-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, V4Cuwwwh9coMq5sNaiFYjbugjJEosK71mjT6Murd2YfxV2Ov8to6n5+93xMlXNsR jALc97OCflhV977P83mIqA== 0000950131-94-001317.txt : 19940819 0000950131-94-001317.hdr.sgml : 19940819 ACCESSION NUMBER: 0000950131-94-001317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST CHICAGO CORP CENTRAL INDEX KEY: 0000036161 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 362669970 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06052 FILM NUMBER: 94543796 BUSINESS ADDRESS: STREET 1: ONE FIRST NATL PLZ MAIL STE 0287 CITY: CHICAGO STATE: IL ZIP: 60670 BUSINESS PHONE: 3127324000 10-Q 1 FORM 10-Q FIRST CHICAGO CORPORATION AND SUBSIDIARIES FINANCIAL SUPPLEMENT AND FORM 10-Q
CONTENTS - - --------------------------------------------------------------- FIVE-QUARTER SUMMARY OF SELECTED FINANCIAL INFORMATION 1 BUSINESS SEGMENTS 2 EARNINGS ANALYSIS Summary 6 Net Interest Income 7 Provision for Credit Losses 9 Noninterest Income 9 Noninterest Expense 11 Applicable Income Taxes 11 Venture Capital Activities 12 BALANCE SHEET ANALYSIS Assets 13 Liabilities 13 Capital 14 CREDIT RISK ANALYSIS Summary 15 Allowance for Credit Losses 16 Nonperforming Assets 17 Consumer Risk Management 18 Commercial Risk Management 19 Commercial Real Estate 19 Highly Leveraged Transactions 20 FINANCIAL SECTION Consolidated Balance Sheet 21 Consolidated Income Statement 22 Consolidated Statement of Changes in Stockholders' Equity 23 Consolidated Statement of Cash Flows 24 Notes to Consolidated Financial Statements 25 SELECTED STATISTICAL INFORMATION Investment Securities 29 Impact of Credit Card Securitization 30 Analysis of Allowance for Credit Losses 31 Average Balances/Net Interest Margin/Rates 32 Five-Quarter Consolidated Income Statement 35 Selected Statistical Information 36 Financial Ratios 36 Common Stock Data 36 FORM 10-Q Form 10-Q Cross-Reference Index 38 Signatures 40
- - ----------------------------------------------------------------------------------------------------------------------- F I V E - Q U A R T E R S U M M A R Y O F S E L E C T E D F I N A N C I A L I N F O R M A T I O N First Chicago Corporation and Subsidiaries - - ----------------------------------------------------------------------------------------------------------------------- June March December September June (Dollars in millions, except per share data) 1994 1994 1993 1993 1993 - - ----------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL DATA FOR THE QUARTER Net interest income..................................... $332.8 $330.6 $300.7 $323.1 $303.2 Tax-equivalent adjustment............................... 5.9 4.9 6.2 17.5 8.3 ------ ------ ------ ------ ------ Net interest income--tax-equivalent basis............... 338.7 335.5 306.9 340.6 311.5 Provision for credit losses............................. 43.0 50.0 70.0 65.0 70.0 Noninterest income...................................... 428.8 501.9 523.0 685.4 503.5 Noninterest expense..................................... 460.6 484.5 481.9 475.5 466.6 Net income.............................................. 168.7 193.8 172.8 284.1 168.5 - - ----------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Net income - Primary.................................... $1.71 $2.05 $1.81 $3.14 $1.81 Net income - Fully diluted.............................. 1.67 2.00 1.77 2.97 1.72 - - ----------------------------------------------------------------------------------------------------------------------- AT QUARTER-END Assets.................................................. $64,089 $59,843 $52,560 $53,154 $49,959 Deposits................................................ 28,577 28,833 28,186 29,379 27,794 Loans................................................... 23,680 23,782 23,103 21,969 21,621 Long-term debt.......................................... 2,269 2,265 2,065 2,091 2,366 Common stockholders' equity............................. 3,763 3,647 3,503 3,378 3,018 Stockholders' equity.................................... 4,524 4,408 4,264 4,139 3,887 - - ----------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCES Assets.................................................. $60,490 $61,475 $57,708 $56,932 $56,951 Earning assets.......................................... 50,464 49,488 48,977 48,403 48,749 Loans................................................... 22,924 22,460 22,263 21,588 21,974 Deposits................................................ 29,009 29,366 29,075 29,343 30,062 Common stockholders' equity............................. 3,663 3,620 3,451 3,177 2,937 Stockholders' equity.................................... 4,424 4,381 4,212 4,004 3,806 - - ----------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS Return on stockholders' equity.......................... 15.3% 17.9% 16.3% 28.2% 17.8% Return on common stockholders' equity................... 16.5 20.2 18.3 33.8 20.9 Return on assets........................................ 1.12 1.28 1.19 1.98 1.19 - - ----------------------------------------------------------------------------------------------------------------------- CAPITAL DATA (1) Common-equity-to-assets................................. 6.5% 6.6% 7.2% 7.0% 6.5% Regulatory leverage ratio (2)........................... 8.0 7.8 8.0 8.0 7.4 Risk-based capital (2) Tier 1 ratio.......................................... 8.9 9.1 8.8 8.7 8.0 Total capital ratio................................... 13.8 14.2 13.6 13.5 13.0 Tier 1 capital........................................ $4,148 $4,182 $4,098 $3,969 $3,715 Total capital......................................... 6,424 6,509 6,292 6,179 6,001 - - ----------------------------------------------------------------------------------------------------------------------- COMMON SHARE AND STOCKHOLDER DATA FOR THE QUARTER ENDED Market price............................................ $48 1/8 $48 1/8 $43 1/4 $48 3/4 $41 1/8 Book value.............................................. 43.40 42.19 40.55 39.03 36.27 Dividends declared per common share..................... 0.50 0.40 0.40 0.30 0.30 Common dividends........................................ 43 34 35 26 25 Preferred dividends (3)................................. 18 14 14 13 16 Dividend payout ratio................................... 29.2% 19.5% 22.1% 9.6% 16.6% Average number of common and common-equivalent shares (in millions).................................. 88.0 87.7 87.7 86.1 84.5 Average number of shares, assuming full dilution (in millions)................................ 91.8 91.6 91.5 91.9 91.4 - - -----------------------------------------------------------------------------------------------------------------------
[FN] (1) Net of investment in First Chicago Capital Markets, Inc. (2) June 1994 excludes $150 million of Preferred Stock, Series D, that was redeemed on July 1, 1994. (3) Second quarter of 1994 includes a $4.5 million premium related to the redemption of Preferred Stock, Series D. 1 BUSINESS SEGMENTS The Corporation's financial results have been prepared in alignment with its three major business segments: Corporate and Institutional, Consumer, and Middle Market Banking. Results from other corporate activities, including venture capital, the accelerated asset disposition portfolio and other corporate items, are segregated and reported separately. Segment financial results are derived from the Corporation's internal profitability reporting system and reflect full allocation of all items, including institutional assets and overhead items. The Corporation maintains a detailed funds transfer pricing system that charges or credits assets and liabilities based on known or assumed repricing characteristics. In cases where liquidity characteristics differ significantly from repricing characteristics, a liquidity charge or credit is assigned. Common equity is allocated to each segment based on the measured risk of that segment using historical loss and volatility data.
- - ------------------------------------------------------------------------------------------------- Three Months Ended June 30 Corporate and Consumer Middle Market Other Corporate (Dollars in millions, Institutional Banking Banking Banking Activities (1) except where noted) 1994 1993 1994 1993 1994 1993 1994 1993 - - ------------------------------------------------------------------------------------------------- Net interest income- tax-equivalent basis...................... $ 99 $ 103 $ 184 $152 $ 59 $ 56 $ (3) $ 1 Provision for credit losses..................... (21) 10 57 50 7 10 - - Noninterest income.......... 140 231 237 207 22 21 30 45 Noninterest expense......... 172 203 235 214 46 48 8 2 Net income.................. 53 71 80 56 18 12 18 30 Return on equity (2)........ 12% 17% 36% 35% 21% 15% N/M N/M Efficiency ratio (3)........ 72% 61% 56% 60% 56% 61% N/M N/M Average assets (in billions).............. $43.7 $41.4 $9.9 $8.5 $5.5 $5.3 $1.4 $1.7 - - -------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------- Six Months Ended June 30 Corporate and Consumer Middle Market Other Corporate (Dollars in millions, Institutional Banking Banking Banking Activities (1) except where noted) 1994 1993 1994 1993 1994 1993 1994 1993 - - ------------------------------------------------------------------------------------------------- Net interest income- tax-equivalent basis...................... $ 196 $ 200 $ 373 $303 $116 $110 $(11) $ 4 Provision for credit losses..................... (22) 22 101 91 14 22 - - Noninterest income.......... 233 406 462 397 43 42 193 149 Noninterest expense......... 348 382 461 418 93 94 43 7 Net income.................. 61 121 168 115 34 22 100 90 Return on equity (2)........ 6% 16% 40% 35% 20% 14% N/M N/M Efficiency ratio (3)........ 81% 63% 55% 60% 58% 62% N/M N/M Average assets (in billions).............. $43.9 $39.4 $10.2 $8.8 $5.5 $5.4 $1.4 $2.8 - - -------------------------------------------------------------------------------------------------
(1) Includes results from the accelerated asset disposition portfolio, the venture capital group and other special corporate items. (2) The capital allocation method was changed in December 1993. Prior results have been restated to reflect this change, which did not have a material impact on results. (3) Noninterest expense as a percentage of total revenue. N/M - Not meaningful. 2 CORPORATE AND INSTITUTIONAL BANKING Net income of $53 million in Corporate and Institutional Banking and return on equity of 12 percent was a significant improvement from the first quarter, but year-to-date results were substantially below the 1993 level. Performance for the second quarter of 1994 reflected: - Difficult trading conditions, with continued below-trend revenues in foreign exchange, derivatives and emerging markets. - Continued excellent credit quality. - $32 million in interest income and recoveries related to the receipt of Brazilian bonds. - Lower noninterest expenses, due largely to reduced incentive compensation accruals. - Lower gains from corporate financing and debt restructuring equity securities. Revenue performance by activity, including both net interest income and fee revenue, is summarized in the following table.
- - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (In millions) 1994 1993 1994 1993 - - -------------------------------------------------------------------------------- Lending.................. $ 60 $ 52 $102 $ 98 Servicing................ 91 98 186 181 Financing................ 32 63 69 104 Trading.................. 43 118 44 197 Other.................... 13 3 28 26 ---- ---- ---- ---- Total................ $239 $334 $429 $606 ==== ==== ==== ==== - - --------------------------------------------------------------------------------
Lending revenues for the second quarter included $14 million from Brazilian interest bonds. Excluding this income, lending revenues were down slightly from a year ago, reflecting lower large corporate loan volume and narrower market pricing. Lower servicing revenues for the quarter resulted principally from timing of income in shareholder services. Revenues for six months in shareholder services, corporate trust and cash management were slightly above 1993 results. Financing revenues were reduced because of sharply lower corporate financing and debt restructuring equity securities gains -- down $29 million from 1993's second quarter. Year-to-date results were affected by the timing of leasing and syndications transactions. Trading results for the quarter and year-to-date dropped substantially from last year's record levels. Comparative data for key trading revenue components are shown in the following table. All other revenue reflected the higher funding value of increased capital, as well as lower interest costs for other institutional allocations. 3
- - -------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 (In millions) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------- Foreign exchange and derivatives..... $12 $ 37 $ 16 $ 48 Fixed income and derivatives......... 20 30 34 53 Emerging markets..................... (1) 17 (51) 27 Funding and arbitrage................ 8 17 20 35 Other trading........................ 4 17 25 34 --- ---- ---- ---- Total........................... $43 $118 $ 44 $197 === ==== ==== ==== - - --------------------------------------------------------------------------------
Less favorable market conditions caused lower revenues in foreign exchange and derivatives, and in fixed income and derivatives. Last year's environment, particularly in European markets, was considerably better for these activities. Emerging markets activities were sharply reduced in the quarter due to the generally unstable market conditions. Rising interest rates reduced funding and arbitrage opportunities relative to the falling rate conditions last year. Other trading revenues for the quarter included lower gains on distressed loan trading. CONSUMER BANKING This business segment continued to produce an outstanding return on equity -- 40 percent for 1994's first six months -- and outpaced last year's performance with a 46 percent improvement in net income for the first half. The credit card remained the driving factor in Consumer Banking's $80 million bottom line for the second quarter. Total credit card receivables reached $11.0 billion at quarter-end, up 22 percent from June 30, 1993. Related revenues and expenses rose at similar rates as the Corporation continued to invest aggressively to grow this business. In local retail banking, results for the first half of 1994 improved substantially over a year ago. As announced August 4, initiatives are underway to enhance the quality of products and services in this area in order to increase revenue and further reduce expenses. 4 MIDDLE MARKET BANKING The earnings contribution from Middle Market Banking was $18 million in the second quarter resulting in a 21 percent return on equity. Lower credit provisions together with reduced purchase accounting costs produced this significant improvement from a year ago. OTHER CORPORATE ACTIVITIES Accelerated asset disposition activities resulted in net revenue gains of $22 million for the second quarter. Earnings from the venture capital portfolio in the quarter were not significant. Year-to-date, venture capital produced significant net income of $66 million due principally to gains related to the Corporation's investment in NEXTEL Communications, Inc. Also included in Other Corporate Activities for the first half of 1994 is a $35 million pretax gain from the sale of the remaining interest in Brinson Holdings, Inc., an institutional investment management business. This was offset by total special expenses of $43 million related to the accounting for personal computer equipment, certain litigation costs, and other corporate items. STAFFING LEVELS Staff levels for each of the three business segments as well as corporate support functions were as follows.
- - ------------------------------------------------------------------------------- Average Full-Time-Equivalent 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. Staff 1994 1994 1993 1993 1993 - - ------------------------------------------------------------------------------- Corporate and Institutional............. 6,340 6,315 6,280 6,349 6,241 Consumer.................... 7,430 7,390 7,304 7,392 7,256 Middle Market............... 2,069 2,062 2,032 2,037 2,011 Corporate Support........... 1,527 1,514 1,502 1,538 1,483 ------ ------ ------ ------ ------ First Chicago Corporation.. 17,366 17,281 17,118 17,316 16,991 ====== ====== ====== ====== ====== ------------------------------------------------------------------------------
5 EARNINGS ANALYSIS SUMMARY The Corporation reported net income of $168.7 million, or $1.67 per share, for the second quarter of 1994, compared with $168.5 million, or $1.72 per share, for the second quarter of 1993. The redemptive dividend of $4.5 million accrued in the second quarter of 1994 related to Preferred Stock, Series D, reduced earnings by 5 cents per share. Excluding the results from the Corporation's venture capital operations, net income was $172.3 million, or $1.73 per share, compared with $147.9 million, or $1.52 per share a year ago.
- - --------------------------------------------------------------------------------- Three Months Six Months Ended Ended (Dollars in millions, June 30 June 30 except per share data) 1994 1993 1994 1993 - - -------------------------------------------------------------------------------- Net interest income--tax-equivalent basis.. $338.7 $311.5 $674.2 $616.5 Provision for credit losses................ 43.0 70.0 93.0 135.0 Noninterest income......................... 428.8 503.5 930.7 994.0 Noninterest expense........................ 460.6 466.6 945.1 900.7 No income.................................. 168.7 168.5 362.5 347.6 Common Share Data PRIMARY Net income............................... $ 1.71 $1.81 $3.76 $3.78 Average common and common-equivalent shares (in millions)................... 88.0 84.5 87.9 84.1 FULLY DILUTED Net income............................... $ 1.67 $1.72 $3.67 $3.64 Average shares, assuming full dilution (in millions).......................... 91.8 91.4 91.7 89.5 Return on assets........................... 1.12% 1.19% 1.20% 1.24% Return on common stockholders' equity...... 16.5 20.9 18.3 22.4 - - --------------------------------------------------------------------------------
Stronger net interest income and reduced credit provisions offset by lower revenues in market-driven businesses were key factors in the results for the second quarter of 1994. The credit card business was a major contributor to earnings, as managed receivables grew to $11 billion at June 30, 1994, up 22 percent from $9 billion a year ago. The Corporation received Brazilian bonds as part of a debt restructuring that was completed during the second quarter. This added approximately $32 million to pre-tax earnings, including $14 million in interest income representing the fair value of interest bonds; and $18 million representing the fair value of principal bonds in excess of the recorded carrying amounts, which was treated as a loan loss recovery. The provision for credit losses declined to $43 million in the second quarter. Reserve building for growth in the credit card portfolio was offset by a negative commercial provision, principally reflecting the Brazilian debt restructuring. Combined trading profits were $37 million in the second quarter of 1994, compared with record profits of $92 million a year ago. Despite the decline from a year ago, trading profits rebounded sharply from the 1994 first quarter, which produced overall losses of $25 million principally driven by $54 million in losses from emerging markets trading activities. 6 Other revenue for the second quarter of 1994 included net gains of $22 million resulting from accelerated asset disposition portfolio activities. These gains totaled $10 million a year ago. Excluding special charges that included a $12 million intangible write-off in the second quarter of 1993, noninterest expense in the second quarter of 1994 was up only 1 percent reflecting a continuing focus on expense control. The Corporation's regulatory capital ratios continued to increase and are considerably above "well-capitalized" regulatory guidelines. At June 30, 1994, the Corporation's risk-based capital ratio was 13.8 percent, compared with 13.6 percent at year-end 1993 and 13.0 percent a year ago. The regulatory leverage ratio remained strong at 8.0 percent, compared with 7.4 percent a year ago. Regulatory capital ratios for the Corporation's principal banking subsidiaries exceeded the minimum levels for well-capitalized institutions. The Corporation's solid capital position enabled it to take several important capital management steps: (1) the quarterly common stock dividend was increased 25 percent to 50 cents a share; (2) the common stock repurchase program was increased from 2.5 million shares to 7 million shares; and (3) the Corporation announced that on July 1, 1994, its Preferred Stock, Series D, would be redeemed at a 3 percent premium which will reduce annual preferred stock dividend requirements by $15 million. NET INTEREST INCOME Net interest income includes fundamental spreads on earning assets as well as such items as loan fees, cash interest collections on problem loans, dividend income, interest reversals, and income or expense on interest rate derivatives used to manage interest rate risk. Net interest income is a function of average earning assets and the net interest margin, which are presented in the following table.
- - ------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (Dollars in millions) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------- Net interest income -- tax-equivalent basis.................................... $338.7 $311.5 $674.2 $616.5 Average earning assets..................... $50,464 $48,749 $49,976 $48,344 Net interest margin........................ 2.69% 2.56% 2.72% 2.57% - - -------------------------------------------------------------------------------
In order to analyze fundamental trends in the Corporation's net interest margin, it is useful to adjust for: 1) securitization of credit card receivables, and 2) the activities of First Chicago Capital Markets, Inc. (FCCM). 7 When credit card receivables are sold in securitization transactions, the Corporation's earnings are unchanged; however, the net interest income related to these high-yield assets is displaced by increased servicing fees, net of portfolio credit losses. The average level of securitized assets was $5.1 billion in the second quarter of 1994, compared with $4.5 billion in the second quarter of 1993. The effect of credit card securitization transactions on the Corporation's financial statements is summarized on page 30. The impact is also discussed within specific categories of the Earnings Analysis. FCCM is the Corporation's wholly owned subsidiary engaged in permissible investment banking activities. Because capital requirements for FCCM are risk-exposure driven rather than based on asset levels, FCCM can generate substantial volumes of relatively riskless, thin-spread earning assets that require little additional capital. Net interest margin trends can be better analyzed if these earning assets and related margins are excluded. The following table reflects the elements of net interest margin adjusted for credit card securitizations and the activities of FCCM.
- - ------------------------------------------------------------------------------ Three Months Six Months Ended Ended June 30 June 30 (Dollars in millions) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------ Adjusted net interest income-- tax-equivalent basis............ $ 463.7 $ 416.4 $ 918.9 $ 822.7 Adjusted average earning assets... $47,382 $46,653 $47,193 $46,152 Adjusted net interest margin...... 3.93% 3.58% 3.93% 3.59% - - ------------------------------------------------------------------------------
On an adjusted basis, net interest margin for the second quarter of 1994, as compared to a year ago, increased 35 basis points to 3.93 percent. Adjusted net interest income rose to $464 million. Improved margins were primarily the result of strong growth in credit card receivables, which produced a more favorable earning asset mix. Average managed credit card receivables grew 22 percent to $10.5 billion in the second quarter of 1994, compared with $8.6 billion a year ago. Interest income of $14 million from the Brazilian debt restructuring added 12 basis points to the adjusted margin in the second quarter of 1994. A breakdown of average loans adjusted for credit card securitizations is presented in the following table.
- - ------------------------------------------------------------------------------ Average Loans For the Quarter Ended June 30 1994 1993 (Dollars in millions) Percent Percent - - ------------------------------------------------------------------------------ Commercial................................ $14,764 53% $15,640 59% Managed credit card receivables........... 10,541 37 8,619 32 Other consumer............................ 2,741 10 2,510 9 ------- --- ------- --- Total................................. $28,046 100% $26,769 100% ======= === ======= === - - ------------------------------------------------------------------------------
Average nonperforming assets totaled $237 million for the second quarter of 1994, a 39 percent reduction from the year-ago level of $389 million. 8 PROVISION FOR CREDIT LOSSES The provision for credit losses was $43 million for the quarter. The commercial provision was a negative $14 million, principally reflecting recoveries resulting from the Brazilian debt restructuring. In the second quarter of 1993, the commercial provision was $24 million. The provision for consumer loans, primarily for credit cards, was $57 million for the 1994 second quarter, compared with $46 million a year ago. This increase was related primarily to reserve building for growth in the credit card portfolio. The change in the allowance for credit losses is presented in the following table. - - ------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (Dollars in millions) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------- Allowance for credit losses --beginning of period...... $710 $610 $683 $ 624 Provision for credit losses.. 43 70 93 135 Net charge-offs.............. (34) (32) (67) (106) Other, transfers related to securitized receivables.... (38) (21) (28) (26) ---- ---- ---- ---- Net change in allowance for credit losses.......... (29) 17 (2) 3 ---- ---- ---- ---- Allowance for credit losses -- end of period........... $681 $627 $681 $ 627 ==== ==== ==== ==== -- as a percentage of loans outstanding....... 2.9% 2.9% 2.9% 2.9% -- as a percentage of nonperforming loans..... 454% 170% 454% 170% - - ------------------------------------------------------------------------------- Details of the Corporation's credit risk management and performance during the six months ended June 30, 1994, are presented in the Credit Risk Analysis section, beginning on page 15. NONINTEREST INCOME Noninterest income for the second quarter of 1994 decreased 15 percent to $428.8 million from the year-earlier level of $503.5 million. For the first six months of 1994, noninterest income totaled $930.7 million, down 6 percent from $994 million in 1993. - - ------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (In millions) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------- Combined trading account profits.................... $ 36.7 $ 91.6 $ 12.0 $146.1 Equity securities gains...... 3.9 78.7 138.1 211.9 Investment securities gains.. 0.6 0.2 1.1 0.2 ------ ------ ------ ------ Market-driven revenues..... 41.2 170.5 151.2 358.2 Credit card fee revenue...... 193.9 164.2 376.2 310.9 Service charges and commissions................ 104.2 103.9 205.5 202.1 Fiduciary and investment management fees............ 49.3 53.6 101.7 102.1 Net gains from accelerated disposition portfolio activities................. 21.5 10.0 31.5 10.0 Other........................ 18.7 1.3 64.6 10.7 ------ ------ ------ ------ Total...................... $428.8 $503.5 $930.7 $994.0 ====== ====== ====== ====== - - ------------------------------------------------------------------------------- 9 Market-driven revenues include trading account profits, foreign exchange trading profits, and both equity and investment securities gains. Market-driven revenues for the second quarter of 1994 decreased to $41.2 million, compared with $170.5 million for the same period in 1993. Market-driven revenues were $151.2 million for the first six months of 1994, compared with $358.2 million for the same period in 1993. Combined trading account profits were $36.7 million in the second quarter of 1994, compared with record profits of $91.6 million a year ago. For the first six months of 1994, combined trading account profits were $12.0 million, compared with $146.1 million a year ago. See the line-of-business discussion related to trading results on page 3 for further information. Equity securities gains arise principally from the Corporation's venture capital and corporate finance activities, as well as from the sale of securities received in troubled-debt restructurings. The following table presents a breakdown of securities gains from these activities.
- - -------------------------------------------------------------------------------- Three Months Six Months Ended June 30 Ended June 30 (In millions) 1994 1993 1994 1993 - - -------------------------------------------------------------------------------- Venture capital............................ $2.4 $42.4 $121.0 $152.8 Corporate finance.......................... 1.5 28.2 16.6 35.9 Debt restructuring......................... - 8.1 0.5 23.2 ---- ----- ------ ------ Total equity securities gains............ $3.9 $78.7 $138.1 $211.9 ==== ===== ====== ====== - - --------------------------------------------------------------------------------
The venture capital portfolio accounted for $121 million of the year-to-date gains, of which approximately 65 percent was related to the Corporation's investment in NEXTEL Communications, Inc., a telecommunications services company. Adjusted for the effects of credit card securitization, credit card fee growth was 15 percent for the second quarter and 17 percent for the first six months of 1994. This revenue growth resulted from increased transaction volumes. Service charges and commissions for the first six months of 1994 rose 2 percent from the year-earlier period to $205.5 million, resulting primarily from growth in product revenues. Fiduciary and investment management fees for the second quarter of 1994 declined 8 percent from one year ago, to $49.3 million. The corporate shareholder services business generated $19.6 million of these revenues in the second quarter of 1994, compared with $23.0 million in the second quarter of 1993. Other revenue in the first quarter of 1994 included a $34.5 million gain related to the sale of the Corporation's remaining interest in Brinson Holdings, Inc. to Brinson's management. Other revenue in the second quarter of 1993 was reduced by a $5 million charge that related to the early retirement of subordinated debt and a $4 million charge that represented losses related to partnership distributions on investments in the venture capital portfolio. 10 NONINTEREST EXPENSE Operating expenses were $460.6 million for the second quarter of 1994, compared with $466.6 million a year ago. Second-quarter 1993 expenses included a $12.4 million charge for the accelerated amortization of certain acquired intangibles. Excluding special charges, operating expense in the second quarter was up only 1 percent from a year ago. - - --------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (In millions) 1994 1993 1994 1993 - - --------------------------------------------------------------------------- Salaries and benefits....................... $212.9 $210.9 $420.3 $409.7 Occupancy expense of premises, net.......... 35.7 36.0 70.5 75.0 Equipment rentals, depreciation and maintenance............................... 32.3 26.5 85.6 53.5 Amortization of intangible assets........... 17.0 31.5 35.2 50.3 Deposit insurance expense................... 10.8 14.2 21.5 28.4 Other....................................... 151.9 147.5 312.0 283.8 ------ ------ ------ ------ Total................................. $460.6 $466.6 $945.1 $900.7 ====== ====== ====== ====== - - ---------------------------------------------------------------------------
In the 1994 second quarter, salaries and benefits increased $2.0 million, or 0.9 percent, from one year ago. For the first six months of 1994, salaries and benefits increased 3 percent from a year ago. The impact of higher staff levels, increased 401(k) contributions and reduced pension credits was partially offset by reduced incentive compensation accruals. Equipment rentals, depreciation and maintenance grew 22 percent to $32.3 million in the second quarter of 1994, compared with $26.5 million a year ago. The increase reflects the expensing of personal computer equipment; previously, purchases of personal computers were capitalized and depreciated. Currently, most purchases of such equipment are being expensed. The first quarter of 1994 included a special charge of $24.5 million reflecting the reduction in the estimated useful life of certain personal computer equipment. Other operating expense in the first six months of 1994 included $18.7 million of special corporate expense items that were primarily incurred in the first quarter; $3.0 million of similar charges were incurred a year ago. Excluding these charges, other operating expense rose 4 percent, mainly due to higher bankcard marketing and solicitation costs. APPLICABLE INCOME TAXES - - --------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 (Dollars in millions) 1994 1993 1994 1993 - - --------------------------------------------------------------------------- Income before income taxes.................. $258.0 $270.1 $556.0 $560.3 Applicable income taxes..................... 89.3 101.6 193.5 212.7 Effective tax rate.......................... 34.6% 37.6% 34.8% 38.0% - - ---------------------------------------------------------------------------
The decrease in the effective tax rate for the second quarter of 1994 as compared to a year ago is due to a favorable tax ruling in 1994 as well as the special intangible charge recorded in 1993. Tax expense for the first six months of 1994 also reflects a one-time tax benefit for the first quarter implementation of the final I.R.S. bad debt recapture regulations. 11 VENTURE CAPITAL ACTIVITIES The Corporation's portfolio of venture capital investments is composed of publicly traded equity securities held directly, publicly traded equity securities held indirectly, and investments in private companies. Venture Capital Portfolio - - ------------------------------------------------------------------------------- June 30, 1994 Investments Investments (In millions) Held Directly Held Indirectly Total - - ------------------------------------------------------------------------------- Publicly traded equity investments Gross value............. $384 $ 559 $ 943 Discount................ (17) (132) (149) ---- ----- ------ Fair value........... $367 $ 427 794 ==== ===== Investments in private companies................. 649 ------ Total...................... $1,443 ====== - - -------------------------------------------------------------------------------
Fair value accounting is used for this portfolio, which has significantly increased the volatility of the Corporation's reported earnings. The Corporation has instituted a program intended to reduce volatility relative to expected returns, through the use of equity derivatives and the sale of investments. As a material example, during the first quarter of 1994, the Corporation issued Debt Exchangeable for Common Stock ("DECS") related to 7.475 million shares of its holdings in NEXTEL Communications, Inc. The DECS transaction limits the Corporation's downside risk on this investment to the $271 million DECS proceeds and, at the same time, allows the Corporation to share in potential market appreciation. As of June 30, 1994, 58 percent of the $794 million in publicly traded investments was hedged under this program. Management intends to continue to use these and other techniques to hedge the price risk inherent in this portfolio. The following table provides fair value and sale information for the portfolio for 1994. Venture Capital Portfolio Activity - - ------------------------------------------------------------------------------- Publicly Traded Private (In millions) Companies Companies Total - - ------------------------------------------------------------------------------- Fair value--December 31, 1993........... $ 759 $698 $1,457 Additional investments.................. 10 44 54 Appreciation (depreciation) recorded as equity securities gains (losses)(1).... 157 (2) 155 Sales proceeds (1)...................... (150) (33) (183) Other (2)............................... 18 (58) (40) ----- ---- ------ Fair value--June 30, 1994 (3)........... $ 794 $649 $1,443 ===== ==== ====== Unrealized appreciation (depreciation) at June 30, 1994....................... $ 555 $ (2) $ 553 ===== ==== ====== - - -------------------------------------------------------------------------------
(1) Net of transaction costs. (2) Includes principal repayments, fund distributions and sales, and certain reclassifications. (3) Publicly traded amount includes net unrealized gains of $35 million related to hedging instruments used to reduce the earnings volatility of the venture capital portfolio. In addition to the $1.4 billion of investments in the venture capital portfolio, unfunded commitments totaled $256 million at June 30, 1994. 12 BALANCE SHEET ANALYSIS ASSETS The Corporation's assets totaled $64.1 billion at June 30, 1994, up from $52.6 billion at year-end 1993 and $50 billion at June 30, 1993. In 1994, the Corporation prospectively adopted FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, which increased the Corporation's total assets and total liabilities. For more information regarding the impact on the Corporation's balance sheet, see Note 6 on page 26. The Corporation believes that asset liquidity is the most effective way to manage overall liquidity. One measure of the Corporation's liquidity is the ratio of liquid assets to total assets for The First National Bank of Chicago and FCC National Bank. The short-term assets defined as liquid are deposit placements (due from banks--interest-bearing) and federal funds sold. During the first six months of 1994, the Corporation maintained an average liquid asset ratio of 20 percent. This ratio was well in excess of the 10 percent to 15 percent range targeted by the Corporation. The Corporation continues to use credit card securitization as an effective tool for increasing liquidity and diversifying funding sources. Securitized credit cards totaled $5.6 billion at June 30, 1994, compared with $5.0 billion at year-end 1993 and $5.0 billion at June 30, 1993. Loans increased $577 million from year-end 1993 and $2.1 billion from June 30, 1993. The increase from year-end 1993 was primarily due to an increase in commercial loans. The continued growth in credit card receivables significantly contributed to the year-to-year growth in loans. LIABILITIES The Corporation's total liabilities were $59.6 billion at June 30, 1994, up from $48.3 billion at year-end 1993 and $46.1 billion at June 30, 1993. The continued diversification of liabilities among instruments, maturities and depositors is intended to balance the total expense of gathering funds with the maintenance of flexibility in funding options. The Corporation is able to adjust its funding based on its needs through an established distribution network in both domestic and international markets. The Corporation has strengthened its retail deposit base in recent years through its expanded presence in the Chicago area. The Corporation increased the use of short-term bank notes in order to better match asset repricing and maturity characteristics. These notes increased $1.3 billion from year-end 1993 and $2.2 billion from a year ago. At the same time, the level of negotiable certificates of deposit declined by $257 million from year-end 1993 and $389 million from a year ago. Long-term debt increased $204 million from year-end 1993 as a result of the issuance of $200 million of subordinated debt in January 1994. Long-term debt decreased $97 million from a year ago due to the redemption of $428 million of subordinated debt and $24 million of senior debt partially offset by the January 1994 issuance, as well as the issuance of $150 million of subordinated debt in the third quarter of 1993. The Corporation's Statement of Cash Flows is presented on page 24. 13 CAPITAL Stockholders' equity totaled $4.5 billion at June 30, 1994, up from $4.3 billion at December 31, 1993, and $3.9 billion at June 30, 1993. Because of the Corporation's solid capital position, several important capital management steps were taken during the quarter: (1) the quarterly common stock dividend was increased to 50 cents a share, from 40 cents a share, (2) the common stock repurchase program was increased from 2.5 million shares to 7 million shares and (3) the Corporation announced that on July 1, 1994, its Preferred Stock, Series D, would be redeemed at a 3 percent premium. This action will reduce annual preferred stock dividend requirements by $15 million. The Corporation's principal capital objective is to maintain and enhance its strong capital ratios relative both to its peer group and to the regulatory capital guidelines. Management believes that a strong capital position is instrumental in achieving enhanced stockholder returns over the long term. The Corporation increased regulatory capital in the first quarter of 1994 by issuing $200 million of subordinated debt. The Corporation's ratio of common equity to assets, net of its investment in FCCM, was 6.5 percent at June 30, 1994, 7.2 percent at year-end 1993 and 6.5 percent a year ago. The following table shows the components of regulatory capital as defined by the banking regulators for risk-based capital and leverage ratio guidelines.
- - ----------------------------------------------------------------------------- Regulatory Capital June 30 December 31 June 30 (In millions) 1994 1993 1993 - - ----------------------------------------------------------------------------- Tier 1 capital Common stockholders' equity....... $3,763 $3,503 $3,018 Preferred stock................... 611(1) 761 869 Less: 50 percent of investment in FCCM................... (129) (69) (70) Less: Disallowed intangibles and other adjustments.......... (97) (97) (102) ------ ------ ------ Tier 1 capital.................. 4,148 4,098 3,715 ------ ------ ------ Tier 2 capital Allowance for credit losses (2)... 585 581 579 Qualifying long-term debt......... 1,820 1,682 1,777 Less: 50 percent of investment in FCCM................... (129) (69) (70) ------ ------ ------ Tier 2 capital.................. 2,276 2,194 2,286 ------ ------ ------ Total capital........... $6,424 $6,292 $6,001 ====== ====== ====== - - -----------------------------------------------------------------------------
(1) Excludes $150 million of Preferred Stock, Series D redeemed on July 1, 1994. (2) Limited to 1.25 percent of risk-weighted assets. The risk-based capital guidelines consider both balance-sheet and off-balance-sheet credit risk, while the leverage ratio is an ongoing tool to monitor capital in relation to total average assets. The Corporation's Tier 1 and total risk-based capital ratios, as well as its leverage ratio, exceed the current regulatory minimum guidelines by a considerable margin. The Corporation intends to continue to build its capital resources in the current year primarily through internal capital generation and effective balance sheet management. 14
- - ------------------------------------------------------------------------------- Regulatory Capital Ratios Minimum June 30 Dec. 31 June 30 Regulatory 1994 1993 1993 Requirements - - ------------------------------------------------------------------------------- Risk-Based Capital Ratios Tier 1 capital........... 8.9% 8.8% 8.0% 4.0% Total capital............ 13.8 13.6 13.0 8.0 Leverage Ratio............. 8.0 8.0 7.4 3.0 - - -------------------------------------------------------------------------------
As of June 30, 1994, the regulatory capital ratios for all of the Corporation's banking subsidiaries exceeded the minimum levels for well-capitalized institutions. To achieve well-capitalized status, a bank's Tier 1 and total capital ratios must be at least 6 percent and 10 percent, respectively. In addition, its leverage ratio must be at least 5 percent. CREDIT RISK ANALYSIS Summary
- - -------------------------------------------------------------------------------- Selected Statistical Information June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1994 1994 1993 1993 1993 - - -------------------------------------------------------------------------------- At period-end: Loans outstanding............... $23,680 $23,782 $23,103 $21,969 $21,621 Nonperforming loans (1)......... 150 237 234 307 370 Other real estate, net.......... 31 43 43 44 45 Nonperforming assets............ 181 280 277 351 415 Allowance for credit losses..... 681 710 683 637 627 Nonperforming loans/ loans outstanding.............. 0.6% 1.0% 1.0% 1.4% 1.7% Nonperforming assets/loans outstanding and other real estate, net............... 0.8 1.2 1.2 1.6 1.9 Allowance for credit losses/ loans outstanding.............. 2.9 3.0 3.0 2.9 2.9 Allowance for credit losses/ nonperforming loans............ 454 300 292 208 170 For the quarter ended: Average loans outstanding....... $22,924 $22,460 $22,263 $21,588 $21,974 Net charge-offs................. 34 33 39 37 32 Net charge-offs/average loans(2) 0.6% 0.6% 0.7% 0.7% 0.6% - - --------------------------------------------------------------------------------
(1) The Corporation's term loans to Brazil, having a net book value of $49 million, were exchanged during the second quarter of 1994 for securities having a market value of $81 million as part of Brazil's recent term debt restructuring. For additional information on this transaction, see page 6. (2) Annualized. 15 For analytical purposes, the Corporation's portfolio is divided into commercial (domestic and foreign office) and consumer (credit card and other nonbusiness credit to individuals) segments.
- - -------------------------------------------------------------------------------- Loan Composition June 30 March 31 Dec. 31 Sept. 30 June 30 (In millions) 1994 1994 1993 1993 1993 - - -------------------------------------------------------------------------------- Commercial Risk Domestic office Commercial............... $ 7,148 $ 6,438 $ 6,007 $ 5,807 $ 6,536 Commercial real estate Construction........... 284 302 315 384 386 Other.................. 2,106 2,050 2,094 2,106 2,054 Financial institutions... 1,018 1,241 1,292 1,295 1,288 Other.................... 2,639 2,631 2,746 3,258 2,510 ------- ------- ------- ------- ------- Total domestic......... 13,195 12,662 12,454 12,850 12,774 Foreign office............. 2,153 2,578 1,975 2,030 2,225 ------- ------- ------- ------- ------- Total commercial... 15,348 15,240 14,429 14,880 14,999 ------- ------- ------- ------- ------- Consumer Risk Credit cards............... 5,356 5,736 5,778 4,302 4,000 Secured by real estate Mortgage................. 1,425 1,370 1,469 1,370 1,222 Home equity.............. 803 767 780 813 824 Other...................... 748 669 647 604 576 ------- ------- ------- ------- ------- Total consumer..... 8,332 8,542 8,674 7,089 6,622 ------- ------- ------- ------- ------- Total.............. $23,680 $23,782 $23,103 $21,969 $21,621 ======= ======= ======= ======= ======= - - --------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is maintained at a level considered adequate to provide for the credit losses inherent in the loan portfolio. The credit risk associated with certain off-balance-sheet exposures for credit-related and derivative financial instruments is also included in the assessment of the adequacy of the allowance. While the allowance for credit losses is available to absorb potential losses in the entire credit portfolio, its composition reflects an internal allocation to the commercial and consumer segments. Potential losses associated with the commercial and consumer categories are estimated quarterly and are reflected in the allowance for credit losses. The underlying credit risk for both these categories of credit exposure is actively managed. Using this framework, the following table presents an allocation of the allowance for credit losses for both categories of credit exposure.
- - ----------------------------------------------------------------------------------------- Allowance for Credit Losses Three Months Ended Six Months Ended June 30, 1994 June 30, 1994 -------------------------------------------------------- (Dollars in millions) Commercial Consumer Total Commercial Consumer Total - - ----------------------------------------------------------------------------------------- Balance--beginning of period... $507 $203 $710 $488 $195 $683 Provision for credit losses.... (14) 57 43 (7) 100 93 Net (charge-offs)/recoveries... 9 (43) (34) 21 (88) (67) Other, transfers related to securitized receivables....... - (38) (38) - (28) (28) ---- ---- ---- ---- ---- ---- Balance--end of period......... $502 $179 $681 $502 $179 $681 ==== ==== ==== ==== ==== ==== Allowance as a percentage of loans outstanding........ 3.3% 2.1% 2.9% 3.3% 2.1% 2.9% Allowance as a percentage of nonperforming loans...... 335 - 454 335 - 454 - - -----------------------------------------------------------------------------------------
16 NONPERFORMING ASSETS The following table shows the trend in nonperforming assets, as well as the level of nonperforming loans by portfolio segment.
- - ---------------------------------------------------------------------------------------------- Nonperforming Assets June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1994 1994 1993 1993 1993 - - ---------------------------------------------------------------------------------------------- Nonaccrual loans............................... $146 $233 $230 $303 $366 Accrual renegotiated loans..................... 4 4 4 4 4 ---- ---- ---- ---- ---- Total nonperforming loans.................. $150 $237 $234 $307 $370 ==== ==== ==== ==== ==== Nonperforming Loans Commercial real estate....................... $ 72 $101 $108 $151 $190 Troubled-country debtor...................... 1 50 50 57 57 Other........................................ 77 86 76 99 123 ---- ---- ---- ---- ---- Total nonperforming loans................. 150 237 234 307 370 ---- ---- ---- ---- ---- Other real estate, net Owned assets................................. 12 26 29 14 11 In-substance foreclosed assets............... 19 17 14 30 34 ---- ---- ---- ---- ---- Total other real estate, net.............. 31 43 43 44 45 ---- ---- ---- ---- ---- Total nonperforming assets................ $181 $280 $277 $351 $415 ==== ==== ==== ==== ==== Nonperforming assets as a percentage of loans outstanding and other real estate net....... 0.8% 1.2% 1.2% 1.6% 1.9% - - ----------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing interest amounted to $54 million at June 30, 1994, compared with $63 million at December 31, 1993, and $200 million at June 30, 1993.
- - ----------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, 1994 June 30, 1994 ------------------------ ------------------------ Reconciliation of Changes in Commercial Commercial Nonperforming Loans Real Real (In millions) Estate Other Total Estate Other Total - - ----------------------------------------------------------------------------------------------- Nonperforming loans--beginning of period... $101 $136 $237 $108 $126 $234 Loans placed on nonperforming status....... 10 11 21 19 44 63 Charge-offs................................ (12) (2) (14) (14) (12) (26) Transfers to other real estate............. (4) -- (4) (11) -- (11) Transfers to accrual status................ (18) (7) (25) (19) (9) (28) Other: Impact of Brazilian debt restructuring.. -- (49) (49) -- (49) (49) Principally payments.................... (5) (11) (16) (11) (22) (33) ---- ---- ---- ---- ---- ---- Nonperforming loans--end of period......... $ 72 $ 78 $150 $ 72 $ 78 $150 ==== ==== ==== ==== ==== ==== - - -----------------------------------------------------------------------------------------------
17 CONSUMER RISK MANAGEMENT Consumer loans consist of credit card receivables as well as home mortgage loans, home equity loans and other forms of installment credit. At June 30, 1994, consumer loans totaled $8.3 billion. Total managed credit card receivables (i.e. those held in the portfolio and those sold to investors through securitization) were $11.0 billion at June 30, 1994, up 22 percent from a year earlier. At June 30, 1994, the allowance for credit losses related to the consumer portfolio was $179 million, or 2.1 percent of loans. Comparable figures for December 31, 1993, were $195 million and 2.2 percent. Net charge-offs in the second quarter were $43 million, compared with $26 million in the second quarter of 1993.
- - ------------------------------------------------------------------------------------------------- Consumer Loans June 30 March 31 Dec. 31 Sept. 30 June 30 (In millions) 1994 1994 1993 1993 1993 - - ------------------------------------------------------------------------------------------------- Credit card.......................... $ 5,356 $ 5,736 $ 5,778 $ 4,302 $ 4,000 Other consumer loans................ 2,976 2,806 2,896 2,787 2,622 Securitized credit card receivables.. 5,617 4,700 4,958 5,333 5,008 ------- ------- ------- ------- ------- Total........................... $13,949 $13,242 $13,632 $12,422 $11,630 ======= ======= ======= ======= ======= - - -------------------------------------------------------------------------------------------------
Average credit card receivables for the second quarter of 1994 grew 22 percent from the year-earlier quarter and 7 percent from the fourth quarter of 1993. The net charge-off rate for the total average managed credit card portfolio was 3.8 percent in the second quarter of 1994. Charge-off rates for the remainder of the year are expected to be in line with second-quarter 1994 results.
- - --------------------------------------------------------------------------------------------- Average Credit Card Receivables For the Quarter Ended June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1994 1994 1993 1993 1993 - - --------------------------------------------------------------------------------------------- Credit card loans outstanding........ $ 5,435 $ 5,473 $ 4,661 $ 4,014 $ 4,116 Securitized credit card receivables.. 5,106 4,848 5,203 5,170 4,503 ------- -------- ------- -------- ------- Total credit card receivables... $10,541 $ 10,321 $ 9,864 $ 9,184 $ 8,619 ======= ======== ======= ======== ======= Total net charge-offs (including securitizations)........ $ 100 $ 91 $ 88 $ 81 $ 84 ======= ======== ======= ======== ======= Net charge-offs/average total receivables (1).................... 3.8% 3.6% 3.5% 3.5% 3.9% ======= ======== ======= ======== ======= - - ---------------------------------------------------------------------------------------------
(1) Annualized. 18 COMMERCIAL RISK MANAGEMENT Commercial loans totaled $15.3 billion at June 30, 1994, up 6.4 percent from December 31, 1993, and 2.3 percent from June 30, 1993. During the second quarter, net recoveries in the commercial portfolio totaled $9 million. The provision for credit losses related to the commercial portfolio was a negative $14 million, and the quarter-end reserve of $502 million represented 3.3 percent of total commercial loans and 335 percent of nonperforming loans. COMMERCIAL REAL ESTATE Commercial real estate consists primarily of loans secured by real estate. In addition, this category includes certain loans that are not secured by real estate when 80 percent or more of the borrower's revenues are derived from real estate activities and the loans are not collateralized by cash or marketable securities. - - ------------------------------------------------------------------------------- Commercial Real Estate Assets June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions) 1994 1994 1993 1993 1993 - - ------------------------------------------------------------------------------- Commercial real estate loans (1)...... $2,451 $2,416 $2,474 $2,563 $2,526 Nonperforming loans................... 72 101 108 151 190 Other real estate, net................ 31 43 43 44 45 Nonperforming assets.................. 103 144 151 195 235 Net charge-offs for the quarter....... 11 - 9 21 5 Nonperforming assets/loans outstanding and other real estate, net.......... 4.1% 5.9% 6.0% 7.5% 9.1% - - -------------------------------------------------------------------------------
(1) Includes loans booked in foreign offices. The following table presents loans secured by real estate identified by both geographic region and collateral type. Since real estate-related loans are not in all cases geographic- or property-specific, such loans are not included in the table below. - - ---------------------------------------------------------------------------------------------------- Commercial Real Estate Assets June 30, 1994 (Dollars in millions) - - ---------------------------------------------------------------------------------------------------- Industrial/ Office Shopping Land Service Geographic Region Buildings Hotels Centers Loans Centers Other Total Percent - - ---------------------------------------------------------------------------------------------------- Chicago..................... $241 $ 29 $150 $48 $623 $625 $1,716 77% Southeast................... 45 18 43 - 12 5 123 5 Los Angeles................. 30 11 16 - 12 22 91 4 Other California............ 3 31 21 - 6 21 82 4 Other Midwest............... 35 5 18 - 11 3 72 3 Arizona/Colorado/Texas...... 4 15 - 26 1 - 46 2 Other....................... 23 59 9 - 2 8 101 5 ---- ---- ---- --- ---- ---- ------ --- Total loans secured by real estate............. $381 $168 $257 $74 $667 $684 $2,231 100% ==== ==== ==== === ==== ==== ====== === - - ---------------------------------------------------------------------------------------------------- Nonperforming loans secured by real estate............ $10 $- $2 $26 $15 $19 $72 Other real estate........... - 1 5 2 7 16 31 - - ----------------------------------------------------------------------------------------------------
19 HIGHLY LEVERAGED TRANSACTIONS The Corporation originates and syndicates highly leveraged transactions (HLTs). Policies and procedures are maintained for the management and reporting of HLT exposure. The Corporation continues to disclose this exposure using the HLT definition previously established by federal banking regulatory agencies. - - ------------------------------------------------------------------------------ HLT Credit Exposure June 30 March 31 Dec. 31 Sept. 30 June 30 (In millions) 1994 1994 1993 1993 1993 - - ------------------------------------------------------------------------------ Loans...................... $590 $650 $ 711 $ 871 $ 834 Other credit exposure...... 333 309 303 344 442 ---- ---- ------ ------ ------ Total HLT credit exposure.. $923 $959 $1,014 $1,215 $1,276 ==== ==== ====== ====== ====== - - ------------------------------------------------------------------------------ Credit exposure to communications and electronics-related industries represented the only significant HLT concentrations. These concentrations reflected approximately 27 and 12 percent, respectively, of HLT credit exposure at June 30, 1994. During the second quarter of 1994, there were no charge-offs of HLT loans. HLT net charge-offs were $4 million in the second quarter of 1993. Nonperforming HLT loans totaled $1 million at June 30, 1994. At December 31, 1993, and June 30, 1993, nonperforming HLT loans were $1 million and $35 million, respectively. The Corporation's venture capital subsidiaries have invested in companies that have substantially higher leverage than would normally exist in their industries. At June 30, 1994, this portfolio consisted of 38 HLT investments, with a carrying value of $396 million. At June 30, 1994, gross unrealized gains related to HLT investments totaled $85 million while gross unrealized losses were $67 million. The same portfolio at December 31, 1993, and June 30, 1993, totaled $397 million and $390 million, respectively. At June 30, 1994, $2 million of unfunded commitments were related to the HLT segment of the venture capital portfolio. 20 FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
- - ---------------------------------------------------------------------------------------------------------------------------- June 30 December 31 June 30 - - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in millions) 1994 1993 1993 - - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks--noninterest-bearing........................................... $ 3,373 $ 3,916 $ 4,161 Due from banks--interest-bearing....................................................... 7,759 6,037 6,290 Federal funds sold and securities under resale agreements.............................. 13,674 8,783 7,852 Trading account assets................................................................. 5,037 4,536 3,427 Investment securities (fair values--$2,255, $2,264, and $2,197, respectively).......... 2,254 2,256 2,185 Loans (net of unearned income--$263, $282, and $307, respectively)..................... 23,680 23,103 21,621 Less allowance for credit losses..................................................... 681 683 627 ------- ------- ------- Loans, net........................................................................... 22,999 22,420 20,994 Premises and equipment................................................................. 639 635 602 Accrued income receivable.............................................................. 444 407 366 Customers' acceptance liability........................................................ 486 517 498 Derivative product assets.............................................................. 6,086 - - Other assets........................................................................... 1,338 3,053 3,584 ------- ------- ------- Total assets................................................................. $64,089 $52,560 $49,959 ======= ======= ======= - - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits Demand............................................................................... $ 7,009 $ 8,184 $ 6,964 Savings.............................................................................. 7,401 7,541 7,545 Time................................................................................. 4,321 4,925 5,063 Foreign offices...................................................................... 9,846 7,536 8,222 ------- ------- ------- Total deposits............................................................... 28,577 28,186 27,794 Federal funds purchased and securities under repurchase agreements..................... 12,208 8,255 6,359 Other funds borrowed................................................................... 8,051 6,007 5,627 Long-term debt......................................................................... 2,269 2,065 2,366 Acceptances outstanding................................................................ 486 517 498 Derivative product liabilities......................................................... 6,094 - - Other liabilities...................................................................... 1,880 3,266 3,428 ------- ------- ------- Total liabilities............................................................ 59,565 48,296 46,072 - - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock........................................................................ 761 761 869 Common stock--$5 par value............................................................. 434 434 417 Number of shares authorized--150,000,000 Number of shares issued--86,824,888, 86,715,812, and 83,369,073, respectively Number of shares outstanding--86,697,805, 86,398,605, and 83,217,811, respectively Surplus................................................................................ 1,721 1,724 1,617 Retained earnings...................................................................... 1,616 1,358 989 Other adjustments...................................................................... (2) - - ------- ------- ------- Total........................................................................ 4,530 4,277 3,892 Less treasury stock at cost, 127,083, 317,207, and 151,262 shares, respectively........ 6 13 5 ------- ------- ------- Stockholders' equity......................................................... 4,524 4,264 3,887 ------- ------- ------- Total liabilities and stockholders' equity................................... $64,089 $52,560 $49,959 ======= ======= ======= - - ----------------------------------------------------------------------------------------------------------------------------
21 FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT
- - ------------------------------------------------------------------------------- Three Months Six Months Ended Ended June 30 June 30 - - ------------------------------------------------------------------------------- (In millions, except per share data) 1994 1993 1994 1993 - - ------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans.... $470.3 $416.3 $ 907.9 $ 839.1 Interest on bank balances..... 82.5 75.9 157.5 154.7 Interest on federal funds sold and securities under resale agreements........... 133.7 82.0 224.7 166.6 Interest on trading account assets...................... 56.7 55.7 115.8 106.4 Interest on investment securities (including dividends).................. 14.6 18.6 30.5 40.9 ------ ------ -------- -------- Total............... 757.8 648.5 1,436.4 1,307.7 - - ------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits.......... 182.9 160.6 336.8 331.6 Interest on federal funds purchased and securities under repurchase agreements.................. 110.0 71.6 191.8 152.8 Interest on other funds borrowed.................... 90.8 76.9 162.2 152.2 Interest on long-term debt.... 41.3 36.2 82.2 69.1 ------ ------ -------- -------- Total............... 425.0 345.3 773.0 705.7 - - ------------------------------------------------------------------------------- NET INTEREST INCOME........... 332.8 303.2 663.4 602.0 Provision for credit losses... 43.0 70.0 93.0 135.0 ------ ------ -------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES. 289.8 233.2 570.4 467.0 - - ------------------------------------------------------------------------------- NONINTEREST INCOME Combined trading profits...... 36.7 91.6 12.0 146.1 Equity securities gains....... 3.9 78.7 138.1 211.9 Investment securities gains... 0.6 0.2 1.1 0.2 ------ ------ -------- -------- Market-driven revenue....... 41.2 170.5 151.2 358.2 Credit card fee revenue....... 193.9 164.2 376.2 310.9 Service charges and commissions................. 104.2 103.9 205.5 202.1 Fiduciary and investment management fees............. 49.3 53.6 101.7 102.1 Other income.................. 40.2 11.3 96.1 20.7 ------ ------ -------- -------- Total............... 428.8 503.5 930.7 994.0 - - ------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits.................... 212.9 210.9 420.3 409.7 Occupancy expense of premises, net......................... 35.7 36.0 70.5 75.0 Equipment rentals, depreciation and maintenance................. 32.3 26.5 85.6 53.5 Other expense................. 179.7 193.2 368.7 362.5 ------ ------ -------- -------- Total............... 460.6 466.6 945.1 900.7 - - ------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES.... 258.0 270.1 556.0 560.3 Applicable income taxes....... 89.3 101.6 193.5 212.7 ------ ------ -------- -------- NET INCOME.................... $168.7 $168.5 $ 362.5 $ 347.6 ------ ------ -------- -------- NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY. $150.4 $152.7 $ 330.4 $ 318.2 ====== ====== ======== ======== - - ------------------------------------------------------------------------------- EARNINGS PER SHARE NET INCOME-PRIMARY.......... $1.71 $1.81 $3.76 $3.78 NET INCOME-FULLY DILUTED.... $1.67 $1.72 $3.67 $3.64 - - -------------------------------------------------------------------------------
22 FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES TO STOCKHOLDERS' EQUITY - - ----------------------------------------------------------------- Six Months Ended June 30 (In millions) 1994 1993 - - ----------------------------------------------------------------- Stockholders' Equity Balance, beginning of period................... $4,264 $3,401 Net income................................... 363 348 Issuance of common stock..................... 5 27 Issuance of preferred stock.................. - 196 Issuance of treasury stock................... 19 (4) Treasury stock purchases..................... (16) - Other........................................ (2) (2) ------ ------ 4,633 3,966 Cash dividends declared on preferred stock... (32) (30) Cash dividends declared on common stock...... (77) (49) ------ ------ 1994 1993 - - ----------------------------------------------- Rate per common share for period $0.90 $0.60 - - ----------------------------------------------- Balance, end of period......................... $4,524 $3,887 ====== ====== - - -----------------------------------------------------------------
23 FIRST CHICAGO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
- - ----------------------------------------------------------------------------------------------- Six Months Ended June 30 (In millions) 1994 1993 - - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................................ $ 363 $ 348 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization........................................... 89 99 Provision for credit losses............................................. 93 135 Equity securities gains................................................. (138) (212) Net decrease in net derivative product balances......................... 244 - Net (increase) in trading account assets................................ (501) (115) Net (increase) in accrued income receivable............................. (37) (10) Net decrease in other assets............................................ 226 385 Interest income from Brazilian debt restructuring....................... (14) - Other noncash adjustments............................................... (125) 21 --------- -------- Total adjustments....................................................... (163) 303 --------- -------- Net cash provided by operating activities................................. 200 651 - - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in federal funds sold and securities under resale agreements. (4,891) (960) Purchases of investment securities........................................ - (1,900) Purchase of investment securities--available for sale..................... (548) - Purchase of debt investment securities--held to maturity.................. (100) - Purchase of equity securities--venture capital............................ (55) - Proceeds from maturities of debt securities............................... - 1,925 Proceeds from maturities of debt securities--available for sale........... 630 - Proceeds from maturities of debt securities--held to maturity............. 30 - Proceeds from sales of debt securities.................................... - 2 Proceeds from sales of debt securities--available for sale................ 27 - Proceeds from sales of equity securities.................................. - 401 Proceeds from sales of equity securities--available for sale.............. 1 - Proceeds from sales of equity securities--venture capital................. 231 - Net (increase) in credit card receivables................................. (677) (1,073) Credit card receivables securitized....................................... 1,000 1,000 Net (increase) decrease in loans of bank subsidiaries..................... (1,134) 1,068 Loans made to customers and purchased from others by nonbank subsidiaries............................................................. (430) (191) Principal collected on and proceeds from sale of loans by nonbank subsidiaries............................................................. 446 138 Loan recoveries........................................................... 44 48 Purchases of premises and equipment....................................... (94) (78) Proceeds from sales of premises and equipment............................. 23 21 Net cash and cash equivalents due to acquisitions......................... (4) - --------- -------- Net cash provided by (used in) investing activities....................... (5,501) 401 - - ----------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in demand and savings deposits............................... (1,340) (684) Net decrease in time deposits............................................. (616) (1,199) Net increase in deposits in foreign offices............................... 2,086 22 Net increase (decrease) in federal funds purchased and securities under repurchase agreements.................................................... 3,953 (603) Proceeds from other funds borrowed........................................ 116,917 41,309 Repayment of other funds borrowed......................................... (114,852) (39,852) Proceeds from issuance of long-term debt.................................. 202 667 Repayment of long-term debt............................................... (7) (10) Net increase (decrease) in other liabilities.............................. (31) 363 Dividends paid............................................................ (97) (75) Proceeds from issuance of common stock.................................... 5 30 Proceeds from issuance of preferred stock................................. - 196 Payment for purchase of treasury stock.................................... (16) - Proceeds from reissuance of treasury stock................................ 8 - --------- -------- Net cash provided by financing activities................................. 6,212 164 - - ----------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.............. 268 (103) - - ----------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 1,179 1,113 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 9,953 9,338 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 11,132 $ 10,451 ========= ======== - - -----------------------------------------------------------------------------------------------
See Note 7 on page 27. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Although the interim amounts are unaudited, they do reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods. All such adjustments are of a normal, recurring nature. Because the results from commercial banking operations are so closely related and responsive to changes in economic conditions, fiscal policy and monetary policy, and because the results for the venture capital and trading portfolios are largely market-driven, the results for any interim period are not necessarily indicative of the results that can be expected for the entire year. Note 2 The Corporation presents earnings per share on both a primary and a fully diluted basis. Earnings per common and common-equivalent share amounts were computed by dividing net income, after deducting dividends on preferred stock, by the average number of common and common-equivalent shares outstanding during the period. Common-equivalent shares consist of shares issuable under the Employee Stock Purchase and Savings Plan and outstanding stock options. Fully diluted shares also include the common shares that would result from the conversion of convertible preferred stock. Net income was reduced by preferred stock dividend requirements to compute primary earnings per share. To compute fully diluted earnings per share, net income was reduced by preferred stock dividend requirements, except those related to convertible stock. The net income, preferred stock dividends and shares used to compute primary and fully diluted earnings per share are presented in the table below. - - ------------------------------------------------------------------------------- Six Months Ended (In millions) June 30 1994 1993 - - ------------------------------------------------------------------------------- PRIMARY Net income.......................................... $362.5 $347.6 Preferred stock dividends (1)....................... 32.1 29.4 ------ ------ Net income attributable to common Stockholders' equity.............................. $330.4 $318.2 ====== ====== Average number of common and common-equivalent shares.......................... 87.9 84.1 ==== ==== FULLY DILUTED Net income.......................................... $362.5 $347.6 Preferred stock dividends, excluding convertible Series A and B, where applicable (1).. 26.3 21.8 ------ ------ Fully diluted net income............................ $336.2 $325.8 ====== ====== Average number of shares, assuming full dilution............................ 91.7 89.5 ==== ==== - - -------------------------------------------------------------------------------
(1) As of June 30, 1994, includes $4.5 million of additional preferred dividends, which represent a 3 percent premium over the $150 million par value of the Corporation's Preferred Stock, Series D, that was redeemed on July 1, 1994. Note 3 At June 30, 1994, credit card receivables aggregated $5.4 billion. These receivables are available for sale at face value through credit card securitization programs. 25 Note 4 - - ------ The reserve for credit losses related to securitized credit card receivables is included in other assets on the Corporation's consolidated balance sheet to the extent that the reserve offsets the receivables due from the securitization trust. Any remaining reserve balance is included in other liabilities. This reserve totaled $234 million at June 30, 1994, compared with $196 million at year-end 1993 and $193 million a year ago. Note 5 - - ------ Included in other assets on the Corporation's consolidated balance sheet are accelerated disposition portfolio assets of $58 million at June 30, 1994, compared with $107 million at year-end 1993 and $355 million a year ago. These assets are carried at the lower of the initially established carrying value or their estimated disposition value. Of these assets, $42 million were nonperforming at June 30, 1994, compared with $87 million at year-end 1993 and $192 million a year ago. Note 6 - - ------ Offsetting of Amounts Related to Certain Contracts - - -------------------------------------------------- In 1994, the Corporation prospectively adopted FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. This interpretation is applicable to the balance sheet presentation of derivative financial instruments. These derivatives include interest rate, currency, commodity and equity swaps, forwards, options, caps, floors, collars, forward rate agreements, and other conditional or exchange contracts, and include both exchange-traded and over-the-counter contracts. In general, purchased option, cap and floor contracts are reported in derivative product assets, and written option, cap and floor contracts are reported in derivative product liabilities. For other derivative financial instruments, an unrealized gain is reported in derivative product assets and an unrealized loss is reported in derivative product liabilities. Previously, the Corporation reported certain unrealized gains and unrealized losses on a net basis. Derivative financial instruments executed with the same counterparty under a legally enforceable master netting arrangement are reported on a net basis as derivative product assets or liabilities depending on whether they are a net asset or liability. At December 31, 1993, the fair value of currency options purchased totaled $536 million, while the fair value of currency options written totaled $501 million. At June 30, 1993, the fair value of currency options purchased totaled $617 million, while the fair value of currency options written totaled $499 million. These amounts are recorded in other assets and other liabilities, respectively. The adoption of this interpretation for balance sheet presentation purposes does not affect the net income or capital of the Corporation. It also does not affect its risk-based capital ratios, which historically have incorporated the gross unrealized gains on derivative financial instruments. However, based on current regulatory agency guidelines, the Corporation's regulatory leverage ratio was adversely affected by this change. The balance sheet impact of this interpretation at future dates will fluctuate as the unrealized gains and losses on derivative financial instruments increase or decrease with changes in remaining maturity and market rates, as well as the ability to net amounts under master netting arrangements. 26 Accounting for Loan Impairment - - ------------------------------ In May 1993, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. This statement is effective for financial statements issued for periods beginning after December 15, 1994. SFAS No. 114 addresses the accounting for loans when it is probable that all principal and interest amounts that are due on a loan will not be collected in accordance with its contractual terms (i.e. "impaired loans"). Pursuant to SFAS No. 114, to the extent the recorded investment of an impaired loan exceeds the present value of the loan's expected future cash flows or other measures of value, a valuation allowance is established for the difference with a corresponding charge to the provision for credit losses. The Corporation does not expect the adoption of SFAS No. 114 to have a material impact on the results of its operations and financial position. However, the future impact at the adoption date is not currently determinable since it would be based on the existing impaired loans as of that date. SFAS No. 114 also changes the definition of In-Substance Foreclosures (ISFs), with the result that a larger portion of currently reported ISFs would be reclassified as nonaccrual loans. The Corporation intends to adopt this new ISF definition concurrent with the adoption of the other provisions of SFAS No. 114. Note 7 - - ------ For purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and due from banks. Cash flows from derivative financial instruments are reported net as operating activities. Upon adopting FASB Interpretation No. 39 on January 1, 1994, a noncash transfer of balances attributable to derivative financial instruments on December 31, 1993, was made. Transfers to net derivative product balances of $573 million, $941 million and $1.3 billion were made from other assets, accrued income receivable and other liabilities, respectively, for purposes of reporting the Consolidated Statement of Cash Flows. Loans of $11 million and $30 million were transferred to other real estate in the first six months of 1994 and 1993, respectively. The Corporation's term loans to Brazil, having a net book value of $49 million were exchanged for securities having a fair market value of $81 million as part of Brazil's recent term debt restructuring. For additional information on this transaction, see page 6. Note 8 - - ------ The ratio of income to fixed charges for the six months ended June 30, 1994, excluding interest on deposits was 2.2x, and including interest on deposits was 1.7x. The ratio has been computed on the basis of the total enterprise (as defined by the Securities and Exchange Commission) by dividing income before fixed charges and income taxes by fixed charges. Fixed charges consist of interest expense on all long- and short-term borrowings, excluding or including interest on deposits. 27 Note 9 - - ------ The Corporation and certain of its subsidiaries are defendants in various lawsuits, including certain class actions, arising out of normal corporate activities, and the Corporation has received certain tax deficiency assessments. Since the Corporation and certain of its subsidiaries, which are regulated by one or more federal and state regulatory authorities, also are the subject of numerous examinations and reviews by such authorities, the Corporation is and will be, from time to time, normally engaged in various disagreements with regulators, primarily related to banking matters. In the opinion of management and the Corporation's general counsel, the ultimate resolution of the matters referred to in this note will not have a material effect on the Corporation's consolidated financial statements. Note 10 - - ------- In November 1993, the Corporation and Lake Shore Bancorp., Inc. (Lake Shore) signed a definitive agreement providing for the merger of Lake Shore into the Corporation. Lake Shore, with approximately $1.2 billion in assets and capital of approximately $124 million as of July 8, 1994, had seven locations in the Chicago metropolitan area. It was the holding company for Lake Shore National Bank, Chicago, Illinois, and Bank of Hinsdale, Hinsdale, Illinois. The combination was consummated on July 8, 1994. Consideration tendered for Lake Shore shares and stock options approximates $323 million, which consists of approximately 6.4 million common shares of the Corporation. The agreement provided that each share or share equivalent of Lake Shore common stock be exchanged for the Corporation's common stock valued at $31.08. The exchange ratio was based on the average closing price of the Corporation's common stock during a 20-day trading period beginning on June 7, 1994, and ending on July 5, 1994, with a minimum price of $37 and a maximum of $53 per share. The average closing price of the Corporation's common stock during the 20-day trading period was $50.406 per share. The combination will be accounted for on a pooling-of-interest basis; however, because the transaction is not considered material, the Corporation will not restate either 1994 or prior year financial data. 28 FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - - -------------------------------------------------------------------------------- INVESTMENT SECURITIES Investment securities included in the consolidated balance sheet as of June 30, 1994, were as follows: - - -------------------------------------------------------------------------------- Book Cost Unrealized Unrealized Fair (In millions) Value Basis Gains Losses Value - - -------------------------------------------------------------------------------- U.S. government and federal agency Held to maturity.............. $ 267 $ 267 $ - $ 4 $ 263 Available for sale............ 246 246 - - 246 ------ ------ ---- ---- ------ Total........................... 513 513 - 4 509 States and political subdivisions Held to maturity.............. 135 135 5 - 140 Available for sale............ - - - - - ------ ------ ---- ---- ------ Total........................... 135 135 5 - 140 Other securities Bonds, notes and debentures Held to maturity.............. 4 4 - - 4 Available for sale............ 63 66 - 3 63 ------ ------ ---- ---- ------ Total........................... 67 70 - 3 67 Equity securities (1) Venture capital............... 1,404 886 623 105 1,404 Available for sale (2)........ 135 135 - - 135 ------ ------ ---- ---- ------ Total........................... 1,539 1,021 623 105 1,539 Total investment securities....... $2,254 $1,739 $628 $112 $2,255 ====== ====== ==== ==== ====== - - --------------------------------------------------------------------------------
(1) The fair values for certain securities for which market quotations are not available have been estimated. In addition, the values reflect liquidity and other market-related factors. (2) Includes Federal Reserve stock. 29 IMPACT OF CREDIT CARD SECURITIZATION For analytical purposes only, the following table shows income statement line items for the Corporation adjusted for the net impact of securitization of credit card receivables.
- - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1994 Three Months Ended June 30, 1993 --------------------------------------------- ---------------------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - - --------------------------------------------------------------------------------------------------------------------------------- Net interest income-- tax-equivalent basis.. $ 339 $ 127 $ 466 $ 312 $ 109 $ 421 Provision for credit losses................ 43 62 105 70 58 128 Noninterest income...... 429 (65) 364 504 (51) 453 Noninterest expense..... 461 - 461 467 - 467 Net income.............. 169 - 169 169 - 169 Assets--quarter-end..... $64,089 $5,617 $69,706 $49,959 $5,008 $54,967 --average......... 60,490 5,106 65,596 56,951 4,503 61,454 - - ---------------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1994 Six Months Ended June 30, 1993 --------------------------------------------- ---------------------------------------------- Credit Card Credit Card (In millions) Reported Securitizations Adjusted Reported Securitizations Adjusted - - --------------------------------------------------------------------------------------------------------------------------------- Net interest income-- tax-equivalent basis.. $ 674 $ 250 $ 924 $ 617 $ 212 $ 829 Provision for credit losses................ 93 118 211 135 111 246 Noninterest income...... 931 (132) 799 994 (101) 893 Noninterest expense..... 945 - 945 901 - 901 Net income.............. 363 - 363 348 - 348 Assets--quarter-end..... $64,089 $5,617 $69,706 $49,959 $5,008 $54,967 --average......... 60,982 4,977 65,959 56,389 4,492 60,881 - - ---------------------------------------------------------------------------------------------------------------------------------
30 FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES
- - ----------------------------------------------------------------------------------------------------- (In millions) June 30 March 31 December 31 September 30 June 30 1994 1994 1993 1993 1993 - - ----------------------------------------------------------------------------------------------------- Balance, beginning of quarter Commercial.................................. $507 $488 $490 $487 $469 Consumer.................................... 203 195 147 140 141 ---- ---- ---- ---- ---- Total balance, beginning of quarter..... 710 683 637 627 610 - - ----------------------------------------------------------------------------------------------------- Provision for credit losses Commercial.................................. (14) 7 8 19 24 Consumer.................................... 57 43 62 46 46 ---- ---- ---- ---- ---- Total provision for credit losses....... 43 50 70 65 70 - - ----------------------------------------------------------------------------------------------------- Charge-offs Commercial Domestic Commercial.............................. 2 6 5 3 8 Real estate............................. 12 2 10 21 6 Other................................... - 1 1 1 - Foreign, including TCD.................... - 3 8 - - Consumer Credit card............................... 49 50 39 33 39 Other..................................... 2 2 3 1 1 ---- ---- ---- ---- ---- Total charge-offs....................... 65 64 66 59 54 - - ----------------------------------------------------------------------------------------------------- Recoveries Commercial Domestic Commercial.............................. 3 3 3 2 5 Real estate............................. 1 2 1 - 1 Other................................... 1 5 3 2 1 Foreign, including TCD.................... 18 14 7 5 1 Consumer Credit card............................... 7 7 13 13 13 Other..................................... 1 - - - 1 ---- ---- ---- ---- ---- Total recoveries........................ 31 31 27 22 22 - - ----------------------------------------------------------------------------------------------------- Net charge-offs/(recoveries) Commercial.................................. (9) (12) 10 16 6 Consumer.................................... 43 45 29 21 26 ---- ---- ---- ---- ---- Total net charge-offs/(recoveries)............ 34 33 39 37 32 - - ----------------------------------------------------------------------------------------------------- Other Commercial.................................. - - - - - Consumer.................................... (38) 10 15 (18) (21) ---- ---- ---- ---- ---- Total................................... (38) 10 15 (18) (21) - - ----------------------------------------------------------------------------------------------------- Balance, end of quarter Commercial.................................. 502 507 488 490 487 Consumer.................................... 179 203 195 147 140 ---- ---- ---- ---- ---- Total balance, end of quarter........... $681 $710 $683 $637 $627 ==== ==== ==== ==== ==== - - -----------------------------------------------------------------------------------------------------
31 FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION
- - ---------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - - ---------------------------------------------------------------------------------------------------------------------- (Three Months Ended) June 30, 1994 March 31, 1994 - - ---------------------------------------------------------------------------------------------------------------------- (Income and rates on a tax-equivalent basis) Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - - ---------------------------------------------------------------------------------------------------------------------- Assets Due from banks--interest-bearing (A)........................ $ 7,556 $ 82.5 4.38% $ 7,974 $ 75.0 3.81% Federal funds sold and securities under resale agreements... 13,287 133.7 4.04 11,744 91.0 3.14 Trading account assets...................................... 4,342 56.9 5.26 4,672 59.5 5.16 Investment securities U.S. government and federal agency........................ 518 5.6 4.34 793 7.4 3.78 States and political subdivisions......................... 141 3.2 9.10 150 3.3 8.92 Other..................................................... 1,680 8.6 2.05 1,667 6.8 1.65 - - ---------------------------------------------------------------------------------------------------------------------- Total investment securities............................... 2,339 17.4 2.98 2,610 17.5 2.72 Loans (B)(C) Domestic offices.......................................... 21,166 428.9 8.41 20,639 414.3 8.43 Foreign offices........................................... 1,774 44.3 10.02 1,849 26.2 5.75 - - ---------------------------------------------------------------------------------------------------------------------- Total loans................................................. 22,940 473.2 8.54 22,488 440.5 8.20 - - ---------------------------------------------------------------------------------------------------------------------- Total earning assets (D)................................ 50,464 763.7 6.07 49,488 683.5 5.60 Cash and due from banks--noninterest-bearing................ 4,222 4,257 Allowance for credit losses................................. (711) (693) Other assets................................................ 6,515 8,423 - - ---------------------------------------------------------------------------------------------------------------------- Total assets................................................ $60,490 $61,475 ======= ======= - - ---------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest-bearing Savings................................................... $ 8,018 $ 44.9 2.25% $ 8,100 $ 41.3 2.07% Time...................................................... 4,435 34.2 3.09 4,748 29.6 2.53 Foreign offices (E)....................................... 9,553 103.8 4.36 9,343 83.0 3.60 - - ---------------------------------------------------------------------------------------------------------------------- Total deposits--interest-bearing........................ 22,006 182.9 3.33 22,191 153.9 2.81 Federal funds purchased and securities under repurchase agreements................................................ 11,140 110.0 3.96 10,683 81.8 3.11 Other funds borrowed........................................ 8,146 90.8 4.47 7,273 71.4 3.98 Long-term debt.............................................. 2,267 41.3 7.31 2,211 40.9 7.50 - - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities........................ 43,559 425.0 3.91 42,358 348.0 3.33 Demand deposits............................................. 7,003 7,175 Other liabilities........................................... 5,504 7,561 Preferred stock............................................. 761 761 Common stockholders' equity................................. 3,663 3,620 - - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.............. $60,490 $61,475 ======= ======= Interest income/earning assets.............................. $763.7 6.07% $683.5 5.60% Interest expense/earning assets............................. 425.0 3.38 348.0 2.85 - - ---------------------------------------------------------------------------------------------------------------------- Net interest margin......................................... $338.7 2.69% $335.5 2.75% ====== ===== ====== ====
(A) Principally balances in overseas offices. (B) Rates are calculated on average lease-financing receivables balances reduced by deferred liability for taxes. (C) Nonperforming loans are included in average balances used to determine rates. (D) Includes a tax-equivalent adjustment based on the current federal income tax rate. The tax-equivalent adjustment for the third quarter of 1993 reflects the year-to-date impact of the increase in the federal tax rate to 35%, including the required revaluation of the leveraged lease portfolio. The tax-equivalent adjustment for the three months ended June 30, 1994, was $5.9 million, compared with $4.9 million, $6.2 million, $17.5 million and $8.3 million for the three months ended March 31, 1994, December 31, 1993, September 30, 1993, and June 30, 1993. (E) Includes International Banking Facilities deposit balances in domestic offices and balances of Edge Act and overseas offices. 32 --------------------------------------------------------------------------------------- December 31, 1993 September 30, 1993 June 30, 1993 --------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------- $ 7,219 $ 70.0 3.85% $ 7,582 $ 73.3 3.84% $ 7,582 $ 75.9 4.02% 12,171 89.6 2.92 11,610 88.6 3.03 11,324 82.0 2.90 4,595 56.8 4.90 5,152 59.7 4.60 4,999 56.2 4.51 810 6.8 3.33 618 6.8 4.37 947 9.6 4.07 180 4.0 8.82 211 4.9 9.21 234 5.3 9.08 1,622 7.9 1.93 1,458 5.3 1.44 1,397 7.9 2.27 --------------------------------------------------------------------------------------- 2,612 18.7 2.84 2,287 17.0 2.95 2,578 22.8 3.55 20,426 392.3 7.89 19,735 394.2 8.16 20,172 386.9 7.89 1,954 26.5 5.38 2,037 53.4 10.40 2,094 33.0 6.32 --------------------------------------------------------------------------------------- 22,380 418.8 7.67 21,772 447.6 8.38 22,266 419.9 7.74 --------------------------------------------------------------------------------------- 48,977 653.9 5.30 48,403 686.2 5.62 48,749 656.8 5.40 4,128 3,885 3,745 (654) (619) (611) 5,257 5,263 5,068 --------------------------------------------------------------------------------------- $57,708 $56,932 $56,951 ======= ======= ======= --------------------------------------------------------------------------------------- $ 7,952 $ 40.6 2.03% $ 8,296 $ 40.7 1.95% $ 8,569 $ 40.7 1.91% 5,004 37.4 2.97 4,988 32.3 2.57 5,343 35.0 2.63 8,714 78.7 3.58 9,113 82.8 3.60 9,303 84.9 3.66 --------------------------------------------------------------------------------------- 21,670 156.7 2.87 22,397 155.8 2.76 23,215 160.6 2.77 10,798 81.1 2.98 9,800 74.2 3.00 9,371 71.6 3.06 7,020 70.2 3.97 7,238 73.4 4.02 7,780 76.9 3.96 2,088 39.0 7.41 2,255 42.2 7.42 2,026 36.2 7.17 --------------------------------------------------------------------------------------- 41,576 347.0 3.31 41,690 345.6 3.29 42,392 345.3 3.27 7,405 6,946 6,847 4,515 4,292 3,906 761 827 869 3,451 3,177 2,937 --------------------------------------------------------------------------------------- $57,708 $56,932 $56,951 ======= ======= ======= $653.9 5.30% $686.2 5.62% $656.8 5.40% 347.0 2.81 345.6 2.83 345.3 2.84 --------------------------------------------------------------------------------------- $306.9 2.49% $340.6 2.79% $311.5 2.56% ====== ==== ====== ==== ====== ====
33 FIRST CHICAGO CORPORATION AND SUBSIDIARIES - - -------------------------------------------------------------------------------------------------------------------- Average Balances/Net Interest Margin/Rates - - -------------------------------------------------------------------------------------------------------------------- (Six Months Ended June 30) 1994 1993 - - -------------------------------------------------------------------------------------------------------------------- (Income and rates on tax-equivalent basis) Average Average Average Average (Dollars in millions) Balance Interest Rate Balance Interest Rate - - -------------------------------------------------------------------------------------------------------------------- Assets Due from banks--interest bearing (A)........................ $ 7,765 $ 157.5 4.09% $ 7,482 $ 154.7 4.17% Federal funds sold and securities under resale agreements... 12,516 224.7 3.62 11,287 166.6 2.98 Trading account assets...................................... 4,507 116.4 5.21 4,585 107.2 4.71 Investment securities U.S. government and federal agency........................ 655 13.0 4.00 735 16.1 4.42 States and political subdivisions......................... 146 6.5 8.98 237 10.8 9.19 Other..................................................... 1,673 15.4 1.86 1,534 20.6 2.71 - - -------------------------------------------------------------------------------------------------------------------- Total investment securities............................... 2,474 34.9 2.84 2,506 47.5 3.82 Loans (B)(C) Domestic offices.......................................... 20,904 843.2 8.42 20,355 780.8 7.93 Foreign offices........................................... 1,810 70.5 7.85 2,129 65.4 6.19 - - -------------------------------------------------------------------------------------------------------------------- Total loans................................................. 22,714 913.7 8.37 22,484 846.2 7.76 - - -------------------------------------------------------------------------------------------------------------------- Total earning assets (D)................................ 49,976 1,447.2 5.84% 48,344 1,322.2 5.51% Cash and due from banks--noninterest bearing................ 4,240 3,619 Allowance for credit losses................................. (702) (624) Other assets................................................ 7,468 5,050 - - -------------------------------------------------------------------------------------------------------------------- Total assets................................................ $60,982 $56,389 ======= ======= - - -------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits--interest bearing Savings................................................... $ 8,059 $ 86.2 2.16% $ 8,062 $ 81.5 2.04% Time...................................................... 4,592 63.8 2.80 5,806 74.2 2.58 Foreign offices (E)....................................... 9,448 186.8 3.99 9,493 175.9 3.74 - - -------------------------------------------------------------------------------------------------------------------- Total deposits--interest bearing........................ 22,099 336.8 3.07 23,361 331.6 2.86 Federal funds purchased and securities under repurchase agreements................................................ 10,912 191.8 3.54 9,925 152.8 3.10 Other funds borrowed........................................ 7,709 162.2 4.24 6,956 152.2 4.41 Long-term debt.............................................. 2,239 82.2 7.40 1,943 69.1 7.17 - - -------------------------------------------------------------------------------------------------------------------- Total interest bearing liabilities........................ 42,959 773.0 3.63 42,185 705.7 3.37 Demand deposits............................................. 7,089 6,785 Other liabilities........................................... 6,532 3,756 Preferred stock............................................. 761 793 Common stockholders' equity................................. 3,641 2,870 - - -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.............. $60,982 $56,389 ======= ======= Interest income/earning assets.............................. $1,447.2 5.84% $1,322.2 5.51% Interest expense/earning assets............................. 773.0 3.12 705.7 2.94 - - -------------------------------------------------------------------------------------------------------------------- Net interest margin......................................... $ 674.2 2.72% $ 616.5 2.57% ======== ==== ======== ====
(A) Principally balances in overseas offices. (B) Rates are calculated on average lease-financing receivables balances reduced by deferred liability for taxes. (C) Nonperforming loans are included in average balances used to determine rates. (D) Includes tax-equivalent adjustments of $10.8 million based on 35% federal income tax rate and $14.5 million based on 34% federal income tax rate for the six months ended June 30, 1994 and 1993. (E) Includes International Banking Facilities deposit balances in domestic offices and balances of Edge Act and overseas offices. 34 FIRST CHICAGO CORPORATION AND SUBSIDIARIES FIVE-QUARTER CONSOLIDATED INCOME STATEMENT
- - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended June 30 March 31 Dec. 31 Sept. 30 June 30 (Dollars in millions, except per share data) 1994 1994 1993 1993 1993 - - ------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans............................................. $ 470.3 $ 437.6 $ 415.3 $ 433.0 $ 416.3 Interest on bank balances.............................................. 82.5 75.0 70.0 73.3 75.9 Interest on federal funds sold and securities under resale agreements.. 133.7 91.0 89.6 88.6 82.0 Interest on trading account assets..................................... 56.7 59.1 56.3 59.2 55.7 Interest on investment securities (including dividends)................ 14.6 15.9 16.5 14.6 18.6 ------- ------- ------- ------- ------- Total........................................................ 757.8 678.6 647.7 668.7 648.5 - - ------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits................................................... 182.9 153.9 156.7 155.8 160.6 Interest on federal funds purchased and securities under repurchase agreements............................................................ 110.0 81.8 81.1 74.2 71.6 Interest on other funds borrowed....................................... 90.8 71.4 70.2 73.4 76.9 Interest on long-term debt............................................. 41.3 40.9 39.0 42.2 36.2 ------- ------- ------- ------- ------- Total........................................................ 425.0 348.0 347.0 345.6 345.3 - - ------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME.................................................... 332.8 330.6 300.7 323.1 303.2 Provision for credit losses............................................ 43.0 50.0 70.0 65.0 70.0 ------- ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................. 289.8 280.6 230.7 258.1 233.2 - - ------------------------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Combined trading profits (losses)...................................... 36.7 (24.7) 61.2 77.3 91.6 Equity securities gains................................................ 3.9 134.2 40.1 228.2 78.7 Investment securities gains (losses)................................... 0.6 0.5 0.9 (0.8) 0.2 ------- ------- ------- ------- ------- Market-driven revenue............................................. 41.2 110.0 102.2 304.7 170.5 Credit card fee revenue................................................ 193.9 182.3 196.6 186.7 164.2 Service charges and commissions........................................ 104.2 101.3 122.4 108.0 103.9 Fiduciary and investment management fees............................... 49.3 52.4 50.7 47.9 53.6 Other income........................................................... 40.2 55.9 51.1 38.1 11.3 ------- ------- ------- ------- ------- Total........................................................ 428.8 501.9 523.0 685.4 503.5 - - ------------------------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Salaries and employee benefits......................................... 212.9 207.4 226.5 217.7 210.9 Occupancy expense of premises, net..................................... 35.7 34.8 35.7 37.0 36.0 Equipment rentals, depreciation and maintenance........................ 32.3 53.3 30.3 26.5 26.5 Other expense.......................................................... 179.7 189.0 189.4 194.3 193.2 ------- ------- ------- ------- ------- Total........................................................ 460.6 484.5 481.9 475.5 466.6 - - ------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES............................................. 258.0 298.0 271.8 468.0 270.1 Applicable income taxes.............................................. 89.3 104.2 99.0 183.9 101.6 ------- ------- ------- ------- ------- NET INCOME............................................................. $ 168.7 $ 193.8 $ 172.8 $ 284.1 $ 168.5 ======= ======= ======= ======= ======= NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY................. $ 150.4 $ 180.0 $ 159.0 $ 270.3 $ 152.7 ======= ======= ======= ======= ======= - - ------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE Net Income - Primary................................................. $ 1.71 $ 2.05 $ 1.81 $ 3.14 $ 1.81 Net Income - Fully diluted........................................... $ 1.67 $ 2.00 $ 1.77 $ 2.97 $ 1.72 - - ------------------------------------------------------------------------------------------------------------------------ Average number of common and common-equivalent shares (in millions).... 88.0 87.7 87.7 86.1 84.5 Average number of shares, assuming full dilution (in millions)......... 91.8 91.6 91.5 91.9 91.4 Average full-time-equivalent staff..................................... 17,366 17,281 17,118 17,316 16,991
35
FIRST CHICAGO CORPORATION AND SUBSIDIARIES SELECTED STATISTICAL INFORMATION - - ----------------------------------------------------------------------------------------------------------------------- 1994 1993 (Dollars in millions, except per share data) June 30 March 31 December 31 September 30 June 30 - - ------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME DATA Actual Net interest income--tax-equivalent basis..... $ 338.7 $ 335.5 $ 306.9 $ 340.6 $ 311.5 Average earning assets........................ 50,464 49,488 48,977 48,403 48,749 Net interest margin........................... 2.69% 2.75% 2.49% 2.79% 2.56% Adjusted (1) Net interest income--tax-equivalent basis..... $ 463.7 $ 455.2 $ 436.6 $ 465.1 $ 416.4 Average earning assets........................ 47,382 47,004 47,810 46,325 46,653 Net interest margin........................... 3.93% 3.93% 3.62% 3.98% 3.58% - - ------------------------------------------------------------------------------------------------------------------ AT QUARTER-END BALANCE SHEET DATA Assets.......................................... $64,089 $59,843 $52,560 $53,173 $49,959 Deposits........................................ 28,577 28,833 28,186 29,379 27,794 Loans........................................... 23,680 23,782 23,103 21,969 21,621 Long-term debt.................................. 2,269 2,265 2,065 2,091 2,366 Common stockholders' equity..................... 3,763 3,647 3,503 3,378 3,018 Stockholders' equity............................ 4,524 4,408 4,264 4,139 3,887 - - ------------------------------------------------------------------------------------------------------------------ CAPITAL RATIOS (2) Common equity/assets............................ 6.5% 6.6% 7.2% 7.0% 6.5% Regulatory leverage ratio (3)................... 8.0 7.8 8.0 8.0 7.4 Risk-based capital (3) Tier 1 capital ratio.......................... 8.9 9.1 8.8 8.7 8.0 Total capital ratio........................... 13.8 14.2 13.6 13.5 13.0 Tier 1 capital................................ $ 4,148 $ 4,182 $ 4,098 $ 3,969 $ 3,715 Total capital................................. 6,424 6,509 6,292 6,179 6,001 - - ------------------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS FOR THE QUARTER ENDED Net income as a percentage of: Average stockholders' equity.................. 15.3% 17.9% 16.3% 28.2% 17.8% Average common stockholders' equity........... 16.5 20.2 18.3 33.8 20.9 Average total assets.......................... 1.12 1.28 1.19 1.98 1.19 Average earning assets........................ 1.34 1.59 1.40 2.33 1.39 Stockholders' equity as a percentage of: Total assets.................................. 7.1 7.4 8.1 7.8 7.8 Total loans................................... 19.1 18.5 18.5 18.8 18.0 Total deposits................................ 15.8 15.3 15.1 14.1 14.0 Average stockholders' equity as a percentage of: Average assets................................ 7.3 7.1 7.3 7.0 6.7 Average loans................................. 19.3 19.5 18.8 18.4 17.1 Average deposits.............................. 15.3 14.9 14.5 13.6 12.7 - - ------------------------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------------------------ COMMON STOCK DATA FOR THE QUARTER ENDED Market price High......................................... $55 1/2 $52 3/8 $50 5/8 $49 1/4 $45 3/8 Low.......................................... 46 5/8 41 1/8 40 7/8 40 7/8 35 1/2 At quarter-end............................... 48 1/8 48 1/8 43 1/4 48 3/4 41 1/8 Price earnings ratio........................... 5.5 5.5 4.9 5.8 N/M Book value..................................... $ 43.40 $ 42.19 $ 40.55 $ 39.03 $ 36.27 Market price/book value........................ 111% 114% 107% 125% 113% Dividends declared on common stock............. $ 0.50 $ 0.40 $ 0.40 $ 0.30 $ 0.30 - - ------------------------------------------------------------------------------------------------------------------
(1) Adjusted to exclude impact of securitization of credit card receivables and the activity of FCCM, the Corporation's capital markets subsidiary. (2) Net of investment in FCCM. (3) June 1994 excludes $150 million of Preferred Stock, Series D, that was redeemed on July 1, 1994. N/M - Not meaningful. 36 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-6052 FIRST CHICAGO CORPORATION -------------------------------------------------------------------- (exact name of registrant as specified in its charter) DELAWARE 36-2669970 -------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60670 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 312-732-4000 -------------------------------------------------------------------- (Registrant's telephone number, including area code) NO CHANGE -------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 31, 1994. Class Number of Shares Outstanding - - ------------------------- ---------------------------- Common Stock $5 par value 92,402,020 37 Form 10-Q Cross-Reference Index PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements Page ---- Consolidated Balance Sheet -- June 30, 1994 and 1993 and December 31, 1993 21 Consolidated Income Statement -- Three and Six Months Ended June 30, 1994 and 1993 22 Consolidated Statement of Changes in Stockholders' Equity -- Six Months Ended June 30, 1994 and 1993 23 Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1994 and 1993 24 Notes to Consolidated Financial Statements 25-28 Selected Statistical Information 1, 15-17, 29-36 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1-20 PART II - OTHER INFORMATION --------------------------- ITEM 1. Legal Proceedings 39 ITEM 2. Changes in Securities 39 ITEM 3. Defaults Upon Senior Securities 39 ITEM 4. Submission of Matters to a Vote of Security Holders 39 ITEM 5. Other Information 39 ITEM 6. Exhibits and Reports on Form 8-K 39 Signatures 40 38 PART II. - OTHER INFORMATION ---------------------------- ITEM 1. Legal Proceedings None ITEM 2. Changes in Securities None ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders The information in response to Item 4 is incorporated by reference from the Registrant's First Quarter Report for the Period Ended March 31, 1994, set forth as Exhibit 22 hereto. ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibit 12 Statements re computation of ratios. Exhibit 22 Registrant's First Quarter Report for the Period Ended March 31, 1994. (b) The Registrant filed the following Current Reports on Form 8-K during the quarter ended June 30, 1994.
Date Item Reported ------- ------------- 4/8/94 Summary of Registrant's first quarter 1994 results. 4/13/94 The Registrant's earnings for the quarter ended March 31, 1994. 5/16/94 Registrant's announcement of common stock dividend increase and other capital management actions.
39 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST CHICAGO CORPORATION ---------------------------- (Registrant) Date August 12, 1994 Richard L. Thomas --------------------- ---------------------------- Richard L. Thomas Chairman of the Board Date August 12, 1994 William J. Roberts --------------------- ---------------------------- William J. Roberts Principal Accounting Officer 40 EXHIBIT INDEX ------------- Exhibit Number Description of Exhibit Page - - -------------- ---------------------- ---- 12 - Statement re computation of ratios. 42 22 - Registrant's First Quarter Report for the Period Ended March 31, 1994 43 41 EX-12 2 COMPUTATION OF RATIOS Exhibit 12 COMPUTATION OF RATIOS OF INCOME TO FIXED CHARGES The computation of the ratios of income to fixed charges is set forth in Note 8 of Notes to Consolidated Financial Statements on page 27 of the Form 10-Q. 42 EX-22 3 FIRST QUARTER REPORT Exhibit 22 FIRST CHICAGO CORPORATION FIRST QUARTER REPORT For the Period Ended March 31, 1994 43 FINANCIAL SUPPLEMENT CONTENTS - - ----------------------------------------------------------------- Letters to Stockholders 1 Earnings and Balance Sheet Review 2 Annual Meeting Summary 3 Consolidated Balance Sheet 4 Consolidated Income Statement 5 Five-Quarter Comparative Income Statement 6 Credit Data/Capital Data 7 Board of Directors/Stockholder Information INSIDE BACK COVER - - ----------------------------------------------------------------- FINANCIAL HIGHLIGHTS FIRST CHICAGO CORPORATION AND SUBSIDIARIES
- - ------------------------------------------------------------------------- Three Months Ended March 31 (Dollars in millions, except ------------------ Change per share data) 1994 1993 ------ - - ------------------------------------------------------------------------- Earnings Net interest income--tax-equivalent basis.. $ 335.5 $ 305.0 + 10% Combined credit provisions................. 50.2 65.5 - 23% Noninterest income......................... 501.9 490.5 + 2% Noninterest expense (excluding provision for other real estate)................... 484.3 433.6 + 12% Net income................................. 193.8 179.1 + 8% Primary earnings per share................. 2.05 1.97 + 4% Fully diluted earnings per share........... 2.00 1.91 + 5% Net interest margin........................ 2.75% 2.58% + 7% Return on assets........................... 1.28 1.30 - 2% Return on common stockholders' equity...... 20.2 23.9 - 15% - - ------------------------------------------------------------------------- AVERAGE BALANCES Loans...................................... $22,460 $22,162 + 1% Earning assets............................. 49,488 47,939 + 3% Total assets............................... 61,475 55,826 + 10% Common stockholders' equity................ 3,620 2,803 + 29% Stockholders' equity....................... 4,381 3,521 + 24% - - -------------------------------------------------------------------------
At March 31 ----------------- BALANCE SHEET 1994 1993 Change ------- ------- ------ Assets..................................... $59,843 $48,482 + 23% Deposits................................... 28,833 27,687 + 4% Loans...................................... 23,782 21,666 + 10% Common stockholders' equity................ 3,647 2,888 + 26% Stockholders' equity....................... 4,408 3,757 + 17% - - -------------------------------------------------------------------------
Inside front cover First Chicago Corporation - First Quarter Report For the Period Ended March 31, 1994 To the Owners of First Chicago: The first quarter marked our sixth consecutive quarter of solid earnings, reflecting the diversity and strength of all our businesses. Net income for the quarter was $193.8 million, or $2.00 per common share on a fully diluted basis. This compares favorably with year-ago results of $1.91 per share and fourth quarter 1993 results of $1.77. Return on common stockholders' equity for the first quarter of 1994 was 20%. Highlights of the quarter were: better than expected growth in our credit card business, wider net interest margins, continued credit quality improvement, and strong venture capital gains. Losses in trading activities under difficult market conditions partially offset those excellent gains. In addition, there was a special gain and some non-recurring charges that were largely offsetting. The credit card business continued to be a major contributor to earnings. Total credit card receivables climbed 23% from a year ago, ending the quarter at $10.4 billion. Revenues from this business once again exceeded our expectations. Credit card growth, combined with increased volume in middle market loans and a reduction of thinner-margin large corporate loans, has created a higher-yielding loan mix. This improved loan composition is reflected in the first quarter net interest margin, which rose significantly from previous levels. Credit quality continued to be excellent in the first quarter. The total provision for credit losses, which comprises both consumer and commercial portfolios, was $50 million -- the lowest provision posted in five years. Nonperforming assets were essentially unchanged from their low levels at year- end 1993, while reserves remained very strong. Extreme volatility in global financial markets during the quarter led to a $54 million loss in the emerging markets trading unit. This loss more than offset moderate profits in other trading activities, resulting in a combined trading loss of $25 million. We have trimmed back our positions in emerging markets securities in response to currently unsettled market conditions. However, we continue to believe that this business will provide attractive opportunities over the long term. Our venture capital portfolio produced significant equity gains of $119 million in the quarter. Net income from venture capital was $69 million, or $0.73 per share. During the quarter, we completed an innovative financing arrangement related to our investment in NEXTEL Communications, Inc. that protected a substantial portion of the appreciation in our venture capital portfolio. This transaction, along with subsequent appreciation and sales of NEXTEL common stock, accounted for over 80% of the venture capital gains in the quarter. Other revenue included a $35 million gain on the sale of the Corporation's remaining interest in Brinson Holdings, Inc. to its management. Brinson Holdings is the institutional investment management company that was sold in 1989. During the quarter there were $42 million of special charges: $24 million related to a change in accounting treatment for personal computer equipment, and $18 million for litigation and other corporate expenses. With respect to the balance sheet, capital ratios continued to strengthen. Tier I capital increased to 9.1% and total risk-adjusted capital rose to 14.2%--both up substantially from one year-ago and significantly above the regulatory guidelines for "well-capitalized" status. In summary, first quarter results underscore the strengths of First Chicago's franchise and the benefits of our diversified earnings base, excellent credit quality and solid capital position. Our management team is committed to strengthening this franchise further and producing attractive returns in each of our businesses. We are confident about First Chicago's prospects and remain optimistic that we will continue to generate attractive financial returns for our stockholders. Richard L. Thomas Chairman Leo F. Mullin President David J. Vitale Vice Chairman In order to provide more timely financial information, beginning with the second quarter of 1994 First Chicago will mail its quarterly earnings news release to all stockholders of record. We will discontinue issuing a separate quarterly report. Beneficial owners of First Chicago common stock--those who hold the stock through a bank or brokerage account, for example--will not automatically receive the earnings releases. If these stockholders wish to receive the quarterly releases on an ongoing basis, they can send their request in writing to First Chicago Corporation, Corporate Communications, Suite 0358, One First National Plaza, Chicago, IL 60670-0358, or call (312) 732-6204. 1 EARNINGS AND BALANCE SHEET REVIEW NET INCOME was $193.8 million, or $2.00 per common share on a fully diluted basis, for the first quarter of 1994. Return on common stockholders' equity (ROE) was 20%. Net income for the 1993 first quarter was $179.1 million, or $1.91 per common share fully diluted. Earnings from the core businesses in the first quarter were: o $89 million (44% ROE) Consumer Banking; o $15 million (19% ROE) Middle Market Banking; o $9 million (0.4% ROE) Corporate and Institutional Banking. Net income from the venture capital business was $69 million, or 73 cents per share. NET INTEREST INCOME on a tax-equivalent basis was $336 million. Net interest margin increased to 2.75% and average earning assets were $49.5 billion. Adjusted for the effects of credit card securitization and the activities of the Corporation's capital markets subsidiary, net interest margin was a strong 3.93%, up from 3.61% in the first quarter of 1993 and 3.62% in the 1993 fourth quarter. TOTAL NONINTEREST INCOME was $502 million for the first quarter. Combined trading activities generated a loss of $25 million. Equity securities gains were $134 million, including $119 million from the venture capital portfolio. The remaining $15 million of gains was primarily realized from equity securities held in conjunction with corporate financing activities. The $35 million gain related to the sale of the Corporation's interest in Brinson Holdings, Inc. was recorded in other revenue. NONINTEREST EXPENSE was $485 million for the quarter, including nonrecurring charges of $42 million. Salaries and benefits reflected lower incentive compensation costs relative to recent periods. Other expense included increased spending in the credit card business. Excluding special items, noninterest expense was up 3% from the year-ago quarter. The PROVISION FOR CREDIT LOSSES was $50 million for the first quarter. This included $43 million for the consumer portfolios and $7 million principally for middle market commercial credits. NONPERFORMING ASSETS were $280 million, or 1.2% of related assets, essentially unchanged from year-end 1993 and down 26% from one year ago. The Corporation's ALLOWANCE FOR CREDIT LOSSES was $710 million at quarter-end, representing 300% of nonperforming loans. Of this total, $507 million was related to the commercial segment and $203 million to the consumer portfolios. NET CHARGE-OFFS were $33 million for the quarter. Commercial net recoveries were $12 million. Consumer net charge-offs, mainly in the credit card portfolio, were $45 million. The net charge-off rate for total average credit card receivables was 3.6%. The TIER 1 RISK-ADJUSTED CAPITAL RATIO was 9.1%, and the TOTAL RISK-ADJUSTED RATIO was 14.2%. BOOK VALUE at quarter-end was $42.19 per common share. TOTAL ASSETS increased to $59.8 billion at March 31, up 23% from a year earlier due largely to an accounting change for derivative financial instruments. TOTAL DEPOSITS were $28.8 billion. 2 ANNUAL MEETING SUMMARY First Chicago Corporation held its Annual Meeting of Stockholders on Friday, April 8, in First Chicago Center. Chief Financial Officer Robert A. Rosholt summarized the elements that contributed to First Chicago's positive performance in 1993, including record earnings; excellent credit quality indicators; success of the accelerated asset disposition program; and a strong capital position. Reports by the Corporation's senior management are excerpted below: THOMAS OPTIMISTIC ABOUT CORPORATION'S FUTURE First Chicago firmly reestablished itself as a high-performing banking company in 1993 and has a solid base for continuing that excellent performance in 1994, Chairman Richard L. Thomas told stockholders. "A year ago, we said that our No. 1 priority for 1993 would be to restore First Chicago to high-performing status. Today, I am pleased to say that, with the support of our customers and stockholders and because of the dedicated efforts of our employees, we have, indeed, accomplished our goal." The Corporation's strategy for 1994 will be to continue to enhance its position as the largest banking company headquartered in Chicago. "The industry is clearly consolidating," Thomas said, citing BankAmerica's plans to acquire Continental Bank. "Fifteen years ago Chicago was home to four of the 50 largest U.S. banks. Soon, we will have only two of the top 50: The Northern Trust and ourselves." Thomas reaffirmed First Chicago's commitment to build shareholder value and perform well. "Our quarterly earnings have reflected steady improvement over the past two years, excluding our large write-off of lower quality real estate in the third quarter of 1992. In our view, value comes from quality earnings, growth prospects, and the increases in our price/earnings ratio that ultimately will result from superior performance." First Chicago should produce reasonable earnings growth in its core businesses over the intermediate term, Thomas said, despite regulatory burdens that continue to impede the ability of banks to compete effectively. "However, if we are to succeed in implementing our plans and in building the franchise over the next several years, we must raise our return on equity to even higher levels, continue to improve our operating efficiency, and in every respect, challenge ourselves to do the best we can." Thomas added that First Chicago has the constant challenge of balancing short- and long-term earnings. "With consolidation proceeding apace and with constant rumors about the next takeover target, we must be attentive to our earnings performance over the near term to protect against any unwarranted downturn in the price of our shares. Nonetheless, we also plan to invest in people and projects that will support future earnings growth." While the Corporation has extensive operations throughout the U.S. and important facilities overseas, there is a competitive advantage to being "the leading bank in the Midwest and one of the few banks outside New York City serving the large corporate market," Thomas said. "With this home court advantage and our focus on charting a steady course, I believe we can continue to produce good returns." Although acquisitions are not critical, Thomas said First Chicago would like to be in a position to acquire in order to facilitate growth. "In order for us to consider any sizeable acquisition, the valuation of our shares will have to improve significantly relative to those of potential acquirees," he said. "In any event, we are determined to be disciplined in our acquisition strategy, and we will enter into a transaction only when we believe it is clearly in the best interests of our stockholders. "We face a future of opportunities and challenges," Thomas concluded. "But I believe that, with the continued support of our stockholders and customers and the dedication of our employees, it will be an exceedingly bright future for all of us." MULLIN: OUTLOOK FOR BUSINESSES IS BRIGHT President Leo F. Mullin reaffirmed that First Chicago's businesses have a "competitive advantage that can be sustained over time." The credit card business has been a major driver of corporate performance, thanks largely to First Card's proven marketing techniques, sophisticated credit management, state-of-the-art systems and loyal work force. Average credit card receivables grew 21% in 1993 over 1992 levels; receivables ended the year at $10.7 billion. Mullin said he felt confident about growth prospects for the credit card business. Growth is not dependent on simply getting new cardholders, but rather on taking share from other card issuers and then building outstandings by encouraging widespread card use in nontraditional areas of consumer credit, such as supermarkets and health care, he said. In the retail market, First Chicago has been the leader in serving Chicago--the third largest consumer market in the U.S. and, by far, the most attractive in the Midwest. The Bank's market share in Chicagoland is 20%. And when credit cards are included, First Chicago does business with well over 1 million area households. "Our challenge now is to move more products through the distribution network and to obtain major gains in efficiency," Mullin said. American National Corporation, which also has a 20% market share, leads in serving Chicagoland's middle market (companies with $5 million-$150 million in annual sales). "Its success derives from excellence in execution," Mullin said. "At American National, 'hustle' is the strategy--our bankers do the basics better." In the large corporate market, First Chicago is No. 1 with Midwest companies and among the top banks in the nation. "In 1993, we had our best year ever in each of our corporate businesses: trading, operating products and corporate finance," Mullin said. Based on these factors, the Corporation's businesses should continue to do well. "First Chicago comprises a set of businesses that were highly successful in 1993," Mullin said. "All have strong prospects for maintaining competitive advantage in the marketplaces in which they compete. Their futures are bright, and collectively they offer stockholders the prospect of excellent returns over time." VITALE: WE WELCOME COMPETITION Vice Chairman David J. Vitale asserted that while the competitive marketplace continues to heat up, First Chicago is "up to the challenge." Technology and deregulation have intensified the competitive environment in the past 20 years. "These two factors have (continued on page 8) 3
CONSOLIDATED BALANCE SHEET First Chicago Corporation and Subsidiaries - - ----------------------------------------------------------------------- March 31 (Dollars in millions) 1994 1993 - - ----------------------------------------------------------------------- ASSETS Cash and due from banks--noninterest-bearing........ $ 3,621 $ 3,398 Due from banks--interest-bearing................... 7,926 6,193 Federal funds sold and securities under resale agreements......................................... 10,475 7,292 Trading account assets.............................. 4,748 3,276 Investment securities............................... 2,253 2,272 Loans (net of unearned discount--$297 in 1994 and $319 in 1993)...................................... 23,782 21,666 Less allowance for credit losses................... 710 610 ------- ------- Total loans, net................................... 23,072 21,056 Premises and equipment.............................. 612 593 Accrued income receivable........................... 377 347 Customers' acceptance liability..................... 502 546 Derivative product assets........................... 5,047 - Other assets........................................ 1,210 3,509 ------- ------- Total assets................................. $59,843 $48,482 ======= ======= - - ----------------------------------------------------------------------- LIABILITIES Deposits Demand............................................. $ 7,114 $ 6,305 Savings............................................ 7,633 7,613 Time............................................... 4,445 5,784 Foreign offices.................................... 9,641 7,985 ------- ------- Total deposits............................... 28,833 27,687 Federal funds purchased and securities under repurchase agreements.............................. 9,266 6,195 Other funds borrowed................................ 8,284 5,293 Long-term debt...................................... 2,265 1,905 Acceptances outstanding............................. 502 546 Derivative product liabilities...................... 4,574 - Other liabilities................................... 1,711 3,099 ------- ------- Total liabilities............................ 55,435 44,725 - - ----------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock--without par value, authorized 15,000,000 shares.................................. 761 869 Common stock--$5 par value.......................... 434 416 - - ---------------------------------------------------- 1994 1993 - - ---------------------------------------------------- Number of shares authorized.......... 150,000,000 150,000,000 Number of shares issued.............. 86,788,368 83,144,528 Number of shares outstanding......... 86,440,453 83,046,898 Surplus............................................. 1,725 1,612 Retained earnings................................... 1,504 861 Other adjustments................................... (1) 2 ------- ------- Total........................................ 4,423 3,760 - - ----------------------------------------------------------------------- Less Treasury stock at cost: 347,915 shares in 1994 and 97,630 shares in 1993.......................... 15 3 ------- ------- Stockholders' equity......................... 4,408 3,757 ------- ------- Total liabilities and stockholders' equity... $59,843 $48,482 ======= ======= - - -----------------------------------------------------------------------
NOTE: In 1994, the Corporation has prospectively changed its balance sheet presentation to a separate disclosure of derivative product assets and liabilities, which includes currency options purchased and currency options written. This change is consistent with the prospective adoption of FASB Interpretation No. 39 that requires the reporting of unrealized gains on derivative financial instruments as assets and unrealized losses on derivative financial instruments as liabilities. Carrying value amounts recognized for derivative financial instruments executed with the same counterparty under a legally enforceable master netting arrangement are offset. Previously, the Corporation reported unrealized gains and losses related to certain derivative financial instruments on a net basis. In addition, currency options purchased and currency options written totaled $549 million and $522 million, respectively, at March 31, 1993 and are included in other assets and other liabilities. 4 CONSOLIDATED INCOME STATEMENT FIRST CHICAGO CORPORATION AND SUBSIDIARIES
- - -------------------------------------------------------------------------------------------- Three Months Ended March 31 (In millions, except per share data) 1994 1993 - - -------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans............................................. $437.6 $422.8 Interest on bank balances.............................................. 75.0 78.8 Interest on federal funds sold and securities under resale agreements.. 91.0 84.6 Interest on trading account assets..................................... 59.1 50.7 Interest on investment securities (including dividends)................ 15.9 22.3 ------ ------ Total.......................................................... 678.6 659.2 - - -------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits................................................... 153.9 171.0 Interest on federal funds purchased and securities under repurchase agreements........................................................... 81.8 81.2 Interest on other funds borrowed....................................... 71.4 75.3 Interest on long-term debt............................................. 40.9 32.9 ------ ------ Total.......................................................... 348.0 360.4 - - -------------------------------------------------------------------------------------------- NET INTEREST INCOME.................................................... 330.6 298.8 Provision for credit losses............................................ 50.0 65.0 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................. 280.6 233.8 - - -------------------------------------------------------------------------------------------- NONINTEREST INCOME Combined trading profits (losses)...................................... (24.7) 54.5 Equity securities gains................................................ 134.2 133.2 Investment securities gains............................................ 0.5 - ------ ------ Market-driven revenue.......................................... 110.0 187.7 Credit card fee revenue................................................ 182.3 146.7 Service charges and commissions........................................ 101.3 98.2 Fiduciary and investment management fees............................... 52.4 48.5 Other income........................................................... 55.9 9.4 ------ ------ Total.......................................................... 501.9 490.5 - - -------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits......................................... 207.4 198.8 Occupancy expense of premises, net..................................... 34.8 39.0 Equipment rentals, depreciation and maintenance........................ 53.3 27.0 Other expense.......................................................... 188.8 168.8 ------ ------ Subtotal....................................................... 484.3 433.6 Provision for other real estate........................................ 0.2 0.5 ------ ------ Total.......................................................... 484.5 434.1 - - -------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES............................................. 298.0 290.2 Applicable income taxes................................................ 104.2 111.1 ------ ------ NET INCOME............................................................. $193.8 $179.1 ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY................. $180.0 $165.5 ====== ====== - - -------------------------------------------------------------------------------------------- EARNINGS PER SHARE PRIMARY.............................................................. $ 2.05 $ 1.97 FULLY DILUTED........................................................ $ 2.00 $ 1.91 - - --------------------------------------------------------------------------------------------
5 FIVE-QUARTER COMPARATIVE INCOME STATEMENT FIRST CHICAGO CORPORATION AND SUBSIDIARIES
- - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended ------------------------------------------------ MARCH 31 Dec. 31 Sept. 30 June 30 March 31 (In millions, except per share data) 1994 1993 1993 1993 1993 - - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans............................................. $437.6 $415.3 $433.0 $416.3 $422.8 Interest on bank balances.............................................. 75.0 70.0 73.3 75.9 78.8 Interest on federal funds sold and securities under resale agreements.. 91.0 89.6 88.6 82.0 84.6 Interest on trading account assets..................................... 59.1 56.3 59.2 55.7 50.7 Interest on investment securities (including dividends)................ 15.9 16.5 14.6 18.6 22.3 ------ ------ ------ ------ ------ Total........................................................ 678.6 647.7 668.7 648.5 659.2 - - ------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits................................................... 153.9 156.7 155.8 160.6 171.0 Interest on federal funds purchased and securities under repurchase agreements............................................................ 81.8 81.1 74.2 71.6 81.2 Interest on other funds borrowed....................................... 71.4 70.2 73.4 76.9 75.3 Interest on long-term debt............................................. 40.9 39.0 42.2 36.2 32.9 ------ ------ ------ ------ ------ Total........................................................ 348.0 347.0 345.6 345.3 360.4 - - ------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME.................................................... 330.6 300.7 323.1 303.2 298.8 Provision for credit losses............................................ 50.0 70.0 65.0 70.0 65.0 ------ ------ ------ ------ ------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................. 280.6 230.7 258.1 233.2 233.8 - - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Combined trading profits (losses)...................................... (24.7) 61.2 77.3 91.6 54.5 Equity securities gains................................................ 134.2 40.1 228.2 78.7 133.2 Investment securities gains (losses)................................... 0.5 0.9 (0.8) 0.2 - ------ ------ ------ ------ ------ Market-driven revenue.......................................... 110.0 102.2 304.7 170.5 187.7 Credit card fee revenue................................................ 182.3 196.6 186.7 164.2 146.7 Service charges and commissions........................................ 101.3 122.4 108.0 103.9 98.2 Fiduciary and investment management fees............................... 52.4 50.7 47.9 53.6 48.5 Other income........................................................... 55.9 51.1 38.1 11.3 9.4 ------ ------ ------ ------ ------ Total........................................................ 501.9 523.0 685.4 503.5 490.5 - - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits......................................... 207.4 226.5 217.7 210.9 198.8 Occupancy expense of premises, net..................................... 34.8 35.7 37.0 36.0 39.0 Equipment rentals, depreciation and maintenance........................ 53.3 30.3 26.5 26.5 27.0 Other expense.......................................................... 188.8 188.2 192.8 192.2 168.8 ------ ------ ------ ------ ------ Subtotal..................................................... 484.3 480.7 474.0 465.6 433.6 Provision for other real estate........................................ 0.2 1.2 1.5 1.0 0.5 ------ ------ ------ ------ ------ Total........................................................ 484.5 481.9 475.5 466.6 434.1 - - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES............................................. 298.0 271.8 468.0 270.1 290.2 Applicable income taxes................................................ 104.2 99.0 183.9 101.6 111.1 ------ ------ ------ ------ ------ NET INCOME............................................................. $193.8 $172.8 $284.1 $168.5 $179.1 ====== ====== ====== ====== ====== NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS' EQUITY................. $180.0 $159.0 $270.3 $152.7 $165.5 ====== ====== ====== ====== ====== - - ------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE PRIMARY.............................................................. $2.05 $1.81 $3.14 $1.81 $1.97 FULLY DILUTED........................................................ $2.00 $1.77 $2.97 $1.72 $1.91 - - -------------------------------------------------------------------------------------------------------------------------
6 CREDIT DATA First Chicago Corporation and Subsidiaries
- - --------------------------------------------------------------------------------------------------------------------- For the Quarter Ended ----------------------------------------------------- (Dollars in millions) 3/31/94 12/31/93 9/30/93 6/30/93 3/31/93 - - --------------------------------------------------------------------------------------------------------------------- PROVISION FOR CREDIT LOSSES Commercial.................................................... $ 7 $ 8 $ 19 $ 24 $ 27 Consumer...................................................... 43 62 46 46 38 ---- ---- ---- ---- ---- Total......................................................... 50 70 65 70 65 TOTAL CHARGE-OFFS............................................. 64 66 59 54 100 TOTAL RECOVERIES.............................................. 31 27 22 22 26 NET CHARGE-OFFS Commercial Commercial real estate................................... - 9 21 5 16 Other.................................................... (12) 1 (5) 1 30 ---- ---- ---- ---- ---- Total.................................................... (12) 10 16 6 46 Consumer.................................................... 45 29 21 26 28 ---- ---- ---- ---- ---- Total......................................................... 33 39 37 32 74 NONPERFORMING ASSETS Commercial real estate........................................ 101 108 151 190 143 Troubled-country debtor....................................... 50 50 57 57 57 Other......................................................... 86 76 99 123 151 ---- ---- ---- ---- ---- Nonperforming loans......................................... 237 234 307 370 351 Other real estate, net...................................... 43 43 44 45 26 ---- ---- ---- ---- ---- Total nonperforming assets (NPA).............................. 280 277 351 415 377 NPA AS A PERCENTAGE OF LOANS AND OTHER REAL ESTATE............ 1.2% 1.2% 1.6% 1.9% 1.7% TOTAL RESERVE AS A PERCENTAGE OF LOANS........................ 3.0% 3.0% 2.9% 2.9% 2.8% TOTAL RESERVE AS A PERCENTAGE OF NONPERFORMING LOANS.......... 300% 292% 208% 170% 174% CAPITAL DATA - - --------------------------------------------------------------------------------------------------------------------- 3/31/94 12/31/93 9/30/93 6/30/93 3/31/93 - - --------------------------------------------------------------------------------------------------------------------- Common Equity/Assets (1)...................................... 6.6% 7.2% 7.0% 6.5% 6.4% Risk-Based Capital Ratios (1) Tier 1...................................................... 9.1% 8.8% 8.7% 8.0% 7.8% Total....................................................... 14.2% 13.6% 13.5% 13.0% 12.4% Leverage Ratio (1)............................................ 7.8% 8.0% 8.0% 7.4% 7.3% Book Value of Common Equity................................... $42.19 $40.55 $39.03 $36.27 $34.78 (1) Net of investment in First Chicago Capital Markets, Inc.
7 substantially enhanced our ability and the ability of our competitors to take advantage of a less constrained marketplace," he noted. First Chicago faces competition on many fronts other than from commercial banks: for example, from mutual funds and insurance companies, brokerage houses, even telephone and automobile companies. "We have positioned ourselves well, we have excellent franchises and financial strength, and most important, we are committed to quality execution. Success is dictated by one simple principle: delivering value to customers. This means working closely with our customers and providing solutions for their financial problems." Examples of how First Chicago is meeting the new needs of the marketplace include changing consumer delivery channels; applying new technology and developing highly efficient systems for First Card; offering FirstWindow 2000, a patented information delivery system for corporations; and most recently, underwriting and distributing corporate debt securities through First Chicago Capital Markets, Inc. "We know that we face a more challenging marketplace," Vitale acknowledged, "but we can and will take advantage of this challenge and the strength of our position as the only major Chicago-based financial institution." STOCKHOLDER QUESTIONS Management responded to a number of questions and comments. Two that may be of general interest are summarized here: Q. Will you address the subject of derivatives, which have been in the news lately? [A derivative is a financial instrument--such as an interest-rate or currency swap--that "derives" its value from price changes in an underlying asset.] A. Chicago is actually the home of the derivatives business. All the leading exchanges--the Chicago Board Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade--are derivatives houses, and they are very important to the city. Derivatives are risk management tools. They can be used for speculation, but they also have sound business purposes. First Chicago has been dealing in derivatives for 10 years, and has important trading capabilities and expertise in this area. The Corporation uses derivatives primarily in two ways: first, to hedge interest-rate risks on its balance sheet and second, to help corporate customers manage their business risks. Anyone serving large corporations operating in global markets has to be involved in the derivatives business. The Corporation monitors its exposure to derivatives very carefully. Q. Why did First Chicago pay such a high price to acquire Lake Shore Bancorp? A. The Corporation agreed to pay $323 million, about 2.6 times book value for Lake Shore, which is a full price but well worth it for strategic and financial reasons. Strategically, there is no more attractive "micromarket" in Chicagoland than North Michigan Avenue, where Lake Shore is headquartered. Thousands of small companies and affluent consumers within a short distance of that major street contribute to the area's more than $10 billion economy. Financially, First Chicago can use its resources in consumer and middle market banking--which far exceed the resources Lake Shore has as a much smaller institution--to build revenue over time. From an efficiency standpoint, the Lake Shore business can be folded into First Chicago with substantial cost-savings. FORMAL BUSINESS OF THE MEETING A total of 74.3 million shares were represented in person or by proxy, or nearly 86% of the total shares outstanding. Stockholders elected the 17 Director nominees named in the Proxy Statement. Each of the nominees received more than 73 million votes, in excess of 98% of the shares voted at the meeting. The particulars are:
For Withheld Richard L. Thomas 73,840,082 508,341 Richard M. Morrow 74,020,614 327,809 Donald P. Jacobs 73,837,011 511,412 John H. Bryan 73,946,468 401,955 Patrick G. Ryan 73,846,922 501,501 Roger W. Stone 73,049,871 1,298,552 Jerry K. Pearlman 73,828,656 519,767 James J. O'Connor 73,814,057 534,366 Earl L. Neal 74,024,604 323,819 Jack F. Reichert 73,837,646 510,777 Adele Simmons 74,019,449 328,974 Dean L. Buntrock 73,848,176 500,247 James S. Crown 73,836,799 511,624 Leo F. Mullin 73,902,656 445,767 David J. Vitale 73,925,435 422,988 Donald V. Fites 73,140,172 1,208,251 Andrew J. McKenna 74,033,232 315,191
Stockholders ratified the appointment of Arthur Andersen & Co. as the Corporation's independent auditors for 1994. Of the shares present and entitled to vote, 73,942,712 (99.5%) were voted for; 117,391 (0.1%) were voted against; and 288,320 (0.3%) abstained. 8 Board of Directors Richard L. Thomas Chairman of the Board and Chief Executive Officer First Chicago Corporation Leo F. Mullin President and Chief Operating Officer First Chicago Corporation David J. Vitale Vice Chairman of the Board First Chicago Corporation John H. Bryan* Chairman of the Board and Chief Executive Officer Sara Lee Corporation Dean L. Buntrock Chairman of the Board and Chief Executive Officer WMX Technologies, Inc. James S. Crown General Partner Henry Crown and Company (Not Incorporated) Donald V. Fites* Chairman of the Board and Chief Executive Officer Caterpillar Inc. Donald P. Jacobs Dean of the J. L. Kellogg Graduate School of Management Northwestern University Andrew J. McKenna* Chairman of the Board, President and Chief Executive Officer Schwarz Paper Company Richard M. Morrow* Retired Chairman and Chief Executive Officer Amoco Corporation Earl L. Neal Principal Earl L. Neal & Associates James J. O'Connor Chairman and Chief Executive Officer Commonwealth Edison Company Jerry K. Pearlman Chairman and Chief Executive Officer Zenith Electronics Corporation Jack F. Reichert Chairman of the Board and Chief Executive Officer Brunswick Corporation Patrick G. Ryan President and Chief Executive Officer Aon Corporation Adele Simmons President The John D. and Catherine T. MacArthur Foundation Roger W. Stone Chairman of the Board, President and Chief Executive Officer Stone Container Corporation *Member of the Audit Committee Stockholder Information Inquiries Stockholders who have questions about stock transfers, changes of address, dividend payments or lost certificates should contact First Chicago Trust Company of New York, P.O. Box 2500, Jersey City, NJ 07303-2500. 1-800-446-2617. Dividend Direct Deposit First Chicago offers common stockholders the convenience of having dividends electronically deposited without charge into their checking, savings or money market account at most U.S. financial institutions. To obtain an enrollment card, contact First Chicago Trust Company of New York. Dividend Reinvestment and Stock Purchase Plan Stockholders can increase their ownership in the Corporation without brokerage commissions or service fees through the Dividend Reinvestment and Stock Purchase Plan. For a prospectus and an enrollment card, contact First Chicago Trust Company of New York. Financial Reports Requests for annual and quarterly reports and 10-K and 10-Q filings should be addressed to Corporate Communications, First Chicago Corporation, Mail Suite 0358, Chicago, IL 60670-0358. (312) 732-6204. Investor Relations Analysts and investors seeking additional financial information should contact Investor Relations, First Chicago Corporation, Mail Suite 0460, Chicago, IL 60670-0460. (312) 732-4812 or (312) 732-8013. Inside Back Cover -----END PRIVACY-ENHANCED MESSAGE-----