)
Foreign offices		157			158			(1	)	(1	)

Total deposits		12,028			9,915			2,113		21
Insurance policy and claims reserves		6,747			225			6,522		N/M
Equity		1,554			954			600		63

Investment Management Group - continued


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003			Amount			Percent
Credit Quality:
Net charge-offs (recoveries):
Commercial	$	(2	)	$	1		$	(3	)	N/M
Consumer		—			1			(1	)	N/M

Total net charge-offs (recoveries)		(2	)		2			(4	)	N/M
Net charge-off (recovery) ratios:
Commercial		(0.24	)%		0.13	%		(0.37	)%
Consumer		—			0.11			(0.11	)
Total net charge-off (recovery) ratio		(0.11	)		0.12			(0.23	)
Nonperforming assets:
Commercial	$	28		$	68		$	(40	)	(59	)%
Consumer		16			13			3		23

Total nonperforming loans		44			81			(37	)	(46	)
Other, including other real estate owned (“OREO”)		17			1			16		N/M

Total nonperforming assets		61			82			(21	)	(26	)
Allowance for loan losses		38			40			(2	)	(5	)
Allowance for loan losses to period-end loans		0.50	%		0.60	%		(0.10	)%
Allowance for loan losses to nonperforming loans		86			49			37
Nonperforming assets to related assets ₍₁₁₎		0.80			1.23			(0.43	)

Assets Under Management Ending Balances:
Mutual funds	$	102,891		$	97,518		$	5,373		6	%
Other		85,379			60,747			24,632		41

Total		188,270			158,265			30,005		19
By type:
Money market		69,970			73,923			(3,953	)	(5	)
Equity		52,255			35,391			16,864		48
Fixed income		66,045			48,951			17,094		35

Total assets		188,270			158,265			30,005		19
By channel:
Private client services		45,190			41,163			4,027		10
Retail brokerage		8,924			7,124			1,800		25
Institutional ₍₃₅₎		100,077			81,651			18,426		23
Commercial cash sweep		6,581			7,689			(1,108	)	(14	)
Capital markets		3,917			3,353			564		17
External _(35)(36)		9,896			9,409			487		5
All other direct _(35)(37)		13,685			7,876			5,809		74

Total		188,270			158,265			30,005		19
Morningstar^® Rankings:
% of customer assets in funds ranked 4 or better		51	%		54	%		(3	)%
% of customer assets in funds ranked 3 or better		84			88			(4	)

Private Client Services:
Number of private client advisors ₍₃₈₎		640			677			(37	)	(5	)%
Number of private client offices		90			90			—		—
Total client assets-end of period ₍₃₉₎	$	68,271		$	60,641		$	7,630		13	%
Ending balances
Loans		7,198			6,622			576		9
Deposits		12,322			9,913			2,409		24
Average balances
Loans		7,020			6,715			305		5
Deposits		11,744			9,344			2,400		26

Investment Management Group - continued


	Three Months Ended March 31
					Change
*(Dollars in millions)*	2004		2003		Amount		Percent
Insurance Group:
Consolidated gross insurance - related revenue ₍₄₀₎	$	257	$	117	$	140	N/M
Ending Balances:
Invested assets		6,247		408		5,839	N/M
Policy loans		402		—		402	N/M
Policies in-force - direct/assumed (in thousands)		2,117		1,249		868	69
Insurance in-force - direct/assumed		235,815		12,415		223,400	N/M
Insurance in-force - retained		41,885		12,414		29,471	N/M
Insurance policy and claims reserves		6,783		223		6,560	N/M
A.M. Best rating ₍₄₁₎		A		—

For additional footnote detail see pages 9, 13, 16.

₍₃₃₎	Net interest income-FTE did not have material tax equivalent adjustments for the three months ended March 31, 2004 and 2003.

₍₃₄₎	Reflects the transfer of certain technology and operations functions to Corporate and Retail during the first quarter of 2004.

₍₃₅₎	Prior period data has been adjusted for reclassifications from the external and all other direct channels to the institutional channel.

₍₃₆₎	Includes broker/dealers, trust companies, and registered investment advisors that sell, or offer, One Group funds.

₍₃₇₎	One Group funds invested in other One Group funds and other mutual funds sub-advised.

₍₃₈₎	Prior period data has been adjusted to conform to current period presentation.

₍₃₉₎	Fiduciary, brokerage and other related assets (managed and non-managed).

₍₄₀₎	Includes insurance revenues recorded in other lines of business.

₍₄₁₎	A.M. Best maintained A ratings with a stable outlook.

Quarterly Results

Investment Management Group net income totaled $133 million, an increase of $60 million, or 82%, driven by the acquisition of Zurich, an improved market, net inflows of long-term assets and strong deposit growth.

Assets under management increased $30 billion, or 19%, to $188.3 billion. Equity and fixed income assets increased 48% and 35%, respectively. A significant portion of the increase was driven by the institutional channel, which increased $18.4 billion, or 23%. The Zurich acquisition added $5.1 billion to fixed income and the institutional channel. The Security Capital acquisition added $3.7 billion to equity funds. One Group mutual fund assets increased $5.4 billion, or 6%, to $102.9 billion.

Net interest income increased $80 million, or 90%, to $169 million, largely attributable to Zurich and continued strong deposit growth, primarily in private client services. Total average deposits were $12 billion, an increase of $2.1 billion, or 21%.

Noninterest income increased $120 million, or 54%, to $343 million, primarily driven by Zurich. In addition, improved market conditions, a more favorable mix towards long-term assets under management and positive overall net inflows contributed to the increase.

Noninterest expense increased $110 million, or 57%, to $303 million, primarily the result of salaries and benefits and other operating expenses related to Zurich.

The $4 million decrease in provision for credit losses reflected lower net charge-offs and strong recoveries, as credit quality in private client services continued to improve.

Corporate

Corporate includes treasury activities, certain investment portfolios excluding Zurich, non-core portfolios transferred from the Retail line of business, the discontinued corporate trust business, other unallocated corporate expenses, and any gains or losses from corporate transactions.


	Three Months Ended March 31
							Change
*(Dollars in millions)*	2004			2003₍₅₁₎			Amount			Percent
Income Statement Data:
Net interest income (expense)-FTE ₍₁₎ _{(42) (43)}	$	(214	)	$	(67	)	$	(147	)	N/M
Banking fees and commissions ₍₃₎		(14	)		(17	)		3		18	%
Credit card revenue ₍₄₎		—			1			(1	)	N/M
Service charges on deposits ₍₅₎		(1	)		(2	)		1		50
Fiduciary and investment management fees ₍₁₂₎		6			8			(2	)	(25	)
Investment securities gains		122			69			53		77
Trading gains (losses)		3			(13	)		16		N/M
Other income		142			46			96		N/M

Total noninterest income ₍₄₄₎		258			92			166		N/M

Total income, net of interest expense		44			25			19		76
Provision for credit losses		46			89			(43	)	(48	)
Salaries and employee benefits ₍₄₅₎		285			249			36		14
Other expense ₍₄₅₎		(25	)		(83	)		58		70

Total noninterest expense ₍₄₆₎		260			166			94		57

(Loss) before income tax benefit		(262	)		(230	)		(32	)	(14	)
Applicable income tax benefit		(135	)		(105	)		(30	)	(29	)

(Loss) from continuing operations, net of tax benefit		(127	)		(125	)		(2	)	(2	)
Discontinued operations:
Income from discontinued operations		1			11			(10	)	(91	)
Applicable income taxes		—			4			(4	)	N/M

Income from discontinued operations, net of taxes		1			7			(6	)	(86	)
Net loss	$	(126	)	$	(118	)	$	(8	)	(7	)%

Headcount ₍₄₅₎		15,081			15,586			(505	)	(3	)

Ending Balances:
Loans ₍₄₇₎		7,172			13,978			(6,806	)	(49	)
Assets		71,303			83,920			(12,617	)	(15	)
Memo–
Treasury investments ₍₄₈₎		40,362			41,571			(1,209	)	(3	)
Principal investments ₍₄₉₎		2,914			2,183			602		28
Deposits		10,102			13,217			(3,115	)	(24	)
Equity		4,458			2,776			1,682		61

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