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.
(Dollars in millions, except per share information) | 2006 | 2005 | 2004 | 2003 | 2002 |
---|---|---|---|---|---|
Operating basis (1) | |||||
Operating earnings |
$ |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
Effect of merger and restructuring charges, net of tax benefit | 0.11 | 0.07 | 0.11 | | |
Diluted operating earnings per common share |
$ |
$ |
$ |
$ |
$ |
Reconciliation of net income to shareholder value added | |||||
Net income |
$ |
$ |
$ |
$ |
$ |
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 |
$ |
$ |
$ |
$ |
$ |
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 |
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.
(Dollars in millions) | 2006 | 2005 | 2004 | |
---|---|---|---|---|
Net interest income | ||||
As reported (FTE basis) |
$ |
$ |
$ |
|
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 |
$ |
$ |
$ |
|
Average earning assets | ||||
As reported |
$ |
$ |
$ |
|
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 |
$ |
$ |
$ |
|
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 % |
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.