second quarter review & corporate update new york city july 19, 2000
DESCRIPTION
Second Quarter Review & Corporate Update New York City July 19, 2000. Today’s Outline. What has been done since AprilDimon Comprehensive financial repositioningScharf Earnings reviewScharf Long-term outlookDimon Future agendaDimon. What has been done since April?. Since April. - PowerPoint PPT PresentationTRANSCRIPT
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Second Quarter Review & Second Quarter Review & Corporate UpdateCorporate Update
New York CityNew York CityJuly 19, 2000July 19, 2000
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Today’s Outline What has been done since AprilWhat has been done since April
DimonDimon
Comprehensive financial repositioningComprehensive financial repositioningScharfScharf
Earnings reviewEarnings reviewScharfScharf
Long-term outlookLong-term outlookDimonDimon
Future agendaFuture agendaDimonDimon
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What has been done What has been done since April?since April?
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Since April Evaluation of businessesEvaluation of businesses ExecutionExecution
– Develop systems / charter consolidations planDevelop systems / charter consolidations plan– Improved customer serviceImproved customer service– Waste reductionWaste reduction– First USA stabilizationFirst USA stabilization
Form management teamForm management team Implement clear management philosophies and processImplement clear management philosophies and process Implement new financial philosophiesImplement new financial philosophies
– Balance sheet strengthBalance sheet strength– Dividend and capitalDividend and capital– Management and public reportingManagement and public reporting
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Evaluation of Businesses
No significant business sales - pruning onlyNo significant business sales - pruning only Franchises have high market sharesFranchises have high market shares Franchises are positioned for growthFranchises are positioned for growth Businesses form a strong portfolio that Businesses form a strong portfolio that
benefit one anotherbenefit one another
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Execution - Systems / Charter Consolidations
Plan to collapse 20 domestic bank charters to 3 Plan to collapse 20 domestic bank charters to 3 Convert 7 DDA systems into oneConvert 7 DDA systems into one 5 planned conversions beginning 20015 planned conversions beginning 2001
– Easiest first, complex last - mitigates riskEasiest first, complex last - mitigates risk– None will be done until readyNone will be done until ready
This is a mustThis is a must– Should be core competencyShould be core competency– Right for customer serviceRight for customer service– Significant expense savingsSignificant expense savings
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Execution - Improve Customer Service Must get this right to build a great companyMust get this right to build a great company Incorporate service metrics into management Incorporate service metrics into management
reporting and compensationreporting and compensation Empower the front line to serve customer needsEmpower the front line to serve customer needs ServiceService
– Local authority / responsibilityLocal authority / responsibility• Suggestion boxSuggestion box• New recognition systemNew recognition system• Battlefield decisionsBattlefield decisions• Serve one anotherServe one another
Rolling out banking center computersRolling out banking center computers
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Execution - Waste Reduction Reduce noninterest expense $500 million pretaxReduce noninterest expense $500 million pretax
– Savings net of systems conversion costsSavings net of systems conversion costs
– To be completed by end of first quarter of 2001To be completed by end of first quarter of 2001
– Represents less than 10% of $6 billion of non-Represents less than 10% of $6 billion of non-headcount expense baseheadcount expense base
Most expense reductions will be non-headcount relatedMost expense reductions will be non-headcount related
Expense cuts will not impact customer service, technology Expense cuts will not impact customer service, technology investments, or other investment spendinginvestments, or other investment spending
Additionally, we will drive headcount downAdditionally, we will drive headcount down
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Execution - First USA Management team reorganization - 75% of changes filled internallyManagement team reorganization - 75% of changes filled internally Operating expenses excluding marketing decreasingOperating expenses excluding marketing decreasing International card operations sold - $65 million after tax savings per International card operations sold - $65 million after tax savings per
yearyear Transitioned Wingspan and consumer lending to Retail - leverage & Transitioned Wingspan and consumer lending to Retail - leverage &
efficiencyefficiency Established in-house payment processing - improvements in accuracy Established in-house payment processing - improvements in accuracy
and timelinessand timeliness Improving Internet contract valuesImproving Internet contract values
4Q994Q99 2Q002Q00
Operating expense ratio (normalized)Operating expense ratio (normalized) 4.35%4.35% 4.13%4.13%
Staffing (EOP)Staffing (EOP) 13,50013,500 10,80010,800
Managed net credit lossesManaged net credit losses 6.52%6.52% 5.44%5.44%
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Execution - First USA
Customer CareCustomer Care
Sep 99Sep 99 Jun 00Jun 00
Customer satisfactionCustomer satisfaction 64%64% 76%76%
New account card delivery - daysNew account card delivery - days 1313 99
Inbound customer service callsInbound customer service calls 7 mill7 mill 5 mill5 mill
Telephone contact rateTelephone contact rate 26.0%26.0% 21.2%21.2%
Attrition is improvingAttrition is improving
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Management TeamBusiness HeadsBusiness Heads AgeAge Yrs @ Yrs @
ONEONE
Bill BoardmanBill Boardman Credit cardCredit card 5959 1616
David BolgerDavid Bolger Corporate bankingCorporate banking 4242 2020
David KundertDavid Kundert Investment mgmt.Investment mgmt. 5757 2929
Ken StevensKen Stevens RetailRetail 4848 44
Geoff StringerGeoff Stringer Corporate investmentsCorporate investments 5656 2626
Mike WelbornMike Welborn Middle marketMiddle market 4848 44
StaffStaff
Marv AdamsMarv Adams CTOCTO 4242 33
Bill CampbellBill Campbell E-commerceE-commerce 5656 NewNew
Mike CavanaghMike Cavanagh Strategic planningStrategic planning 3434 NewNew
Christine EdwardsChristine Edwards CLO/Corp Secty.CLO/Corp Secty. 4747 NewNew
Tim MoenTim Moen Human resourcesHuman resources 4747 2020
Robert O’NeillRobert O’Neill General auditorGeneral auditor 4444 1313
Charlie ScharfCharlie Scharf CFOCFO 3535 NewNew
Richard WadeRichard Wade Corp. risk managementCorp. risk management 4848 2626
TBDTBD Capital marketsCapital markets
Average share ownership *
Owned ** 80,152
Options 283,077
* excluding Dimon and Istock
** owned + unvested restricted shares
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Implement New Management Philosophies EntrepreneurialEntrepreneurial Owners and partnersOwners and partners Run lean and fastRun lean and fast Open door policyOpen door policy MeritocracyMeritocracy High standardsHigh standards TeamworkTeamwork Personal characterPersonal character
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Financial Philosophies
Strong balance sheetStrong balance sheet
Recurring incomeRecurring income
Be low-cost providerBe low-cost provider
Invest relentlesslyInvest relentlessly
Credit ratings countCredit ratings count
Disciplined reporting / MISDisciplined reporting / MIS
Make money on operationsMake money on operations
Build for good times and badBuild for good times and bad
Create stock buyback capacityCreate stock buyback capacity
Financial TargetsFinancial Targets
ROEROE 18%-20%18%-20%
Dividend payoutDividend payout 25%-30%25%-30%
EPS growthEPS growth 12%-15%12%-15%
Target AA RatingTarget AA Rating
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Financial Philosophies - Public Reporting Clarity
- All allocations reality based- All allocations reality based
- Loan losses charged to units- Loan losses charged to units
- Better capital and profitability analysis- Better capital and profitability analysis
- Clear and transparent public reporting- Clear and transparent public reporting
Retail (including Wingspan)Retail (including Wingspan) Commercial bankingCommercial banking First USAFirst USA Investment management group - newInvestment management group - new Corporate investments - newCorporate investments - new Corporate (treasury / unallocated)Corporate (treasury / unallocated)
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Dividend Philosophy Reset to “proper” level - earnings basedReset to “proper” level - earnings based
– 50% reduction50% reduction Dividends are tax inefficientDividends are tax inefficient Retain capital - active capital allocation decisionsRetain capital - active capital allocation decisions
– Not abdicated, major strategic alternatives improvedNot abdicated, major strategic alternatives improved– Maintain maximum flexibilityMaintain maximum flexibility
Use capital to: Use capital to: – Invest in businessesInvest in businesses– Prepare for potential downturnPrepare for potential downturn– Buyback stockBuyback stock
Payout target: 25%-30% - increase with earningsPayout target: 25%-30% - increase with earnings Best for long-term stock value - offensive, not defensiveBest for long-term stock value - offensive, not defensive
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Comprehensive Comprehensive Financial RepositioningFinancial Repositioning
DividendDividendBalance SheetBalance Sheet
ExpensesExpenses
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Comprehensive Financial Repositioning
Reduce annual dividend by 50% to $0.84Reduce annual dividend by 50% to $0.84
Significant item adjustments of $1.9 billion after taxSignificant item adjustments of $1.9 billion after tax
Strong capital baseStrong capital base
– Tangible common equity ratio of 5.4%Tangible common equity ratio of 5.4%
Plan to raise additional regulatory capital Plan to raise additional regulatory capital
Reduce noninterest expense $500 million pretaxReduce noninterest expense $500 million pretax
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Dividend Analysis Yield and payout ratio high relative to peersYield and payout ratio high relative to peers
20012001 2000 2000 Payout Payout
Yield*Yield* RatioRatioBank One Bank One - current- current 5.95.9 %% 5656 %%
First Union - pro formaFirst Union - pro forma 7.07.0 6868Bank of AmericaBank of America 4.44.4 3838US BancorpUS Bancorp 4.14.1 3737FleetBostonFleetBoston 3.43.4 3939FirstarFirstar 3.13.1 4545Bank One Bank One (pro forma **)(pro forma **) 2.82.8 2929Chase ManhattanChase Manhattan 2.72.7 3333Wells FargoWells Fargo 2.22.2 3636
CitigroupCitigroup 1.01.0 1919AIGAIG 0.20.2 55Merrill LynchMerrill Lynch 1.0 1.0 1818Morgan Stanley Dean WitterMorgan Stanley Dean Witter 1.0 1.0 2323
* Based on 6/27/00 stock price and 2000 dividend from Salomon Smith Barney & UBS Warburg* Based on 6/27/00 stock price and 2000 dividend from Salomon Smith Barney & UBS Warburg** Stock price of $30 and First Call median 2001 EPS consensus of $2.92** Stock price of $30 and First Call median 2001 EPS consensus of $2.92
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Significant Item Adjustments of $1.9 Billion
Conservative and realistic assumptions on all Conservative and realistic assumptions on all assets and liabilitiesassets and liabilities
- I/O- I/O - Auto residuals- Auto residuals
- PCCRs- PCCRs - Facilities- Facilities
- Partnership assets- Partnership assets - Reserves- Reserves All new business decisions and accounting All new business decisions and accounting
consistent with today’s assumptionsconsistent with today’s assumptions Balance sheet is sacrosanctBalance sheet is sacrosanct
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Significant Item Adjustments($ in millions)($ in millions)
2Q002Q00
RetailRetail
Auto lease residualAuto lease residual $307$307
Asset sale / restructuringAsset sale / restructuring 167167
All otherAll other 4444 (1)(1)
TotalTotal 518518
Commercial bankingCommercial banking
Credit loss reservesCredit loss reserves 647647
All otherAll other 2626
TotalTotal 673673
First USAFirst USA
I/O stripI/O strip 354354
PCCRsPCCRs 275275
Partnership assetsPartnership assets 121121
All otherAll other 2727 (2)(2)
TotalTotal 777777
2Q002Q00
Investment managementInvestment management
All otherAll other 99
TotalTotal 99
Corporate / unallocatedCorporate / unallocated
Investment portfolioInvestment portfolio 415415
LegalLegal 190190
Real estateReal estate 141141
ReconciliationsReconciliations 100100
All otherAll other 117117
TotalTotal 963963
TotalTotal CorporationCorporation $2,940$2,940pretaxpretax
$1,913$1,913after taxafter tax
(1) Reduced by $22 million for gain on loan sale(1) Reduced by $22 million for gain on loan sale(2) Reduced by $46 million for gain on sale of Canadian and UK card operations(2) Reduced by $46 million for gain on sale of Canadian and UK card operations
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Strong Capital Position * TCETCE Tier 1 Tier 1 Total Total
Ratio**Ratio** CapitalCapital CapitalCapitalFirstarFirstar 6.26.2 %% 8.08.0 %% 10.710.7 %%US BancorpUS Bancorp 5.65.6 6.66.6 10.910.9Bank OneBank One - 6/30/00 - 6/30/00 5.45.4 7.17.1 10.210.2
Wells FargoWells Fargo 4.24.2 7.57.5 10.310.3Bank of AmericaBank of America 4.14.1 7.47.4 11.011.0
First Union - pro formaFirst Union - pro forma 3.83.8 6.66.6 10.610.6FleetBostonFleetBoston 3.63.6 6.76.7 11.011.0Chase ManhattanChase Manhattan 3.43.4 8.68.6 12.312.3
If Bank One preferred was 15% of equity and sub. debt was 20% of Total Capital If Bank One preferred was 15% of equity and sub. debt was 20% of Total Capital the ratios would be: Tier 1 @ 7.6% and Tier 2 @10.8% at 6/30/00the ratios would be: Tier 1 @ 7.6% and Tier 2 @10.8% at 6/30/00
* @ 3/31/00 unless otherwise noted ** (Common equity - all intangibles) / (total assets + securitized credit cards - * @ 3/31/00 unless otherwise noted ** (Common equity - all intangibles) / (total assets + securitized credit cards - intangible assets) intangible assets)
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Credit Trends
($ in millions)($ in millions) 4Q994Q99 1Q001Q00 2Q002Q00
Nonperforming assets - commercialNonperforming assets - commercial $1,159$1,159 $1,190$1,190 $1,344$1,344
Nonperforming assets - consumerNonperforming assets - consumer 506506 471471 440440
TotalTotal $1,665$1,665 $1,661$1,661 $1,784$1,784
Nonperforming assets / related assetsNonperforming assets / related assets 1.02%1.02% 0.99%0.99% 1.03%1.03%
Reserve / loansReserve / loans 1.39%1.39% 1.39%1.39% 1.73%1.73%
Reserve / reported net charge-offsReserve / reported net charge-offs annualized 207% * annualized 207% * 220%220% 233%233%
Reserve / NPLsReserve / NPLs 147%147% 149%149% 177%177%
Managed charge-off rate (annualized)Managed charge-off rate (annualized) 1.99% *1.99% * 2.04%2.04% 1.99%1.99%
Downgrades increasing faster than upgradesDowngrades increasing faster than upgrades
* Adjusted for FFIEC-related charge-offs* Adjusted for FFIEC-related charge-offs
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Noninterest Expense Reductions $500 million annualized by end of 2001 first quarter$500 million annualized by end of 2001 first quarter
Change in process will drive expenses downChange in process will drive expenses down
Policy changes driving reductionsPolicy changes driving reductions : :
OldOld NewNew
– To Planning Group (PG)To Planning Group (PG) >$5 mill>$5 mill >$50 >$50 thousandthousand
– T & ET & E Self-approvalSelf-approval No self-No self-approvalapproval
– Consultants, executive Consultants, executive PG to $10 mill PG to $10 mill CEO/CFOCEO/CFO search, contributions, search, contributions, Mgrs. <$5 mill Mgrs. <$5 mill
donations, donations, etc.etc.
This will change the cultureThis will change the culture
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Noninterest Expense ReductionsTotal Annualized ExpensesTotal Annualized Expenses ReportedReported
1999 1999 full year *full year * $10.9$10.9 billbill1Q001Q00 annualizedannualized 10.610.62Q002Q00 annualizedannualized 10.510.52001 2001 quarterly average targetquarterly average target 10.010.0
Headcount Headcount (Full-time + part-time with benefits)(Full-time + part-time with benefits)
12/31/9912/31/99 Adjusted for BOFSAdjusted for BOFS 86,60086,6003/31/003/31/00 85,50085,5006/30/006/30/00 82,50082,50012/31/00 12/31/00 BudgetBudget 86,00086,000
- - We will not add staff from todayWe will not add staff from today- Expect to drive headcount down- Expect to drive headcount down
* excluding merger-related charges* excluding merger-related charges
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($ in millions)($ in millions) Efficiency RatioEfficiency Ratio2Q002Q00 Mid Pt Mid Pt Cost Save Cost Save
AnnualizedAnnualized ONEONE PeerPeer PotentialPotential
Retail Retail $4,096$4,096 64%* 64%* 60%60% $240$240 pretaxpretax
CommercialCommercial 2,2522,252 54%54% 50%50% 150150
OtherOther 4,1524,152 110110
TotalTotal $10,500$10,500 $500$500
Mid-point is not best in classMid-point is not best in class
* Excluding Wingspan* Excluding Wingspan
Noninterest Expense Reductions - Efficiency Improvement
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Comprehensive Financial Repositioning Dividend set to appropriate levelDividend set to appropriate level
Capital position strong and will be strengthenedCapital position strong and will be strengthened
Balance sheet integrityBalance sheet integrity
Gain efficiencies quickly - expense disciplineGain efficiencies quickly - expense discipline
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Earnings ReviewEarnings Review
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($ in millions)($ in millions) 2Q99 2Q99 1Q00 1Q00 2Q00 2Q00 NetNet NetNet NetNet
IncomeIncome EPSEPS IncomeIncome EPSEPS IncomeIncome EPSEPS
ReportedReported $992$992 $0.83$0.83 $689$689 $0.60$0.60 $(1,269)$(1,269)$(1.11)$(1.11)
AdjustmentsAdjustments
Significant items Significant items ---- -- -- ---- -- -- 1,9131,913 1.661.66
Merger-relatedMerger-related 120120 0.100.10 -- -- -- -- -- -- -- --
AdjustedAdjusted $1,112$1,112 $0.93$0.93 $689$689 $0.60$0.60 $644$644 $0.55$0.55
Adjusted Adjusted ROA ROA (reported assets)(reported assets) 1.76%1.76% 1.03%1.03% 0.95%0.95%ROEROE 21%21% 14%14% 13%13%
Net Income (Loss)
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LOB Performance Review Summary($ in millions)($ in millions) ReportedReported NormalizedNormalized
Net IncomeNet Income 2Q992Q99 1Q001Q00 2Q002Q00
Retail (incl. Wingspan)Retail (incl. Wingspan) $290$290 $236$236 $247$247Commercial bankingCommercial banking 203203 200200 214214First USAFirst USA 339339 6767 113113Investment managementInvestment management 9191 8181 7979Corporate investmentsCorporate investments 9090 141141 6161Corporate / unallocatedCorporate / unallocated 99 99 (36)(36) (70)(70)
Sub-totalSub-total $1,112 $1,112 $ 689$ 689 $ 644$ 644Less: Merger-related itemsLess: Merger-related items (120)(120) -- -- -- --
Total CorporationTotal Corporation $992$992 $689$689 $644$644EPSEPS $0.83$0.83 $0.60$0.60 $0.55$0.55
ROA (reported assets)ROA (reported assets) 1.57%1.57% 1.03%1.03% 0.95%0.95%ROEROE 19%19% 14%14% 13%13%Efficiency ratioEfficiency ratio 52%52% 54%54% 55%55%
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Retail (including Wingspan)Performance Drivers - 2Q00 vs 2Q99
Net income down $43mm or 15%Net income down $43mm or 15%
Revenue growth of $45mm or 3% impacted by:Revenue growth of $45mm or 3% impacted by:– Lower loan sale gains ($50mm), higher auto lease Lower loan sale gains ($50mm), higher auto lease
residual losses ($39mm)residual losses ($39mm)– Revenues up 9%, excluding above Revenues up 9%, excluding above
Higher provision ($38mm) Higher provision ($38mm) Noninterest expense up $62mmNoninterest expense up $62mm
– Wingspan launched 6/99Wingspan launched 6/99 Excluding loan sale gains, auto lease residual losses Excluding loan sale gains, auto lease residual losses
and Wingspan, net income up 12%and Wingspan, net income up 12%
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Commercial BankingPerformance Drivers - 2Q00 vs 2Q99
Net income up $11mm or 5%Net income up $11mm or 5% Revenue growth up $93mm or 10%Revenue growth up $93mm or 10%
– Loan growth of 12% Loan growth of 12% – Treasury Management fees up 12% ($23mm)Treasury Management fees up 12% ($23mm)
Provision up $42mm or 39%Provision up $42mm or 39%– Deteriorating credit qualityDeteriorating credit quality
Noninterest expense up $26mm or 5%Noninterest expense up $26mm or 5%– Treasury Management expenses higher to Treasury Management expenses higher to
support volume growthsupport volume growth
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First USAPerformance Drivers - 2Q00 vs 1Q00
Net income up $46mm or 69%Net income up $46mm or 69% Revenue down $31mm or 2%Revenue down $31mm or 2%
– Declining yield, lower outstandingsDeclining yield, lower outstandings– Higher funding costsHigher funding costs– Offset by higher interchangeOffset by higher interchange
Provision lower by $69mm or 7%Provision lower by $69mm or 7% Noninterest expense improved $38mmNoninterest expense improved $38mm
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First USAPerformance Drivers - 2Q00 vs 2Q99
Net income down $226mm or 67%Net income down $226mm or 67% Margin down $330mm or 19%Margin down $330mm or 19%
– Lower outstandings, higher funding costs Lower outstandings, higher funding costs Noninterest income down $148mm or 33%Noninterest income down $148mm or 33%
– Securitization gains $80mm lowerSecuritization gains $80mm lower Noninterest expense better $139mm or 17%Noninterest expense better $139mm or 17%
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First USA
ReportedReported NormalizedNormalized
% of Avg. Managed Loans% of Avg. Managed Loans 2Q992Q99 1Q001Q00 2Q002Q00 PeersPeers
Net Interest MarginNet Interest Margin 10.3710.37 %% 9.149.14 %% 8.838.83 %% 7.857.85 %%
Loan loss provisionLoan loss provision 5.235.23 5.785.78 5.445.44 4.224.22
Noninterest incomeNoninterest income 2.652.65 1.581.58 1.871.87 3.053.05
Noninterest expenseNoninterest expense 4.764.76 4.294.29 4.134.13 4.344.34
Pretax incomePretax income 3.033.03 0.630.63 1.091.09 2.342.34
90 Day past due (% managed)90 Day past due (% managed) 1.961.96 1.911.91 1.691.69
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First USA *ChangeChange
($ billions)($ billions) 2Q992Q99 1Q001Q00 2Q002Q00 %2Q99%2Q99Managed loans - avg. Managed loans - avg. $68.9$68.9 $67.1$67.1 $66.1$66.1
(4)%(4)%
Managed charge-offs - %Managed charge-offs - % 5.25%5.25% 5.78%5.78% 5.44%5.44%
Charge volume Charge volume $35.6$35.6 $34.0$34.0 $36.8$36.8 33
New accounts opened New accounts opened (000s)(000s) 2,2872,287 950950 826826 (64)(64)
Cards issued Cards issued (000s)(000s) 65,62065,620 56,37856,378 54,64854,648 (17)**(17)**
* Managed ** (6)% excluding 1Q00 purge of 7 million inactive accounts* Managed ** (6)% excluding 1Q00 purge of 7 million inactive accounts
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Investment Management GroupPerformance Drivers - 2Q00 vs 2Q99
Net income down $12mm or 13%Net income down $12mm or 13% 1999 Earnings inflated by:1999 Earnings inflated by:
– Reversal of litigation expensesReversal of litigation expenses– Accounting changeAccounting change
Roney Securities operated at a small loss Roney Securities operated at a small loss – Sold May 1999Sold May 1999
Excluding the above itemsExcluding the above items– Revenues up 5%Revenues up 5%– Expenses up 3%Expenses up 3%– Net income up 7%Net income up 7%
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Current Earnings PowerAfter taxAfter tax
EarningsEarnings EPSEPS ROEROE
Normalized 2Q00Normalized 2Q00 $644$644 $0.55$0.55 13%13%
2Q00 Annualized2Q00 Annualized $2,576$2,576 $2.20$2.20
Expense savingsExpense savings 320320 0.270.27
Investment portfolio / otherInvestment portfolio / other 150150 00.13.13
TotalTotal $3,046$3,046 $2.60$2.60
10% EPS growth 10% EPS growth 2.862.86 16%16% 15% EPS growth15% EPS growth 2.992.99 17%17%
ROE Target 18-20%ROE Target 18-20%
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Long-term Long-term OutlookOutlook
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Retail Competitive strength fromCompetitive strength from
– Broad geographic reach - 14 statesBroad geographic reach - 14 states– Top market share - #1 or #2 in 70% of our marketsTop market share - #1 or #2 in 70% of our markets– Large customer base - over 8 million householdsLarge customer base - over 8 million households– Strong deposit baseStrong deposit base
Focus onFocus on– Customer service, sales culture, costsCustomer service, sales culture, costs– True national platformTrue national platform– Direct expenses reduced $125 million in 1999 and Direct expenses reduced $125 million in 1999 and
$126 million in 2000$126 million in 2000– 700,000 online customers700,000 online customers
Clear ability to cross sellClear ability to cross sell– Sold more than $4 billion of mutual funds and annuitiesSold more than $4 billion of mutual funds and annuities– Over 3,600 registered brokersOver 3,600 registered brokers
Quality portfolioQuality portfolio– Auto business an exceptionAuto business an exception– Very little subprimeVery little subprime
Test new concepts / innovateTest new concepts / innovate
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E-Business Internet is critical to our business - must be fully integratedInternet is critical to our business - must be fully integrated New “Skunkworks” groupNew “Skunkworks” group Bill Campbell & senior management working groupBill Campbell & senior management working group Coordinate and develop company-wide strategiesCoordinate and develop company-wide strategies Internet is not binary, but a continuum of servicesInternet is not binary, but a continuum of services Wingspan - 95,000 customersWingspan - 95,000 customers
– Built great stuff - technology, customer-focusedBuilt great stuff - technology, customer-focused– Merge platforms (save $30 million)Merge platforms (save $30 million)– Test various products, services, private brand can be... Test various products, services, private brand can be...
• Private labeledPrivate labeled• AgnosticAgnostic
Fully leverage all our assets, use physical presenceFully leverage all our assets, use physical presence Major opportunities existMajor opportunities exist
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Commercial Banking Middle market franchise a company jewelMiddle market franchise a company jewel
– Relationships are wide and deep - single provider, many productsRelationships are wide and deep - single provider, many products– Relationships last and are profitable over the long-termRelationships last and are profitable over the long-term– Closely tied to RetailClosely tied to Retail
Large Corporate needs focus on capitalLarge Corporate needs focus on capital– Improve risk analysis and control in total and by customerImprove risk analysis and control in total and by customer– Force the cross sellForce the cross sell– Maximize ROE - not earningsMaximize ROE - not earnings
ProductsProducts– Strong treasury management franchiseStrong treasury management franchise– Great origination capability - higher velocity neededGreat origination capability - higher velocity needed– Improve capital markets capabilitiesImprove capital markets capabilities
• No equity - don’t compete with Wall StreetNo equity - don’t compete with Wall Street• Double penetrationDouble penetration
– 40% of net revenues are noninterest-related40% of net revenues are noninterest-related
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First USA Stabilizing - have gotten resultsStabilizing - have gotten results
Opportunity to increase ROO vs. industryOpportunity to increase ROO vs. industry
Several major partnership contracts renewedSeveral major partnership contracts renewed
50+ new partnerships launched this year50+ new partnerships launched this year
This is still a fundamentally good industryThis is still a fundamentally good industry
Being the #2 player in a consolidating industry is enviableBeing the #2 player in a consolidating industry is enviable
Little subprimeLittle subprime
Bank One ownership should be a competitive advantageBank One ownership should be a competitive advantage
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Investment Management Large and growing mutual fund companyLarge and growing mutual fund company
– $67 billion of mutual funds under management$67 billion of mutual funds under management– $129 billion of total assets under management$129 billion of total assets under management– 62% of funds are Morningstar 4 or 5 rated62% of funds are Morningstar 4 or 5 rated
Wealth managementWealth management– Over 650 private bankersOver 650 private bankers
Great opportunities to growGreat opportunities to grow
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Corporate Investments Recurring net income is approximately $200 million Recurring net income is approximately $200 million
per yearper year– Tax-driven leasing, housing, energyTax-driven leasing, housing, energy 50%50%– Equity investments / venture capitalEquity investments / venture capital 25%25%– OtherOther 25%25%
Target 25%-30% returns on capital over timeTarget 25%-30% returns on capital over time Very specializedVery specialized Good talent - more opportunitiesGood talent - more opportunities
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Financial Philosophies - Public Reporting Clarity
RetailCommercial
BankingFirst USA
InvestmentManagement
CorporateInvestments
Corporate /Unallocated
• 8+ million 8+ million householdshouseholds
• #1 or #2 in #1 or #2 in 70% of major 70% of major markets markets
• 6500 ATMs6500 ATMs
• 1800+ banking 1800+ banking centerscenters
• Significant on-Significant on-line presenceline presence
• WingspanWingspan
• Good small Good small business / business / community community banking banking presencepresence
• Excellent Excellent middle-market middle-market franchisefranchise
• Good mid- / Good mid- / large corporate large corporate bank to bank to corporations, corporations, governments, governments, institutionsinstitutions
• Capital Capital markets markets capabilitiescapabilities
• Excellent Excellent treasury treasury management management servicesservices
• #3 commercial #3 commercial bank in USbank in US
• #2 domestic #2 domestic Visa / Visa / Mastercard Mastercard issuerissuer
• 54+ million 54+ million cardmemberscardmembers
• $66+ billion in $66+ billion in managed managed assetsassets
• Good Internet Good Internet presencepresence
• Investment Investment advisory, advisory, insurance, insurance, trust and trust and related related services to services to individuals and individuals and institutionsinstitutions
• $129+ billion $129+ billion AUMAUM
• 62% of mutual 62% of mutual funds ranked funds ranked 4 or 5 by 4 or 5 by MorningstarMorningstar
• Proprietary Proprietary investment investment activitiesactivities
• Growth, tax-Growth, tax-oriented and oriented and value value investinginvesting
• Leveraged Leveraged and and equipment equipment leasingleasing
• Investment Investment portfolioportfolio
• Corporate Corporate treasurytreasury
• Unallocated Unallocated expensesexpenses
• Corporate Corporate activitiesactivities
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AgendasAgendas
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Business Philosophies
Strategies will be right for Bank One - constantly reviewStrategies will be right for Bank One - constantly review Franchises should be market leadersFranchises should be market leaders Franchises should be durableFranchises should be durable Always maintain financial disciplineAlways maintain financial discipline Excellence in executionExcellence in execution Employee ownership a keyEmployee ownership a key Management and shareholder interests must be alignedManagement and shareholder interests must be aligned Be field and client drivenBe field and client driven
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Immediate Agenda
Capital allocation - customer, risk, productCapital allocation - customer, risk, product Align incentivesAlign incentives ““Extreme” budgeting for 2001Extreme” budgeting for 2001 Analyst relationshipsAnalyst relationships
– Open door policyOpen door policy– Constantly improve disclosureConstantly improve disclosure– Quarter-by-quarter updatesQuarter-by-quarter updates
Transform tactical plan to strategic planTransform tactical plan to strategic plan Board governance - best practicesBoard governance - best practices
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Future Agenda - Build a Great Company Strong financial structureStrong financial structure
Strong managementStrong management
Building infrastructure and execution capabilitiesBuilding infrastructure and execution capabilities
Strong franchisesStrong franchises
Several years of earnings growth opportunities through Several years of earnings growth opportunities through more disciplined managementmore disciplined management
Future opportunitiesFuture opportunities
– Creative strategiesCreative strategies
– Consolidations and acquisitionsConsolidations and acquisitions
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Private Securities Litigation Reform Act of 1995“Forward-Looking Statement” Disclosure
Certain statements made by management in this presentation and these Certain statements made by management in this presentation and these materials are not statements of historical fact, but are “forward-materials are not statements of historical fact, but are “forward-looking statements” within the meaning of the Private Securities looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995.Litigation Reform Act of 1995.
These “forward-looking statements” involve risks and uncertainties These “forward-looking statements” involve risks and uncertainties which may cause actual results to differ materially from those in which may cause actual results to differ materially from those in
such statements.such statements.
Additional discussion of factors that could cause actual results to differ Additional discussion of factors that could cause actual results to differ materially from projections, forecasts, estimates and expectations is materially from projections, forecasts, estimates and expectations is contained in respective SEC filings, including the Annual Report contained in respective SEC filings, including the Annual Report
on Form 10-K for the year ending December 31, 1999.on Form 10-K for the year ending December 31, 1999.
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52
Special Special AppendixAppendix
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Net Income * ReportedReported NormalizedNormalized
($ in millions)($ in millions) 2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $3,675$3,675 $3,445$3,445 $3,406$3,406
Provision for credit lossesProvision for credit losses 1,075 1,075 1,2721,272 1,1741,174
Noninterest incomeNoninterest income 1,688 1,688 1,5141,514 1,3431,343
Noninterest expenseNoninterest expense 2,6272,627 2,6612,661 2,6112,611
Net income Net income $1,112$1,112 $689$689 $644$644* * Managed basis. Managed basis.
2Q00 represents reported results excluding significant item adjustments. 2Q00 represents reported results excluding significant item adjustments.
2Q99 represents reported results excluding merger-related items. 2Q99 represents reported results excluding merger-related items.
(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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Significant Item Adjustments - By Line of Business
($ in millions)($ in millions) 2Q00 2Q00
Net Income (loss)Net Income (loss) ReportedReported Adj.Adj. NormalizedNormalized
Retail (including Wingspan)Retail (including Wingspan) $(81) $(81) $328$328 $247$247
Commercial bankingCommercial banking (213) (213) 427427 214214
First USAFirst USA (379) (379) 492492 113113
Investment managementInvestment management 73 73 66 7979
Corporate investmentsCorporate investments 61 61 ---- 6161
Corporate / unallocated Corporate / unallocated (730) (730) 660660 (70)(70)
Total CorporationTotal Corporation $(1,269)$(1,269) $1,913$1,913 $ 644$ 644
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Retail (including Wingspan)
($ in millions)($ in millions) ReportedReported NormalizedNormalized
2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $1,082$1,082 $1,236$1,236 $1,205$1,205
Provision for credit lossesProvision for credit losses 8383 167167 121121
Noninterest incomeNoninterest income 408408 306306 330330
Noninterest expenseNoninterest expense 962962 1,0021,002 1,0241,024
Net income (loss)Net income (loss) $290$290 $ 236$ 236 $ 247$ 247
ROE (to be reviewed)ROE (to be reviewed) 25%25% 18%18% 17%17%
Efficiency RatioEfficiency Ratio 65%65% 65%65% 67%67%
Loans - average ($ in billions)Loans - average ($ in billions) $64.9$64.9 $73.1$73.1 $73.6$73.6
(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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Commercial Banking
($ in millions) ($ in millions) ReportedReported NormalizedNormalized
2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $628$628 $664$664 $694$694
Provision for credit lossesProvision for credit losses 108108 132132 150150
Noninterest incomeNoninterest income 329329 354354 356356
Noninterest expenseNoninterest expense 538538 570570 563563
Net income (loss)Net income (loss) 203203 $200$200 $214$214
ROE (to be reviewed)ROE (to be reviewed) 14%14% 13%13% 13%13%
Efficiency RatioEfficiency Ratio 56%56% 56%56% 54%54%
Loans - averageLoans - average ($ in billions) ($ in billions)
Large corporateLarge corporate $31.9$31.9 $37.2$37.2 $38.1$38.1
Middle marketMiddle market 28.628.6 31.031.0 31.931.9
Real estateReal estate 11.011.0 11.911.9 12.012.0(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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First USA
($ in millions) ($ in millions) ReportedReported NormalizedNormalized
2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $1,781$1,781 $1,525$1,525 $1,451$1,451
Provision for credit lossesProvision for credit losses 898898 969969 900900
Noninterest incomeNoninterest income 455455 264264 307307
Noninterest expenseNoninterest expense 818818 715715 679679
Net income (loss)Net income (loss) $339$339 $67$67 $113$113
ROO (pretax)ROO (pretax) 3.0%3.0% 0.6%0.6% 1.1%1.1%
ROE (to be reviewed)ROE (to be reviewed) 23%23% 4%4% 7%7%
Efficiency RatioEfficiency Ratio 37%37% 40%40% 39%39%
Managed loans - avg. ($ in billions)Managed loans - avg. ($ in billions) $68.9$68.9 $67.1$67.1 $66.1$66.1
(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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Investment Management
($ in millions) ($ in millions) ReportedReported NormalizedNormalized
2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $99$99 $100$100 $101$101
Provision for credit lossesProvision for credit losses ---- 22 22
Noninterest incomeNoninterest income 295295 287287 288288
Noninterest expenseNoninterest expense 255255 257257 263263
Net income (loss)Net income (loss) $91$91 $81$81 $79$79
ROE (to be reviewed)ROE (to be reviewed) 41%41% 36%36% 35%35%
Efficiency ratioEfficiency ratio 65%65% 66%66% 68%68%
($ in billions)($ in billions)
Assets under management - avg. Assets under management - avg. $124.7$124.7 $126.9$126.9 $129.4$129.4
(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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Corporate Investments
($ in millions) ($ in millions) Reported Reported
2Q992Q99 1Q001Q00 2Q002Q00
Net interest income Net interest income (1)(1) $48$48 $35$35 $30$30
Provision for credit lossesProvision for credit losses ---- 11 11
Noninterest incomeNoninterest income 9797 185185 5252
Noninterest expenseNoninterest expense 3434 3939 3131
Net income (loss)Net income (loss) $90$90 $141$141 $61$61
ROE (to be reviewed)ROE (to be reviewed) 36%36% 47%47% 20%20%
Efficiency ratioEfficiency ratio 23%23% 18%18% 38%38%
($ in billions)($ in billions)
Assets - avg. Assets - avg. $7.5$7.5 $8.0$8.0 $8.4$8.4
(1) Fully taxable equivalent basis(1) Fully taxable equivalent basis
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Loss Reserve PoliciesConsumer - (home equity, auto, other personal)Consumer - (home equity, auto, other personal) Nonaccrual Nonaccrual 90 days90 days Charge-offCharge-off 120 days120 days Reserves Reserves 1 year prospective charge-off1 year prospective charge-off
Credit cardCredit card Charge-offCharge-off 180 days - interest & fees accrue up 180 days - interest & fees accrue up to point to point
of charge-offof charge-off Re-ageRe-age 3 consecutive payments, once per year; 3 consecutive payments, once per year;
2 times in 5 years (eff. 3Q00)2 times in 5 years (eff. 3Q00)CommercialCommercial NonaccrualNonaccrual Credit determination or 90 daysCredit determination or 90 days Charge-offCharge-off Loan specific analysis; repayment of principal Loan specific analysis; repayment of principal
becomes doubtfulbecomes doubtful ReservesReserves Asset specific reserves for loans classified Asset specific reserves for loans classified
doubtfuldoubtfulRisk Class specific expected loss based on Risk Class specific expected loss based on calculated reservescalculated reservesManagement judgmentManagement judgment
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Credit Card - Purchased Credit Card Relationships (PCCRs)
Total receivablesTotal receivables $7.1$7.1 billionbillion
3/31/00 balance of premium paid3/31/00 balance of premium paid $533$533 millionmillion
Amortization period - approximatelyAmortization period - approximately 77 yearsyears
Second quarter write-down - mainly 2 portfoliosSecond quarter write-down - mainly 2 portfolios $275$275 millionmillion
Attrition, yield compression, and fee income assumptions Attrition, yield compression, and fee income assumptions tightened - better forecastingtightened - better forecasting
Poor retention rates - since stabilizedPoor retention rates - since stabilized Portfolio acquisitions still attractivePortfolio acquisitions still attractive
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Credit Card I/O Strip($ in millions)($ in millions) 3/31/003/31/00 6/30/006/30/00
I/O valueI/O value $630$630 $245$245
Interest rate riskInterest rate risk $ 44$ 44 pretaxpretax
Finance chargeFinance charge 193193
FeesFees 5656
LossesLosses (38) (38)
FFIEC impact *FFIEC impact * 8585
Life adjustment / otherLife adjustment / other 1414
TotalTotal $354$354
* FFIEC impact on I/O strip valuation reflects one-time write-off resulting * FFIEC impact on I/O strip valuation reflects one-time write-off resulting in increased charge-offs from fully adopting rules at First USA in increased charge-offs from fully adopting rules at First USA regarding re-aging and charge-offs from 210 days to regarding re-aging and charge-offs from 210 days to 180 days.180 days.
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Auto Lease ResidualsTotal residual at 6/30/00Total residual at 6/30/00 $6.8$6.8 billbillSize of reserve at 3/31/00Size of reserve at 3/31/00 $166$166 millmill
Second quarter write-downSecond quarter write-downChange from previous Auto Lease Guide valuation Change from previous Auto Lease Guide valuation $137$137 millmillChange realization rate to 95.5%Change realization rate to 95.5% 120120Mitigation costs / other Mitigation costs / other 5050
TotalTotal $307$307
Size of reserve at 6/30/00Size of reserve at 6/30/00 $473$473
Going forwardGoing forward Focus on returns vs. volume - portfolio will seek its own levelFocus on returns vs. volume - portfolio will seek its own level New leases priced based on above assumptionsNew leases priced based on above assumptions No 24-month leasesNo 24-month leases Tightened credit cut-offsTightened credit cut-offs
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Retail Asset Sales / Restructuring ChargeCharge
Severance and exit costsSeverance and exit costs $54$54 millmill
Committed sales Committed sales
Indirect installment loans ($8 billion)Indirect installment loans ($8 billion) 113113
TotalTotal $167$167
Run indirect installment loan business Run indirect installment loan business to maximize economic valueto maximize economic value