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2006 Annual Report

 

Supplemental Financial Data

Table 6 provides a reconciliation of the supplemental financial data mentioned below with financial measures defined by accounting principles generally accepted in the United States (GAAP). Other companies may define or calculate supplemental financial data differently.

Operating Basis Presentation

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

Net Interest Income - FTE Basis

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

Performance Measures

As mentioned above, certain performance measures including the efficiency ratio, net interest yield and operating leverage utilize Net Interest Income (and thus Total Revenue) on a FTE basis. The efficiency ratio measures the costs expended to generate a dollar of revenue, and net interest yield evaluates how many basis points we are earning over the cost of funds. Operating leverage measures the total percentage revenue growth minus the total percentage expense growth for the corresponding period. During our annual integrated planning process, we set operating leverage and efficiency targets for the Corporation and each line of business. We believe the use of these non-GAAP measures provides additional clarity in assessing the results of the Corporation. Targets vary by year and by business, and are based on a variety of factors including maturity of the business, investment appetite, competitive environment, market factors, and other items (e.g., risk appetite). The aforementioned performance measures and ratios, earnings per common share (EPS), return on average assets, and dividend payout ratio, as well as those measures discussed more fully below, are presented in Table 6.

Return on Average Common Shareholders' Equity, Return on Average Tangible Shareholders' Equity and Shareholder Value Added

We also evaluate our business based upon return on average common shareholders' equity (ROE), return on average tangible shareholders' equity (ROTE), and shareholder value added (SVA) measures. ROE, ROTE and SVA utilize non-GAAP allocation methodologies. ROE measures the earnings contribution of a unit as a percentage of the Shareholders' Equity allocated to that unit. ROTE measures the earnings contribution of the Corporation as a percentage of Shareholders' Equity reduced by Goodwill. SVA is defined as cash basis earnings on an operating basis less a charge for the use of capital. These measures are used to evaluate our use of equity (i.e., capital) at the individual unit level and are integral components in the analytics for resource allocation. We believe using SVA as a performance measure places specific focus on whether incremental investments generate returns in excess of the costs of capital associated with those investments. In addition, profitability, relationship, and investment models all use ROE and SVA as key measures to support our overall growth goal.

Table 6 Supplemental Financial Data and Reconciliations to GAAP Financial Measures
(Dollars in millions, except per share information) 2006 2005 2004 2003 2002
Operating basis (1)
Operating earnings
$
21,640
$
16,740
$
14,358
$
10,762
$
9,553
Operating earnings per common share 4.78 4.17 3.82 3.62 3.14
Diluted operating earnings per common share 4.70 4.11 3.75 3.55 3.05
Shareholder value added 9,121 6,594 5,718 5,475 4,509
Return on average assets 1.48
%
1.32
%
1.37
%
1.44
%
1.46
%
Return on average common shareholders' equity 16.66 16.79 16.96 21.50 19.96
Return on average tangible shareholders' equity 33.59 30.70 29.79 27.84 26.01
Operating efficiency ratio (FTE basis) 46.86 49.66 53.13 52.38 51.84
Dividend payout ratio 44.59 45.84 44.98 39.76 38.79
Operating leverage 7.25 7.48 (1.85) (1.12) n/a
FTE basis data
Net interest income
$
35,815
$
31,569
$
28,677
$
21,149
$
20,705
Total revenue 74,247 56,923 49,682 38,478 35,579
Net interest yield 2.82
%
2.84
%
3.17
%
3.26
%
3.63
%
Efficiency ratio 47.94 50.38 54.37 52.38 51.84
Reconciliation of net income to operating earnings
Net income
$
21,133
$
16,465
$
13,947
$
10,762
$
9,553
Merger and restructuring charges 805 412 618
Related income tax benefit (298) (137) (207)
Operating earnings 21,640 16,740 14,358 10,762 9,553
Reconciliation of average shareholders' equity
to average tangible shareholders' equity
Average shareholders' equity
$
130,463
$
99,861
$
84,815
$
50,091
$
47,898
Average goodwill (66,040) (45,331) (36,612) (11,440) (11,171)
Average tangible shareholders' equity 64,423 54,530 48,203 38,651 36,727
Reconciliation of EPS to operating EPS
Earnings per common share 4.66 4.10 3.71 3.62 3.14
Effect of merger and restructuring charges, net of tax benefit 0.12 0.07 0.11
Operating earnings per common share 4.78 4.17 3.82 3.62 3.14
Reconciliation of diluted EPS to diluted operating EPS
Diluted earnings per common share
$
4.59
$
4.04
$
3.64
$
3.55
$
3.05
Effect of merger and restructuring charges, net of tax benefit 0.11 0.07 0.11
Diluted operating earnings per common share
$
4.70
$
4.11
$
3.75
$
3.55
$
3.05
Reconciliation of net income to shareholder value added
Net income
$
21,133
$
16,465
$
13,947
$
10,762
$
9,553
Amortization of intangibles 1,755 809 664 217 218
Merger and restructuring charges, net of tax benefit 507 275 411
Cash basis earnings on an operating basis 23,395 17,549 15,022 10,979 9,771
Capital charge (14,274) (10,955) (9,304) (5,504) (5,262)
Shareholder value added
$
9,121
$
6,594
$
5,718
$
5,475
$
4,509
Reconciliation of return on average assets to
operating return on average assets
Return on average assets 1.44
%
1.30
%
1.34
%
1.44
%
1.46
%
Effect of merger and restructuring charges, net of tax benefit 0.04 0.02 0.03
Operating return on average assets 1.48
%
1.32
%
1.37
%
1.44
%
1.46
%
Reconciliation of return on average common
shareholders' equity to operating return on
average common shareholders' equity
Return on average common shareholders' equity 16.27
%
16.51
%
16.47
%
21.50
%
19.96
%
Effect of merger and restructuring charges, net of tax benefit 0.39 0.28 0.49
Operating return on average common shareholders' equity 16.66
%
16.79
%
16.96
%
21.50
%
19.96
%
Reconciliation of return on average tangible
shareholders' equity to operating return on
average tangible shareholders'equity
Return on average tangible shareholders' equity 32.80
%
30.19
%
28.93
%
27.84
%
26.01
%
Effect of merger and restructuring charges, net of tax benefit 0.79 0.51 0.86
Operating return on average tangible shareholders' equity 33.59
%
30.70
%
29.79
%
27.84
%
26.01
%
Reconciliation of efficiency ratio to operating
efficiency ratio (FTE basis)
Efficiency ratio 47.94
%
50.38
%
54.37
%
52.38
%
51.84
%
Effect of merger and restructuring charges (1.08) (0.72) (1.24)
Operating efficiency ratio 46.86
%
49.66
%
53.13
%
52.38
%
51.84
%
Reconciliation of dividend payout ratio to operating
dividend payout ratio
Dividend payout ratio 45.66
%
46.61
%
46.31
%
39.76
%
38.79
%
Effect of merger and restructuring charges, net of tax benefit (1.07) (0.77) (1.33)
Operating dividend payout ratio 44.59
%
45.84
%
44.98
%
39.76
%
38.79
%
Reconciliation of operating leverage to operating
basis operating leverage
Operating leverage 6.32
%
8.40
%
(4.91)
%
(1.12)
%
n/a
Effect of merger and restructuring charges 0.93 (0.92) 3.06 n/a
Operating leverage 7.25
%
7.48
%
(1.85)
%
(1.12)
%
n/a
Footnote (1) Operating basis excludes Merger and Restructuring Charges which were $805 million, $412 million, and $618 million in 2006, 2005, and 2004.
n/a = not available

Core Net Interest Income - Managed Basis

In managing our business, we review core net interest income - managed basis, which adjusts reported Net Interest Income on a FTE basis for the impact of market-based activities and certain securitizations, net of retained securities. As discussed in the Global Corporate and Investment Banking business segment section, we evaluate our market-based results and strategies on a total market-based revenue approach by combining Net Interest Income and Noninterest Income for the Capital Markets and Advisory Services business. We also adjust for loans that we originated and sold into certain securitizations. These securitizations include off-balance sheet Loans and Leases, specifically those loans in revolving securitizations and other securitizations where servicing is retained by the Corporation (e.g., credit card and home equity lines). Noninterest Income, rather than Net Interest Income and Provision for Credit Losses, is recorded for assets that have been securitized as we are compensated for servicing the securitized assets and record servicing income and gains or losses on securitizations, where appropriate. We believe the use of this non-GAAP presentation provides additional clarity in assessing the results of the Corporation. An analysis of core net interest income - managed basis, core average earning assets - managed basis and core net interest yield on earning assets - managed basis, which adjusts for the impact of these two non-core items from reported Net Interest Income on a FTE basis, is shown below.

Table 7 Core Net Interest Income - Managed Basis
(Dollars in millions) 2006 2005 2004
Net interest income
As reported (FTE basis)
$
35,815
$
31,569
$
28,677
Impact of market-based net interest income (1) (1,651) (1,938) (2,606)
Core net interest income 34,164 29,631 26,071
Impact of securitizations 7,045 323 1,040
Core net interest income - managed basis
$
41,209
$
29,954
$
27,111
Average earning assets
As reported
$
1,269,144
$
1,111,994
$
905,273
Impact of market-based earning assets (1) (369,164) (322,236) (246,704)
Core average earning assets 899,980 789,758 658,569
Impact of securitizations 98,152 9,033 13,591
Core average earning assets - managed basis
$
998,132
$
798,791
$
672,160
Net interest yield contribution
As reported (FTE basis) 2.82
%
2.84
%
3.17
%
Impact of market-based activities 0.98 0.91 0.79
Core net interest yield on earning assets 3.80 3.75 3.96
Impact of securitizations 0.33 0.07
Core net interest yield on earning assets - managed basis 4.13
%
3.75
%
4.03
%
Footnote (1) Represents amounts from the Capital Markets and Advisory Services business within Global Corporate and Investment Banking.

Core net interest income on a managed basis increased $11.3 billion. This increase was primarily driven by the impact of the MBNA merger (volumes and spreads), consumer (primarily home equity) and commercial loan growth, and increases in the benefits from ALM activities, including increased portfolio balances (primarily residential mortgages) and the impact of changes in spreads across all product categories. Partially offsetting these increases was the higher costs associated with higher levels of wholesale funding.

On a managed basis, core average earning assets increased $199.3 billion primarily due to the impact of the MBNA merger, higher levels of consumer and commercial loans from organic growth and higher ALM levels (primarily residential mortgages).

Core net interest yield on a managed basis increased 38 bps as a result of the impact of the MBNA merger (volumes and spreads) and core deposit spread widening, partially offset by loan spread compression due to the flat to inverted yield curve and increased costs associated with higher levels of wholesale funding.